by Michael Isikoff and Mark Hosen­ball with Emily Flynn Ven­cat in Lon­don
NEWSWEEK

Hun­dreds of pages of con­fi­den­tial U.S. bank records may be the miss­ing link in illu­mi­nat­ing new alle­ga­tions that a major British arms con­trac­tor fun­neled up to $2 bil­lion in ques­tion­able pay­ments to Saudi Prince Ban­dar bin Sul­tan. The BBC and Guardian news­pa­per reported last week that BAE Sys­tems made “secret” pay­ments to a Wash­ing­ton, D.C., bank account con­trolled by Ban­dar, the long­time Saudi ambas­sador to the United States who is now the kingdom’s national-security adviser. The pay­ments are alleged to be part of an $80 bil­lion military-aircraft deal between Lon­don and Riyadh. Last week British Prime Min­is­ter Tony Blair acknowl­edged that his gov­ern­ment shut down an inves­ti­ga­tion into the pay­ments, in part because it could have led to the “com­plete wreck­age” of Britain’s “vital strate­gic rela­tion­ship” with Saudi Ara­bia. Before the U.K. closed the inquiry, British inves­ti­ga­tors con­tacted the U.S. Jus­tice Depart­ment seek­ing access to records related to the Saudi bank accounts. Many of these records were first obtained by NEWSWEEK in 2004. At the time, the mag­a­zine reported that fed­eral reg­u­la­tors had been alerted to mil­lions of dol­lars in “sus­pi­cious” activ­i­ties in Saudi accounts at the now-defunct Riggs Bank.

Tom Rose, a British lawyer for Ban­dar, denied the Saudi prince had received “improper secret” com­mis­sions. He said the BAE funds were actu­ally being paid into a Saudi Defense Min­istry account over which Ban­dar had sig­na­ture author­ity, but any pay­outs from those accounts “were exclu­sively for pur­poses approved” by the min­istry. The accounts were known both to the British and Saudi gov­ern­ments. (A BAE spokesman said, “We deny all alle­ga­tions of wrongdoing.”)

The Riggs Bank records show the use of those funds raised con­cerns among bank offi­cials and U.S. reg­u­la­tors. In Novem­ber 2003, Riggs filed a “sus­pi­cious activ­ity report” with the Trea­sury Depart­ment dis­clos­ing that over a four-month period, $17.4 mil­lion from the Saudi Defense account had been dis­bursed to a sin­gle indi­vid­ual in Saudi Ara­bia. When Riggs offi­cials asked the Saudis who the per­son was and why he was receiv­ing the funds, they were told the indi­vid­ual “coor­di­nates home improvement/construction projects for Prince Ban­dar in Saudi Ara­bia,” and the pay­ments were for a “new Saudi palace,” one doc­u­ment shows.

In another instance, Ban­dar wired $400,000 from a Riggs account to a luxury-car dealer over­seas. “It was impos­si­ble to dis­tin­guish between gov­ern­ment funds and what would nor­mally be con­sid­ered per­sonal pur­poses,” said David Caruso, who served as Riggs’s com­pli­ance offi­cer at the time. Caruso also con­firmed to NEWSWEEK that the Saudi Defense account was reg­u­larly replen­ished with $30 mil­lion each quar­ter from an account in Lon­don. But the bank never knew the source of the funds. The bank was so con­cerned about the with­drawals that it cut off all busi­ness with the Saudis. In May 2005, the U.S. Trea­sury fined Riggs $25 mil­lion for fail­ing to mon­i­tor “exten­sive and fre­quent sus­pi­cious” activ­ity in Saudi and other accounts. (Asked about the Riggs records, Bandar’s lawyer said the palace in ques­tion was “Prince Bandar’s offi­cial res­i­dence” in Saudi Ara­bia and that audits by the Saudi Finance Min­istry found “no irreg­u­lar­i­ties” in the Saudi accounts while Ban­dar was ambassador.)

The con­tro­versy also raises ques­tions about what role Bandar—a close friend of the Bush family’s—will play in Washington’s future Mideast ini­tia­tives. Ear­lier this year, after con­sult­ing exten­sively with Ban­dar, U.S. offi­cials pushed for a new Mideast peace summit—only to learn later that Saudi King Abdul­lah was not onboard with the plan. Since then, Bandar—apparently out of pique at being overruled—has largely dropped out of sight, accord­ing to three U.S. offi­cials who asked not to be iden­ti­fied talk­ing about sen­si­tive diplo­matic mat­ters. One source close to the Saudis, who also asked not to be iden­ti­fied, said that Ban­dar spent much of the spring at his $135 mil­lion man­sion in Aspen, Colo., and that he is now back in Saudi Ara­bia. U.S. offi­cials say they can’t con­firm this. “It’s all some­thing of a mys­tery to us,” said one official.