A. Introduction
Recently, BAE Systems, a UK manufacturer of defence equipment has been embroiled in bribery allegations in respect of contracts to supply military aircraftFootnote 1 to the Government of Saudi Arabia. The allegations that have been levelled against BAE concerning these contracts include the payment of bribes to various members of the Saudi royal family and the use of various accounts to conceal these payments. This article will give a brief overview of the contracts between BAE and the Saudi Government; discuss the corruption allegations made against BAE and the investigations into these allegations by the Serious Fraud Office; and examine the UK's legal regime against the bribery of foreign public officials, assessing the UK's compliance with its obligations under the OECD Convention prohibiting such bribery. The article will conclude with an examination of the future prospects for BAE as the United States Department of Justice undertakes an investigation into the Al-Yamamah contracts.
B. Background
The predecessor to BAE Systems, British Aerospace, was formed as a statutory corporation in 1977. Between 1981 and 1985, under Margaret Thatcher's privatization policies, the Government sold its stake in British Aerospace. BAE assumed its present form in 1999 after a merger with Marconi Electronic Company and the defence arm of General Electric Company. BAE Systems is currently among the top defence manufacturers in the world with annual sales in excess of £13 billion.Footnote 2
BAE's relationship with Saudi Arabia dates back to 1966,Footnote 3 but in terms of the Al-Yamamah contracts, the company's relationship with Saudi Arabia was formalized in September 1985, when a Memorandum of Understanding was signed committing the Saudi's to the purchase of 40 Tornado IDS aircraft, 24 Tornado ADV aircraft, 30 Hawk aircraft, and 30 PC-9 aircraft, together with associated support, services and ammunition at an initial cost of between £3 and £4 billion.Footnote 4 The contract was entered into between the UK Government and the Saudi Government, with BAE acting as the supplier. The contract was to be paid for by means of an oil trading scheme, with a loan facility opened to meet any shortfall between the project costs and the funds generated by the oil deal.Footnote 5
So far, the Al-Yamamah contracts have been conducted in two stages, with the second phase of the contracts signed in 1989. In 2006, the most recent series of contracts, dubbed Al-Salam, involved the supply of Euro-fighter Typhoon jets worth £5 billion to the Royal Saudi Airforce.Footnote 6 It was announced on 18 September 2007, that BAE and the Government of Saudi Arabia had signed a contract worth more than £4 billion for the supply of the Euro-fighter.Footnote 7
C. The Allegations and the Investigation
Allegations that bribes were paid to secure the Al-Yamamah contracts began almost as soon as the contracts were signed. A newspaper report in October 1985, one month after the contracts were signed alleged the payment of bribes.Footnote 8 In March 2001, the Serious Fraud Office (SFO) sent information to the Ministry of Defence (MOD) about allegations of fraud involving BAE in relation to Al-Yamamah.Footnote 9 However, it was not until secret MOD documents were leaked to the press in 2004 that the SFO took action to investigate the allegations.Footnote 10
The SFO was created to investigate and prosecute cases of serious and complex fraud.Footnote 11 Given that most cases of corruption involve elements of fraud, the SFO emerged as the focal point for the investigation of serious corruption casesFootnote 12 and is also responsible for investigating all allegations of foreign bribery.Footnote 13 The SFO investigation was directed at allegations of suspected false accounting in relation to contracts for services between two travel and visa firms (Robert Lee International and Travellers World) and BAE in connection with contracts with the Saudi Government.Footnote 14 The allegations were made by former employees of the firms, in a BBC programmeFootnote 15 where these employees alleged that as far back as 1989 they had been instructed by BAE to lavish cash, luxury gifts, and holidays on members of the Saudi Royal family responsible for overseeing the Al-Yamamah contracts.Footnote 16 It was also alleged that BAE used a number of devices to disguise the payments and expendituresFootnote 17 and that the money for these expenses, although provided by BAE in the first instance, were eventually paid for by the inflation of the contract prices by up to 32 per cent.Footnote 18
After two years and an estimated expenditure of £2 million,Footnote 19 the investigations by the SFO into the affairs of BAE, in so far as they relate to the Al-Yamamah arms deal, were abruptly terminated in December 2006. In a press statement, the Director of the SFO stated that the investigation was being discontinued on the basis of the need to safeguard national and international security and the necessity to balance the need to maintain the rule of law against the wider public interest and that no weight had been given to commercial interests or to the national economic interest.Footnote 20
As expected, there was a furore over the termination of the investigation and the UK Government was also criticized by the OECD over the termination of the investigation.Footnote 21
D. The Legal Framework Against Overseas Corruption
