CAATnews June/July 2006 - Cover Story

OIL, AUTOCRATS...
AND ARMS

Nicholas Gilby and Mike Lewis uncover 70 years’ worth of evidence of an unholy trinity at the heart of UK arms deals with Saudi Arabia

Some things in UK foreign policy never change. For over 70 years the UK has given powerful backing to the prodigiously repressive House of Saud, rulers of Saudi Arabia. This has been part of a longstanding policy of supporting dictatorial Mid-East rulers to ensure the West’s access to the region’s oil. A prime beneficiary of this policy has been the UK weapons giant BAE Systems. Since 1966 BAE Systems has largely run the Royal Saudi Air Force through a series of massive government-to-government deals for arms and military services (substantially in exchange for oil). These have been crucial to BAE Systems’ growth into the world’s fourth largest weapons manufacturer. From the beginning the deals have been surrounded by allegations of substantial corruption, from the involvement of middleman Geoffrey Edwards in the late 1960s, to the recent “slush fund” allegations surrounding the massive and ongoing Al-Yamamah deal.

Buried files
These last allegations are now under investigation by the Serious Fraud Office (see Developments in the global arms trade). But the origins – and the illicit nature – of the UK’s relationship with the House of Saud lie buried in previously unseen Government files. These reveal an astonishing story of corruption in UK arms sales to Saudi Arabia in the late 1960s and early 1970s, involving not just dirty businessmen, but collusion at the heart of the UK government. The files show that the Foreign Office and Ministry of Defence (MoD) not only encouraged corrupt practices by UK companies, but attempted to use nationalised companies to pass bribes.

Perhaps conscious that senior Saudi figures involved in these deals are still in government (and thus are still some of the UK’s best arms trade customers), the MoD remains supremely sensitive about this murky chapter in recent history. In 2003 the MoD wrote a thundering minute to Parliament to deny claims by the Guardian that the MoD’s arms sales unit, the Defence Export Services Organisation (DESO), had been “directly implicated in bribery abroad for 40 years”. Ministry brass accused the Guardian of “irresponsible” reporting, insisting that DESO had never condoned bribery in arms sales, and had procedures in place to ensure the propriety of government-togovernment contracts. The previously unseen Government files show that this is simply untrue.

What does DESO know?
Founded in 1966, DESO was aware from the start about the murky world of arms trade corruption. In 1967 Harold Hubert, the Director of Army Sales in DESO, told the UK Embassy in Caracas that in DESO “day by day we carry out transactions knowing that at some point bribery is involved. Obviously I and my colleagues in this office do not engage in it, but we believe that various people who are somewhere along the lines of our transactions do. They do not tell us what they are doing and we do not inquire. We are interested in the end result”. Having told the Embassy that the main mechanism through which bribes were paid was “commissions” paid to agents, the Foreign Office wrote to Caracas agreeing with the MoD’s “proposition that an agent acting in a government-togovernment deal (or of course firm-to-government) should get his commission and the price [Her Majesty’s Government] charge must reflect this cost”.

Hubert was heavily involved in arms sales to Saudi Arabia. In 1971 he was a key figure in negotiations to equip the Saudi Arabian National Guard with a new battle group – Saladin, Saracen and Fox vehicles, 105mm guns and Vigilant anti-tank weapons for £112m. The equipment would be supplied by nationalised company Millbank Technical Services (MTS). Hubert wrote openly of the Government’s willingness to collude in bribery surrounding the deal: “MTS will have little hope of business unless we [MoD] invite them to sell on our behalf… since when the Ambassador sees the King he will indicate our willingness to do business on a [governmentto- government] basis there might be advantages to MTS co-ordinating any British equipment business to provide the quasi-government oversight as well as passing on the douceurs [bribes]”.

Daily Mail allegations quashed
MTS’s agent for this proposed deal was a Mr Fustuq, who was the brother-in-law of Prince Abdullah, the Commander of the Saudi Arabian National Guard,(and, since mid-2005, Saudi Arabia’s new king). Lord Carrington, then Tory Defence Secretary, was told about Fustuq’s role and his connection to Abdullah. The then Head of Defence Sales, Lester Suffield, told him “other ‘fixers’ tried to get in on the deal and we did our best to string them along while continuing to deal through the channel Abdullah desired”.

