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BAE's secret money machine
Sir Dick Evans
Sir Dick Evans, managing director and subsequently chairman of BAE 1990-2004. Responsible for many of the arms deals under investigation. Photograph: The Guardian/Dan Chung

In the 1990s, the temperature started to get uncomfortably hot for Britain's arms salesmen.

For 30 years, Deso [profile] had fended off attempts to curb corruption in the arms trade. But now the international climate began to change.

In 1994 the OECD [profile] urged member countries to put a stop to overseas bribery.

A binding convention was adopted in 1997. It was signed by Britain and came into force in 1999. Signatories promised to outlaw such corruption.

Inside Whitehall the reaction was as hypocritical as usual.

Many state industries had already been privatised in the Thatcher era, including BAE [BAE's position]. So officials no longer needed to employ agents directly.

But the MoD was still lobbying abroad on BAE's [profile] behalf and running huge government-to-government contracts, particularly the Saudi al-Yamamah deal [profile].

Instead of fulfilling their international promises, officials merely tried to put more distance between themselves and the companies doing the bribery.

The defence ministry's Cooper directive of 1977 [document] was rewritten in 1994 [document] in more obscure terms. Officials would no longer visibly "authorise" commission payments. Or correspond about them. Instead, they were to merely "consider" and "advise".

BAE, under Dick Evans's [biography] chairmanship, moved its whole worldwide system of agent payments to Switzerland.

What it did was not illegal, but the firm constructed what might well be called a global money-laundering machine.

For a supposedly reputable public company, the methods used were surprising.

Britain's Serious Fraud Office later concluded: "The whole system is maintained in such conditions of secrecy that there is a legitimate suspicion concerning the real purpose of the payments."

The system was run from a secure block, Warwick House, at BAE's Farnborough premises. "HQ Marketing Services " was headed by Hugh Dickinson, who was also responsible for company liaison with MI6. His long-serving deputy was Julia Aldridge.

Documents indicate that a board-level committee also met to approve each agency agreement.

BAE set up a front company called Novelmight Ltd. [document] With the help of the Swiss branch of its bankers, Lloyds TSB, the firm discreetly rented a high-security office in Geneva, on the sixth floor of a block at 48 Route des Acacias.

Video surveillance cameras were installed, along with an encrypted fax and phone system. A specialist from the UK was flown out to sweep the vault for bugs. Then, just before Britain signed up to the OECD convention in 1997, the filing cabinets and safes containing the agent details were loaded into a van and driven by trusted staff from Farnborough to Geneva.

BAE added a new layer of concealment when the convention came into force in 1999. Novelmight was officially closed down as a UK-registered subsidiary.

But it was secretly re-registered [document] as an offshore entity in the British Virgin Islands, a financial "black hole" in the Caribbean where beneficial ownership can be hidden. Now there was apparently no paperwork at all to link BAE with Novelmight.

The agency agreements were handled by Swiss lawyers Rene Merkt and Cyril Abecassis. The lawyers also set up parallel offshore companies for agents to receive their payments, often into Swiss accounts.

When the agreements were ready to be made or renewed, Dickinson or Aldridge flew to Geneva and unlocked the office at Route des Acacias for the signing.

The contracts were kept in Geneva and could only be inspected there.

The purpose of these tortuous arrangements seems to have been to ensure that nothing questionable involving the hiring of agents took place within UK legal jurisdiction.

But a further secret payment system was also needed for BAE to transfer large sums in cash to those agents.

BAE used offshore front companies once again. In February 1998, "Red Diamond Trading Ltd" was anonymously incorporated in the British Virgin Islands [document]. It was used to channel payments all over the world, via Red Diamond accounts in London, Switzerland and New York.

We have traced secret payments going to agents in South America, Tanzania, Romania, South Africa, Qatar, Chile and the Czech Republic.

Red Diamond was also used to make payments to UK citizens who were working as consultants for BAE. These included David Hart, who advised Thatcher during the miners' strike of the 1980s.

BAE never disclosed the existence of Red Diamond in its published company accounts, and has never explained why it was set up.

A key role in the "laundering" was played by BAE's British bank, Lloyds TSB. [document] Again, what was done was not illegal, although it was surprising.

A system was organised with the online Lloydslink software under which cash from BAE was automatically funnelled through Red Diamond accounts and on to its final destination.

The next year, BAE set up a second front company, purely to handle the Saudi commission payments for al-Yamamah. "Poseidon Trading Investments Ltd" [document] was incorporated in the British Virgin Islands on June 25 1999.

Those close to it say more than £1bn has passed through its accounts to Saudi agents, in transfers made by Lloyds TSB.

A different method was used to disguise corrupt benefits for Saudi officials who went on vacation trips to the US and Europe. This was what became known as BAE's "slush fund".

The head of the Saudi air force, Prince Turki bin Nasser [biography], along with his relatives and hangers-on, were provided with unlimited shopping, plane tickets and free holidays by BAE. They ran up enormous bills, totalling £60m, over the years.

BAE did not pay directly. Instead, the arms firm used two cooperative front companies of travel agents to pick up the bills - Robert Lee International and Travellers World.

Peter Gardiner, Travellers World managing director, has described how deliberately misleading invoices were organised by BAE's executives. They referred merely to "accommodation and support services".

BAE's "money laundries" flourished for a while. In September 2001, however, international terrorists destroyed the twin towers in New York. One of the many reverberations was a US crackdown on terrorist financing.

Under American pressure, the UK was forced to pass anti-laundering measures.

These included a 2002 law that explicitly criminalised overseas bribery and brought corrupt acts abroad under UK jurisdiction.

BAE was now to face a serious new crisis. Confident of its political muscle, the company dealt with it in the end by successfully nobbling the police.

David Leigh and Rob Evans

Part 9: Nobbling the police


Find out more ...
Peter Gardiner Watch the video
Peter Gardiner, the man who ran a slush fund for BAE, testifies about his experiences.
BAE The money trail 64sq The worldwide money trail
Interactive: The secret channels used to make payments worldwide.
BAE's position BAE's position
The documents

How we obtained the documents for the BAE files.

More from the BAE files

Cast of characters

Who are David Leigh and Rob Evans?

What BAE sells

Global investigations

Britain and the arms trade