The statutory framework on corruption is contained in three statutes,Footnote 22 together referred to as the Prevention of Corruption Acts 1889–1916. Although these statutes are aimed at domestic corruption, the Government had insisted that the statutes were applicable to the bribery of foreign public officials where the necessary nexus with the UK existed,Footnote 23 and there was evidence to suggest that UK judges would be willing to apply these statutes to the bribery of foreign officials where required.Footnote 24
The criminalization of the bribery of foreign public officials is a recently new phenomenon in international law and may be indirectly traced to the passage of the US Foreign Corrupt Practices Act 1977,Footnote 25 and directly traced to the activities of the Organisation for Economic Co-operation and Development (OECD).Footnote 26 In 1994, the OECD issued a Recommendation on Bribery in International Business Transactions,Footnote 27 which provided that OECD Members take appropriate action to prevent and combat the bribery of foreign public officials,Footnote 28 including criminalizing the bribery of foreign public officials,Footnote 29 the reform of tax law,Footnote 30 and accounting and banking reform.Footnote 31
The Recommendation was later revised,Footnote 32 to propose the passage of an international convention to criminalize bribery.Footnote 33 This ConventionFootnote 34 was adopted in November 1997 and commits signatories to ensuring that it is a criminal offence
for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.Footnote 35
The penalties for this bribery are to be the same for domestic bribery.Footnote 36 The Convention defines a foreign public official to include persons holding a legislative, administrative or judicial office and any person exercising a public function for a foreign country.Footnote 37 The Convention also required signatories to take appropriate measures to establish jurisdiction over the offence where it is committed in whole or in part in its territory,Footnote 38 such as where the offer, acceptance or agreement to the offence takes place in the territory of the signatory.Footnote 39
The Convention was signed by the UK in December 1997 and ratified a year later,Footnote 40 and although the Government had initially asserted that the existing legal framework on corruption was sufficient to comply with the Convention,Footnote 41 in 2001, Parliament enacted the Anti-Terrorism, Crime and Security Act 2001 (ACSA 2001), which contained legislative provisions implementing the Convention.
The Anti-Terrorism Act did not alter the existing legal framework on corruption in the UK, but extended the existing laws to the bribing of foreign officials.Footnote 42 In particular, the Act extends the statutory bribery offences in the Prevention of Corruption Acts 1889–1916 to the bribery of foreign public officials, including foreign members of parliament, foreign judges, ministers and ‘agents’, as long as the offence is committed by a UK national or company incorporated under UK law,Footnote 43 irrespective of any territorial connection with the UK.Footnote 44
E. The UK's Compliance with the OECD Convention: Domestic Law and the BAE Investigation
Although the ACSA 2001 is intended to implement the Convention, there are several areas in which the Act fails to properly implement the Convention. In the first place, because the Act merely extends the existing legislation to foreign officials, all the shortcomings in the Prevention of Corruption Acts 1889–1916 will affect foreign bribery cases.Footnote 45 For instance the existing laws did not provide for situations where the bribe is given to a third party, such as a spouse or associate of the public official. Consequently, the Act does not expressly criminalize foreign bribery involving the payment of the bribe to a third party.Footnote 46 This is at odds with the Convention which requires the criminalization of foreign bribery where the bribe is given to a third party, or given for the purposes of the third party as long as the intention behind the bribe is the inducement of the foreign public official.Footnote 47
Another shortcoming of the Act is that the consent of the Attorney General is required for any prosecution to be initiated under the Act.Footnote 48 This requirement for consent is a vestige of the Prevention of Corruption Acts 1889–1916,Footnote 49 which require similar consent for a prosecution for statutory domestic corruption. In providing this consent, the AG is required to consider similar factors that are considered by Crown Prosecutors in instituting prosecution for other offences. These factors include whether there is a significant prospect of success, whether there is sufficient evidence, whether prosecution will harm international relations and national security and whether or not prosecution is in the general public interest.Footnote 50
Although consent prior to the initiation of certain prosecutions is usual in the UK, the OECD Working Group on Bribery has criticized this requirement as reducing the effectiveness of the Convention by delaying the preparation of foreign bribery cases leading to a loss of evidence.Footnote 51 The Working Group is concerned that the requirement may also conflict with Article 5 of the Convention which prohibits considerations of national economic interest or international relations in deciding whether to prosecute an offence of foreign bribery. Another concern is that since defendants may seek judicial review of the decision to grant consent, this may further delay prosecution.Footnote 52
A final shortcoming of the Act is the removal of the presumption of corruption in relation to gifts in the procurement context.Footnote 53 This creates a dichotomy between foreign bribery and domestic bribery where such a presumption exists and may make it more difficult for prosecutors to prove cases of foreign bribery.
