BAE SYSTEMS is to recruit an independent panel to investigate its conduct of foreign arms sales in an attempt to draw a line under allegations of corruption in its dealings with Saudi Arabia.

Britain’s largest defence group will copy the approach taken last year by BP when it hired James Baker, the former American secretary of state, to probe the circumstances behind an explosion at a refinery in Texas that killed 17 people.

Senior defence industry sources said that BAE had already begun talks with potential candidates to chair the investigation. It is understood to be looking for a senior political or business figure with a legal background. It is not yet clear how many people BAE will recruit beyond the chairman, or what the inquiry’s terms of reference will be. The panel could take the form of an ethics committee similar to those established by American defence contractors.

BAE and the British government have been dogged by allegations of bribery in connection with Al-Yamamah, a huge arms deal with Saudi Arabia. Signed by Margaret Thatcher in 1989, the government-to-govern-ment contract has seen BAE supply more than £20 billion in weapons and support services to the kingdom. A follow-up deal of a similar size is expected to be signed within a fortnight.

Background

• MoD names Thales and Boeing as ‘battlespace’ team

• Eurofighters go to Saudi Arabia in £4.4bn order

• MoD seeks a way out of Typhoon contract

• Armor wins $4bn contract with US military

• Arms companies showcase latest technology

A long and lucrative relationship

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Last year a Serious Fraud Office investigation into the contract, launched after persistent allegations of bribery, was called off when the government said that it would damage relations with Saudi Arabia and harm national security. Tony Blair again warned last week of the “complete wreckage” of British interests that would have occurred if the investigation had continued.

Fresh allegations were made last week by The Guardian and the BBC. They claimed BAE had paid more than £100m a year to Prince Bandar bin Sultan, Saudi Arabia’s former ambassador to Washington. Bandar denied the accusation, as did BAE and Lord Goldsmith, the attorney-general.

Defence industry sources supported the denials, saying the payments in question were part of a clause in the Al-Yamamah contract that meant BAE was required to pay for all US training and support required by the Saudi military.

“There might well have been payments to Bandar, but it wasn’t these ones,” said one source.

BAE would not confirm the plan for an independent investigation. “As part of a periodic review, the board reviews and evaluates the company’s policies and processes relating to the conduct of international business,” was all the company said.

The plan has similarities to BP’s actions last year in the wake of the Texas disaster and other setbacks in America, including an oil leak in Alaska. Dick Olver, BAE’s chairman, is a former deputy chief executive of the oil group.

BAE has always denied any wrongdoing in connection with the Saudi contracts. One City source said: “This kind of investigation would allow them to get the whole thing out in the open once and for all – although it would be unlikely to silence their critics.”

The company may also be conscious that the continued allegations may harm its interests in America, the world’s largest defence market. It has made a number of acquisitions there, including the recent purchase of Armor Holdings, which still awaits regulatory clearance.

BAE executives have made no secret of their desire to boost sales in the US, with many predicting that the British group will eventually seek a tie-up with one of the big American defence companies. Raytheon and General Dynamics are often tipped as candidates.

Defence sources said last week that Saudi Arabia was likely to press ahead with a new arms deal despite the fresh allegations. The kingdom will buy up to 72 Eurofighter Typhoon combat aircraft, with a number of the planes to be assembled at a new plant in Saudi Arabia. BAE is also hopeful of winning a follow-on contract to supply Hawk jet trainer aircraft.

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