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UK arms colossus BAE Systems is under investigation by US authorities for alleged corruption.

According to The Guardian, BAE Systems last night received formal notification that the US Department of Justice was investigating "the company's compliance with anti-corruption laws, including the company's business concerning the Kingdom of Saudi Arabia".

BAE shares immediately plunged 10 per cent during morning trading, down 45.2p to 397p.

The language of the BAE announcement to the London stock exchange suggests that the feds may indeed have a remit to investigate the company's affairs beyond the long-running al-Yamamah deal between the UK and Saudi Governments, as has previously been hinted. It's widely believed that convictions regarding al-Yamamah would be difficult to obtain, as the Saudi officials who have received allegedly corrupt payments are firmly backed by their relative the king. The Saudi state's position is that all payments were entirely legitimate, and thus no crime has taken place.

Convictions regarding Saudi payments may be difficult to obtain; but other governments in Eastern Europe and Africa might well cooperate, especially with US diplomatic clout backing the feds.

BAE, meanwhile, says it has done nothing wrong in following the terms negotiated by the British Government. The Ministry of Defence agreed that large amounts of the Saudi oil credit used to pay for jets and other weaponry under al-Yamamah would be returned to specified Saudi royals in the form of hard cash in Western bank accounts. If BAE had failed to pay up, it would have been guilty of defaulting on a contract.

The fact that the UK Government has been entirely complicit in the handling of al-Yamamah has no doubt contributed to its decision to close down its own Serious Fraud Office investigation into the Saudi backhanders. Not to mention pressure from the House of Saud, who want no public discussion of the way they handle their country's revenues. Last year's announcement by the Saudis that they would purchase a large number of Eurofighters from BAE has no doubt furnished the desert princes with additional leverage.

But the bloodhounds of the SFO, disgruntled at being whipped off a promising scent at the behest of foreign despots and their UK Government and arms-biz puppets, have had their revenge. It was almost certainly insiders at the SFO who leaked details of huge BAE/MoD payments to Saudi Prince Bandar via Riggs bank in Washington.

That gives the American feds an in to the case, and it seems that not even Tony Blair's close chumship with George Bush, nor BAE's traditionally privileged status in DC, has been enough to keep the federal hounds on the leash. The hunt is on.

Where it will lead remains to be seen. The smooth passage of BAE's push to buy US manufacturer Armor must surely now be in doubt. And if people at BAE actually start to go down - the US Government has already used the new US-UK anti-terror extradition arrangements very creatively against suspect Brit businessmen - the arms execs will be reluctant to take the fall alone. They've had government approval for everything they've done - in particular, from officials at the MoD arms-sales-encouragement agency. Some of the trails may lead a surprising distance up the British corridors of power; there will be worried faces along Whitehall this morning.

Tony Blair may be getting out just in time, leaving a massive time bomb for his successor.®

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