In relation to the SFO investigation into the Al-Yamamah contracts, it is not clear whether the termination of the investigation on the grounds of ‘national and international security’ was in compliance with the UK's obligations under the OECD Convention.
As stated above, Article 5 of the Convention expressly prohibits a State taking into account considerations of national economic interest, the potential effect upon relations with another State and the identity of the persons involved in deciding to prosecute foreign bribery. In that respect, the SFO decision to terminate the investigation may be in breach of the provision prohibiting taking into account the effect of the investigation upon relations with another State.Footnote 54 Although the reasons given by the SFO for terminating the investigation deny the presence of Article 5 considerations, the Attorney-General in explaining the decision at the House of Lords expressly stated that ‘continuation of the investigation would cause serious damage to UK/Saudi security, intelligence and diplomatic co-operation’.Footnote 55 In addition, the former Prime Minister, Tony Blair, in defending the Government's decision to terminate the investigation stated that the investigation was dropped to prevent the ‘wreckage of a vital strategic relationship’ with Saudi Arabia and the loss of British jobs.Footnote 56
The OECD Convention is silent as to whether national security considerations may be taken into account in deciding to investigate or prosecute a case of foreign bribery, and it is unclear whether this means that an implicit national security exception may be read into the Convention.Footnote 57 However, academic authority is weighted against this possibility,Footnote 58 especially as many international treaties which provide a national security exception, expressly say so.Footnote 59
It must be noted, however, that Article 5 is in some respects contradictory in the sense that although it provides that the investigation and prosecution of an offence should be subject to the laws of a State Party, which in the UK permit the taking into account of ‘public interest’ considerations, including international relations, the Convention is silent as to the position where domestic prosecutorial discretion conflicts with the considerations prohibited by Article 5.Footnote 60 Where this occurs, two interpretations are possible: first that one of the sentences should be read as superseding the other, or secondly, that the second part of Article 5 creates an obligation on a signatory to transpose those principles into domestic law. Although this has not been done in the UK, and the ACSA 2001 does not mention Article 5, it is submitted that this does not detract from the UK's obligation to comply fully with the provision.Footnote 61
Whether or not the investigation was halted for genuine national security considerations,Footnote 62 or over fears about the loss of subsequent aircraft salesFootnote 63 and the effect upon UK/Saudi relations, the termination of the investigation may send the wrong signal to UK firms doing business overseas and to other countries that the UK Government is not prepared to back its anti-corruption rhetoric where the stakes are high.Footnote 64 Although the investigation has ended, the fall-out of the decision has not abated,Footnote 65 and in June 2007, the United States Government announced its decision to investigate BAE in respect of the Al-Yamamah contracts.
F. United States Involvement and Future Prospects for BAE
Although the SFO has ended the investigations based on the Al-Yamamah contracts, and is concentrating on investigating BAE's dealings in other countries, the US Government has decided to investigate BAE's activities in Saudi Arabia.
