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BAE’s secret money machine

David Leigh and Rob Evans

THE GUARDIAN | THE BAE FILES

In the 1990s, the tem­per­a­ture start­ed to get uncom­fort­ably hot for Britain’s arms sales­men.

For 30 years, Deso [pro­file] had fend­ed off attempts to curb cor­rup­tion in the arms trade. But now the inter­na­tion­al cli­mate began to change.

In 1994 the OECD [pro­file] urged mem­ber coun­tries to put a stop to over­seas bribery.

A bind­ing con­ven­tion was adopt­ed in 1997. It was signed by Britain and came into force in 1999. Sig­na­to­ries promised to out­law such cor­rup­tion.

Inside White­hall the reac­tion was as hyp­o­crit­i­cal as usu­al.

Many state indus­tries had already been pri­va­tised in the Thatch­er era, includ­ing BAE [BAE’s posi­tion]. So offi­cials no longer need­ed to employ agents direct­ly.

But the MoD was still lob­by­ing abroad on BAE’s [pro­file] behalf and run­ning huge gov­ern­ment-to-gov­ern­ment con­tracts, par­tic­u­lar­ly the Sau­di al-Yamamah deal [pro­file].

Instead of ful­fill­ing their inter­na­tion­al promis­es, offi­cials mere­ly tried to put more dis­tance between them­selves and the com­pa­nies doing the bribery.

The defence min­istry’s Coop­er direc­tive of 1977 [doc­u­ment] was rewrit­ten in 1994 [doc­u­ment] in more obscure terms. Offi­cials would no longer vis­i­bly “autho­rise” com­mis­sion pay­ments. Or cor­re­spond about them. Instead, they were to mere­ly “con­sid­er” and “advise”.

BAE, under Dick Evan­s’s [biog­ra­phy] chair­man­ship, moved its whole world­wide sys­tem of agent pay­ments to Switzer­land.

What it did was not ille­gal, but the firm con­struct­ed what might well be called a glob­al mon­ey-laun­der­ing machine.

For a sup­pos­ed­ly rep­utable pub­lic com­pa­ny, the meth­ods used were sur­pris­ing.

Britain’s Seri­ous Fraud Office lat­er con­clud­ed: “The whole sys­tem is main­tained in such con­di­tions of secre­cy that there is a legit­i­mate sus­pi­cion con­cern­ing the real pur­pose of the pay­ments.”

The sys­tem was run from a secure block, War­wick House, at BAE’s Farn­bor­ough premis­es. “HQ Mar­ket­ing Ser­vices ” was head­ed by Hugh Dick­in­son, who was also respon­si­ble for com­pa­ny liai­son with MI6. His long-serv­ing deputy was Julia Aldridge.

Doc­u­ments indi­cate that a board-lev­el com­mit­tee also met to approve each agency agree­ment.

BAE set up a front com­pa­ny called Nov­el­might Ltd. [doc­u­ment] With the help of the Swiss branch of its bankers, Lloyds TSB, the firm dis­creet­ly rent­ed a high-secu­ri­ty office in Gene­va, on the sixth floor of a block at 48 Route des Aca­cias.

Video sur­veil­lance cam­eras were installed, along with an encrypt­ed fax and phone sys­tem. A spe­cial­ist from the UK was flown out to sweep the vault for bugs. Then, just before Britain signed up to the OECD con­ven­tion in 1997, the fil­ing cab­i­nets and safes con­tain­ing the agent details were loaded into a van and dri­ven by trust­ed staff from Farn­bor­ough to Gene­va.

BAE added a new lay­er of con­ceal­ment when the con­ven­tion came into force in 1999. Nov­el­might was offi­cial­ly closed down as a UK-reg­is­tered sub­sidiary.

But it was secret­ly re-reg­is­tered [doc­u­ment] as an off­shore enti­ty in the British Vir­gin Islands, a finan­cial “black hole” in the Caribbean where ben­e­fi­cial own­er­ship can be hid­den. Now there was appar­ent­ly no paper­work at all to link BAE with Nov­el­might.

The agency agree­ments were han­dled by Swiss lawyers Rene Merkt and Cyril Abecas­sis. The lawyers also set up par­al­lel off­shore com­pa­nies for agents to receive their pay­ments, often into Swiss accounts.

