SAUDI ARABIA is threatening to suspend diplomatic ties with Britain unless Downing Street intervenes to block an investigation into a £60m “slush fund” allegedly set up for some members of its royal family.

A senior Saudi diplomat in London has delivered an ultimatum to Tony Blair that unless the inquiry into an allegedly corrupt defence deal is dropped, diplomatic links between Britain and Saudi Arabia will be severed, a defence source has disclosed.

The Saudis, key allies in the Middle East, have also threatened to cut intelligence co-operation with Britain over Al-Qaeda.

They have repeated their threat that they will terminate payments on a defence contract that could be worth £40 billion and safeguard at least 10,000 British jobs.

The Saudis are furious about the criminal investigation by the Serious Fraud Office (SFO) into allegations that BAE Systems, Britain’s biggest defence company, set up the “slush fund” to support the extravagant lifestyle of members of the Saudi royal family.

The payments, in the form of lavish holidays, a fleet of luxury cars including a gold Rolls-Royce, rented apartments and other perks, are alleged
to have been paid to ensure the Saudis continued to buy from BAE under the so-called Al-Yamamah deal, rather than going to another country. Al-Yamamah is the biggest defence contract in British history and has kept BAE in business for 20 years.

At least five people have been arrested in the probe. They include Peter Wilson, BAE’s managing director of international programmes, and Tony Winship, a former company official who oversaw two travel and service firms that are alleged to have been conduits for the payments. Both deny any wrongdoing.

The Saudi threat was made in September after the royal family became alarmed at the latest turn in the fraud inquiry. Sources close to the investigation say the Saudis “hit the roof” after discovering that SFO lawyers had persuaded a magistrate in Switzerland to force disclosure about a series of confidential Swiss bank accounts.

The sources said the accounts relate to substantial payments between “third party” offshore companies that may have received large sums in previously undisclosed “commissions”. Fraud office sources say they are now trying to get more documents that will tell them who benefited from the accounts. The trail is said to lead to the Saudi capital Riyadh.

The Saudis learnt of this development only when they were contacted by the Swiss banks in the late summer. “They hit the roof,” said a source close to the investigation.

The Saudi royal family, which effectively controls the government, instructed a senior diplomat, said to be Prince Mohammed bin Nawaf, its London ambassador, to visit Downing Street. He held a meeting with Jonathan Powell, Blair’s chief of staff, according to the sources.

The diplomat is said to have delivered a 12-page letter drawn up by a Saudi law firm demanding a detailed explanation of why the investigation was still continuing.

The Saudis had been given the impression during a meeting with Blair in July last year that the inquiry would be stopped, say the sources.

“The Saudis are claiming in this letter that the British government has broken its undertaking to keep details of the Al-Yamamah deal confidential,” said a source who has read the document.

“It regards the disclosure of these documents to the SFO from Switzerland, and from the Ministry of Defence, as a totally unacceptable breach of that undertaking. They are claiming the deal is protected by sovereign national immunity and that the British have no right to poke around in their private financial affairs.

“It is a really infuriated letter demanding a full and open explanation, pending which the Al-Yamamah contract is suspended and all payments would stop.”

A defence official said that the preliminary contract, signed last August, to sell the first 24 of 72 promised Typhoons, better known as Eurofighters, was then temporarily suspended. That contract alone is said to be worth £11 billion and would safeguard 9,000 jobs at the Eurofighter’s UK headquarters in Warton, Lancashire, for the next decade.

Downing Street is said to have persuaded the Saudis to reverse for the time being their decision to suspend the Typhoon payments. However, the Saudis made clear they would carry out their threats unless the demands in their letter were met.

During the meeting with Powell the Saudi diplomat is said to have issued a threat to sever all diplomatic and intelligence ties. Such a move would be
damaging for Britain’s strategic interests in the volatile region.

It would involve the Saudis withdrawing their ambassador to London, and the British ambassador in Riyadh would be sent home. Direct communications between the two countries on political, economic and security issues would have to be conducted through a third country.

“It was the Swiss stuff that sent the Saudis over the top. The threat to cut off diplomatic and intelligence ties was a very real one,” said the defence official.

The row will put renewed pressure on Lord Goldsmith, the attorney-general, to intervene. Earlier this year Goldsmith, who is the “superintending” minister for the SFO, was asked to determine whether its inquiry was “in the public interest”. That request followed earlier Saudi pressure on the Ministry of Defence.

A spokesman for Goldsmith said: “We do not comment on ongoing investigations.”

Al-Yamamah, meaning “the Dove” in Arabic, has kept BAE in business for 20 years. It was signed in 1985 when Britain agreed to sell 72 Tornados and 30 Hawks to Saudi Arabia.

The deal was renewed in 1993 when the Saudis agreed to buy another 48 Tornado warplanes. In a third stage of the contract signed last year, Britain is selling up to 72 more planes, the Typhoons.

A Downing Street spokesman said: “We don’t speak about ongoing investigations and we don’t speak about discussions with other countries.”

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