The US, through the Foreign Corrupt Practices Act 1977 (FCPA), criminalizes the bribery of foreign public officials where the necessary connection exists with the US.Footnote 66 The investigations into BAE activities being carried out by the US Department of Justice are premised on the fact that certain illegal payments were made to Saudi Royal officials through US bank accounts.Footnote 67 Under the FCPA, any person who bribes a foreign public official where the briber has American nationalityFootnote 68 or the offence includes an act that establishes a connection with US territoryFootnote 69 is liable under the FCPA, whether or not the person is resident or does business in the US.Footnote 70 The FCPA extends to payments made to a third party if the payments would be used by the third party to contravene the Act.Footnote 71 However, foreign public officials cannot be prosecuted,Footnote 72 and employees cannot be prosecuted unless their employer is found guilty under the FCPA.Footnote 73 Under the FCPA, relevant companies are also required to maintain certain accounts and records to prevent the concealment of illegal transactions.Footnote 74
Where a firm is found liable under the anti-bribery provisions of the FCPA, it may be liable on conviction to a fine of up to $2 million.Footnote 75 Breaches of the accounting provisions may lead to a fine of up to $25 million.Footnote 76 Individuals convicted under the FCPA's accounting provisions may be liable for a fine of $5 million and sentenced to a maximum of 20 years' imprisonment,Footnote 77 and individuals convicted of contravening the anti-bribery provisions may be liable for a fine of up to $100,000 and five years' imprisonment.Footnote 78
Apart from the criminal and civil penalties that may exist against BAE if convicted in the US, another issue that arises is the likely debarment (exclusion) of BAE from US federal government contracts. Debarment is an administrative remedy available to the Government to disqualify contractors or individuals from obtaining government contractsFootnote 79 for alleged breaches of law or ethics.Footnote 80 The US Federal Acquisition Regulations (FAR)Footnote 81 provide that a person or firm may be debarred for receiving a conviction or a civil judgment for inter alia, embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, and tax evasion.Footnote 82 In addition, debarment may be imposed for a conviction or civil judgment for any offence indicating a lack of business integrity or honesty that affects the present responsibility of a contractor.Footnote 83
Where a company is debarred, its name is listed on a website known as the Excluded Parties List System,Footnote 84 and such a firm is from the time of its listing excluded from obtaining public contracts and no federal agency may solicit offers from, award contracts to, or consent to subcontracts with such person.Footnote 85 A listed contractor is also precluded from dealing with the Government as the agent or representative of another contractor.Footnote 86 Debarment constitutes the exclusion of all the divisions and organizational elements of a contractor, unless the debarment decision is otherwise limited.Footnote 87 The effect of debarment is prospective and does not affect the completion of existing contracts.Footnote 88 Debarment is discretionary and is only to be imposed in the public interest,Footnote 89 where the contractor's present and future responsibility is in doubt.Footnote 90 The existence of a cause for debarment does not necessarily require that a contractor be debarred and debarring officials must consider the seriousness of the contractor's actions before a debarment decision is taken.Footnote 91
In relation to BAE, the possible debarment of BAE will have serious repercussions for the firm as the US delivers $9 billion in sales to BAE annuallyFootnote 92 and BAE recently expanded its operations in the US and is determined in the future to increase its business in the US.Footnote 93
While the forecast for future US contracts appears dim for BAE if convicted in the US, there is evidence to suggest that even if BAE is debarred, such a debarment is likely to be waived by other federal agencies if there are compelling reasons for doing so.Footnote 94 Although ‘compelling reason’ is not defined in the FAR, guidance may be found in the Defence Federal Acquisition Regulations (DFARS), which provides as examples of compelling reasons, the fact that only a listed contractor can provide the supplies or services;Footnote 95 the exigencies of urgency;Footnote 96 or where national defence requires continued business dealings with the listed contractor.Footnote 97 The upshot is that any waivers must be necessary to prevent a severe disruption of the agency's operation to the detriment of the Government or the general public.Footnote 98
The possibility that any debarment against BAE may be waived remains a real one, if one draws an analogy with the recent high-profile suspension (temporary debarment of up to 18 months)Footnote 99 of Boeing from US public contracts. This suspension was twice lifted to permit Boeing to receive substantial contracts from the US Government,Footnote 100 and it has been argued that the consolidation of the defence industry in the US has made it impossible to suspend or debar major defence firms from public contracts.Footnote 101 In addition, the lack of competition that follows the exit of a major contractor from the marketplace as a result of a debarmentFootnote 102 has in the past led to price increases for the Government—another reason behind Boeing's short-lived suspension from US Government contracts.
Although BAE may survive its conviction and possible subsequent debarment in the US, the conviction of BAE in the US may have potential consequences for the company's business in the European Union. This is because, in 2004, the latest revision to the European Community (EC) procurement directivesFootnote 103 made it mandatory for contracting authorities in the EC to exclude or debar firms that had received a conviction for corruption.Footnote 104 This means that if BAE is convicted of corruption in the US, EC contracting authorities will be required to exclude BAE from obtaining public contracts in the EC. This might mean that future contracts from countries like the UK, Sweden and Denmark, where BAE has significant interests, may be in jeopardy.