When the agree­ments were ready to be made or renewed, Dick­in­son or Aldridge flew to Gene­va and unlocked the office at Route des Aca­cias for the sign­ing.

The con­tracts were kept in Gene­va and could only be inspect­ed there.

The pur­pose of these tor­tu­ous arrange­ments seems to have been to ensure that noth­ing ques­tion­able involv­ing the hir­ing of agents took place with­in UK legal juris­dic­tion.

But a fur­ther secret pay­ment sys­tem was also need­ed for BAE to trans­fer large sums in cash to those agents.

BAE used off­shore front com­pa­nies once again. In Feb­ru­ary 1998, “Red Dia­mond Trad­ing Ltd” was anony­mous­ly incor­po­rat­ed in the British Vir­gin Islands [doc­u­ment]. It was used to chan­nel pay­ments all over the world, via Red Dia­mond accounts in Lon­don, Switzer­land and New York.

We have traced secret pay­ments going to agents in South Amer­i­ca, Tan­za­nia, Roma­nia, South Africa, Qatar, Chile and the Czech Repub­lic.

Red Dia­mond was also used to make pay­ments to UK cit­i­zens who were work­ing as con­sul­tants for BAE. These includ­ed David Hart, who advised Thatch­er dur­ing the min­ers’ strike of the 1980s.

BAE nev­er dis­closed the exis­tence of Red Dia­mond in its pub­lished com­pa­ny accounts, and has nev­er explained why it was set up.

A key role in the “laun­der­ing” was played by BAE’s British bank, Lloyds TSB. [doc­u­ment] Again, what was done was not ille­gal, although it was sur­pris­ing.

A sys­tem was organ­ised with the online Lloyd­slink soft­ware under which cash from BAE was auto­mat­i­cal­ly fun­nelled through Red Dia­mond accounts and on to its final des­ti­na­tion.

The next year, BAE set up a sec­ond front com­pa­ny, pure­ly to han­dle the Sau­di com­mis­sion pay­ments for al-Yamamah. “Posei­don Trad­ing Invest­ments Ltd” [doc­u­ment] was incor­po­rat­ed in the British Vir­gin Islands on June 25 1999.

Those close to it say more than £1bn has passed through its accounts to Sau­di agents, in trans­fers made by Lloyds TSB.

A dif­fer­ent method was used to dis­guise cor­rupt ben­e­fits for Sau­di offi­cials who went on vaca­tion trips to the US and Europe. This was what became known as BAE’s “slush fund”.

The head of the Sau­di air force, Prince Tur­ki bin Nass­er [biog­ra­phy], along with his rel­a­tives and hang­ers-on, were pro­vid­ed with unlim­it­ed shop­ping, plane tick­ets and free hol­i­days by BAE. They ran up enor­mous bills, totalling £60m, over the years.

BAE did not pay direct­ly. Instead, the arms firm used two coop­er­a­tive front com­pa­nies of trav­el agents to pick up the bills — Robert Lee Inter­na­tion­al and Trav­ellers World.

Peter Gar­diner, Trav­ellers World man­ag­ing direc­tor, has described how delib­er­ate­ly mis­lead­ing invoic­es were organ­ised by BAE’s exec­u­tives. They referred mere­ly to “accom­mo­da­tion and sup­port ser­vice
s”.

BAE’s “mon­ey laun­dries” flour­ished for a while. In Sep­tem­ber 2001, how­ev­er, inter­na­tion­al ter­ror­ists destroyed the twin tow­ers in New York. One of the many rever­ber­a­tions was a US crack­down on ter­ror­ist financ­ing.

Under Amer­i­can pres­sure, the UK was forced to pass anti-laun­der­ing mea­sures.

These includ­ed a 2002 law that explic­it­ly crim­i­nalised over­seas bribery and brought cor­rupt acts abroad under UK juris­dic­tion.

BAE was now to face a seri­ous new cri­sis. Con­fi­dent of its polit­i­cal mus­cle, the com­pa­ny dealt with it in the end by suc­cess­ful­ly nob­bling the police.

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