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BAE’s Hawk:
over the top
(click to view full)

The UK’s Serious Fraud Office (SFO) has spent the last 6 years chasing BAE systems over allegations that bribes were paid to secure foreign deals in a number of countries. Bribes are the least of the allegations involved in some international defense deals, and contract wins without inducements would be far more surprising in countries like Saudi Arabia, Tanzania, and South Africa. Nevertheless, the UK does have laws to prevent British firms from paying them.

An SFO investigation into the giant Saudi Al-Yamamah aircraft deal was killed in December 2006 on national security grounds, after the Saudis threatened to cut off anti-terrorism cooperation and intelligence sharing. The government’s decision was upheld by the British House of Lords, but the SFO continued to pursue other reports concerning Chile, the Czech Republic, Romania, South Africa, Tanzania, and Qatar.

BAE systems was reportedly been given about a month to plead guilty concerning its activities in 3 countries, or face formal charges. It declined, and now the British SFO seems determined to press a formal case…

Deals, Plea Bargains & Options

Romania’s Regina Maria
(click to view full)

The Qatari and Chilean SFO investigations were dropped in 2008, and a Romanian deal to refurbish 2 ex-Royal Navy Type 22 frigates is no longer under investigation either. That leaves South Africa, Tanzania, and the Czech Republic as open investigations.

The South African deal for Gripen fighters and Hawk advanced trainer aircraft was completed in the context of BAE’s contractual role in marketing
Saab’s Gripen internationally. The GBP 1.6 billion deal involved 28 JAS-39C/D fighters and 24 Hawk trainers. Persistent allegations place the ultimate recipient and director of up to GBP 115 million in bribes as high as current Prime Minister Jacob Zuma.

The Tanzanian deal involved air traffic control radars, and was reportedly worth GBP 28 million.

The Czech situation is also related to BAE’s contractual role in marketing Saab’s Gripen fighter internationally, but the GBP 1.1 billion purchase deal was never concluded. Instead, the Czech Republic leased 14 of the fighters from the government of Sweden.

Swedish JAS-39s
and SAAF Cheetahs
(click to view full)

AS BAE ad the SFO consider their positions, several options are currently on the table.

One is full contestation, involving charges and trial. That route could be appealing to a company that says it hasn’t violated any laws, but any trial would take time, during which it would soak up vast executive effort and serve as negative publicity. On the other side of the table, a loss for the SFO would mark the complete failure of all SFO investigations into BAE Systems – and raise sharp questions about why they were pursued.

Another option, which SFO director Richard Alderman is reportedly inviting, is ‘deferred prosecution’. BAE would plead guilty, pay a fine imposed by a judge, and agree to independent monitoring of its behavior. Future violations would allow the imposition of penalties per the original charges, without creating “double jeopardy”. The approach is similar to a criminal suspended sentence, but it’s a novel approach for British corporate cases.

The problem with deferred prosecution is that both US and EU rules could be interpreted to ban any company from bidding for public contracts for specified periods, if they are found guilty of bribery. With the US Department of Justice still technically pursuing their own investigation into the Saudi contracts, for reasons variously attributed as prosecutorial zeal or punishment for a sales loss by American firms, this option may not be attractive to BAE. Particularly given the scale of BAE Systems’ American contracts that could be placed at risk, and the fact that the Americans seem unlikely to get very far unless BAE hands them a guilty plea.

The Times reports that other options may also exist. One would involve a deal whereby the SFO cites BAE for mere procedural failings or accounting procedures, such as the tax treatment of “commissions” paid to middlemen. These approaches would sidestep more serious charges of corruption or bribery, allow the imposition of fines to create a win for the SFO, and put the case behind BAE without requiring an admission of guilt.

As legal observers are well aware, settlements on the eve of trial, or even during proceedings, are not uncommon. All of these options still exist, until and unless a verdict is rendered.

Events & Developments

Oct 1/09: SFO director Richard Alderman says the SFO will prosecute BAE, subject to the consent of Britain’s Attorney General. Reports indicate that BAE Systems rejected the SFO’s proposal of a GBP 300 million settlement, which they apparently considered excessive by an order of magnitude. They also say claim that BAE’s Board of Directors received legal advice that settlement on these terms could leave the firm open to civil lawsuits for misuse of shareholders’ funds.

BAE Sstems are reportedly still willing to consider a deal on terms they find acceptable. There are also reports that BAE Systems is fishing to see how hard the evidence is, before making a final decision. That would happen during the trial’s discovery phase anyway, but it may happen earlier if both sides are willing to deal. The firm’s official release says that BAE:

”...continues to expend considerable effort seeking to resolve, at the earliest opportunity, the historical matters under investigation by the SFO…. If the Director of the SFO obtains the consent that he seeks from the Attorney General and proceedings are commenced, the Company will deal with any issues raised in those proceedings at the appropriate time and, if necessary, in court.”

As a final complicating factor, the US Department of Justice is reportedly asking the Serious Fraud Office to share the information it has compiled, outside of the public record created by a trial process. There has reportedly been an informal exchange of information, and an official request for details is expected soon. Accepting this invitation could get the SFO in serious political trouble, however, if it’s perceived in Whitehall as abetting American protectionism against a British firm. SFO announcement | BAE official response | UK’s Daily Mail | Guardian | Financial Advice | Independent | Telegraph | Times | Times re: settlement readiness | Sunday Times opinion | Agence France Presse | Bloomberg | Reuters | The Daily Mail points out that SFO has a spotty record of both failed and missed prosecutions.

Sept 21/09: Terry Crawford-Browne of Cape Town’s Business Daily writes that:

“Affidavits in my possession detail how BAE paid those bribes of [GBP] 115m (R1,5bn), to whom and into which bank accounts…. The BAE supply contracts also in my possession give the state the right to cancel the contracts and even to claim compensation. With Finance Minister Pravin Gordhan facing a fiscal deficit estimated at between R60bn and R200bn, cancelling the BAE contracts should be his first option…”

Sept 4-7/09: Some reports say that BAE has been given one month to agree a deal or face prosecution, but other newspapers like the Blackpool Gazette quote “sources close to the company” who have insisted that there is no deadline and no imminent resolution, adding BAE Systems’ position that it broke no laws at the time the arms sales were done.

The firm could be subject to “tens of millions” of pounds in fines if convicted or if it pleads guilty, since the fines relate to the total or potential value of the contracts, rather than the scale of the alleged payments. Blackpool Gazette | Daily Mail | The Times | Reuters re: potential settlement | The Times re: potential settlement.

Sept 2/09: Britain’s Serious Fraud Office has stopped investigations into potential overcharging and commissions paid during the sale and refurbishment of 2 British Type 22 frigates: The Regele Ferdinand (formerly HMS Coventry) and Regina Maria (Formerly HMS London). Romania’s Anticorruption Department (DNA) had ended its own investigation in June 2009, and both investigations will remain closed unless fresh evidence emerges. Romanian Times | UK Daily Mail.

Additional Readings

• Daily Mail (Sept 5/09) – The courteous SFO sheriff with BAE in his sights

• Aviation Week (March 28/08) – South African Air Force To Receive First Gripen Soon. Lays out the deals.