Although this deal never came off, official papers reveal that later in the 1970s Fustuq acted as British Leyland’s agent on a successful sale of armoured Land Rovers to the Saudi Arabian National Guard for around £5m. Fustuq collected a 15 per cent commission worth £700,000, paid to his Chase Manhattan Swiss bank account. When the Daily Mail published allegations of corrupt practices at British Leyland in 1977, ministers were told about Fustuq’s commissions and much else in a confidential report. Denis Healey, then Defence Secretary, told the Cabinet at a crisis meeting at Chequers that “there was no doubt that bribery had been going on for years on a large scale in the Middle East... and that organisations responsible to Government (including Defence Sales [forerunner to DESO] and nationalised industries) had been involved”. Far from cleaning up their act, the Government instead brokered a deal with the Tory opposition to suppress the report, while Industry Secretary Eric Varley personally sued the Daily Mail.

Secret payments?
Meanwhile, the MoD continued to turn a blind eye to questionable transactions. In 1973 BAC (now BAE Systems) won a contract to run the Saudi air force until 1978. The £300m contract was put through the MoD accounts, including £30m in payment to “consultants”. The forerunner to the National Audit Office queried the propriety of the secret payments, telling the MoD that since the MoD had not established the purpose for which the £30m payments had been made, the arrangement failed standards set by Treasury legal advice to avoid corruption. When the Treasury Solicitor suggested further enquiries be made of BAC, MoD Permanent Secretary Frank Cooper’s private secretary minuted: “I don’t really like the way this is going and what may be unearthed”. Cooper’s solution was to obtain an unsupported assurance from BAC that it was not engaged in improper acts.

Keeping the customer satisfied
Throughout, keeping the Saudi customers happy remained the paramount political concern. Indeed, the 1973 contract was seen as so valuable that it was exempted from the general UK arms embargo to the Middle East during the Yom Kippur War. The British embassy in Jedda explained that if Saudi Arabia were included “the political consequences could be very serious… undermining the biggest single strand in the fabric of the UK/Saudi relationship”.

Corruption allegations around the massive deal to Saudi Arabia, another government-to-government deal involving BAE Systems’ forerunner British Aerospace, were also investigated by the National Audit Office. Its results were issued in a 1992 report for the Public Accounts Committee. The report has never been published (see Parliamentary), despite Labour’s pledge while in opposition to do so. Indeed, Freedom of Information requests for it are currently being denied on grounds of Parliamentary Privilege: insisting that its publication remains the prerogative of MPs, even though in 1992 only two members of the Public Accounts Committee were allowed to see it, and none of the current members have seen it. It is the only National Audit Office report ever presented to Parliament which has never been published. Labour defence ministers have assiduously continued the Tory refusal to publish.

Closed files on current customers
The Foreign Office too is continuing the fight to keep its own Saudi arms trade files secret, many of which are almost 40 years old. Several of the closed files concern the role of Mr Fustuq in Saudi Arabia, as well as that of Geoffrey Edwards in the deals of the 1960s.

Crucially, the customers from forty years ago remain the customers today – Prince Sultan, the Minister of Defence, and King (then Prince) Abdullah. The cover-up by the Foreign Office and National Audit Office is vital to avoid scuppering BAE Systems’ chances of a massive new arms deal with Saudi Arabia, the initial stages of which were signed by Prince Sultan and then Defence Secretary John Reid in Riyadh in December. As with most of the UK-Saudi arms deals over the last forty years, the taxpayer will likely underwrite this new deal with billions in loan guarantees from the Export Credit Guarantee Department. BAE Systems is now rushing to conclude the deal before the Export Credit Guarantee Department’s procedures change next year to require disclosure of their agents’ identities. Arms sales are still “the biggest single strand in the fabric of the UK/Saudi relationship”. Some things in UK foreign policy never change.