BAE Systems

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BAE Systems plc
Type Public (LSE: BA., OTCBB: BAESY)
Founded 30 November 1999
Headquarters Farnborough, England, UK
Key people Dick Olver, Chairman
Mike Turner, CEO
Industry Aerospace and defence
Products Civil and military aerospace
Defence electronics
Naval vessels
Munitions
Land warfare systems
Services Maintenance, training etc.
Revenue ▲ £13,765 million (2006)
Operating income ▲ £1,207 million (2006)
Profit ▲ £1,054 million (2006)
Employees 96,000 (2007)
Divisions See below
Subsidiaries BAE Systems Inc.
Website www.baesystems.com

BAE Systems plc (BAE) is a British defence and aerospace company headquartered at Farnborough, UK, which has worldwide interests, particularly in North America through its subsidiary BAE Systems Inc. BAE is the world's third largest defence contractor and the largest in Europe. BAE was formed on 30 November 1999 by the £7.7 billion merger of two British companies: Marconi Electronic Systems (MES), the defence electronics and naval shipbuilding subsidiary of The General Electric Company plc (GEC) and aircraft, munitions and naval systems manufacturer British Aerospace (BAe).

BAE is the successor to many iconic aircraft and defence electronics companies, including The Marconi Company, the first commercial company devoted to the development and use of radio; A.V. Roe and Company, one of the world's first aircraft companies; de Havilland, manufacturer of the world's first commercial jet airliner; British Aircraft Corporation, co-manufacturer of the Concorde supersonic transport; and Supermarine, the manufacturer of the renowned Spitfire. It has increasingly disengaged from its businesses in continental Europe in favour of investing in the United States. Since its formation it has sold its shares of Airbus, EADS Astrium, AMS and Atlas Elektronik.

BAE Systems is involved in several major defence projects, including the F-35 Lightning II, the Eurofighter Typhoon and the Royal Navy Queen Elizabeth class aircraft carriers. The company has been the subject of criticism, both general opposition to the arms trade and also specific allegations of unethical and corrupt practices, including the Al Yamamah contracts with Saudi Arabia that have earned BAE and its predecessor £43 billion in twenty years.

History

Heritage

Evolution of the land systems division of BAE Systems, 1970s to Land & Armaments formation
Evolution of the land systems division of BAE Systems, 1970s to Land & Armaments formation

BAE Systems was formed on 30 November 1999 by the £7.7 billion merger of British Aerospace (BAe) and Marconi Electronic Systems (MES). As a result, BAE Systems is the successor to many of the most famous British aircraft, defence electronics and warship manufacturers. Predecessor companies built the Comet, the world's first commercial jet airliner; the Harrier "jump jet", the world's first operational Vertical/Short Take-Off and Landing aircraft; the "groundbreaking" Blue Vixen radar carried by Sea Harrier FA2s and which formed the basis of the Eurofighter's CAPTOR radar; and co-produced the iconic Concorde supersonic airliner with Aérospatiale.

British Aerospace was a civil and military aircraft manufacturer, as well as a provider of military land systems. The company had emerged from the massive consolidation of UK aircraft manufacturers since World War II. British Aerospace was formed on 29 April 1977 by the nationalisation and merger of The British Aircraft Corporation (BAC), the Hawker Siddeley Group and Scottish Aviation. Both BAC and Hawker Siddeley were themselves the result of various mergers and acquisitions.

Marconi Electronic Systems was the defence subsidiary of British engineering firm The General Electric Company (GEC), dealing largely in military systems integration, as well as naval and land systems. Marconi's heritage dates back to Guglielmo Marconi's Wireless Telegraph & Signal Company, founded in 1897. GEC purchased English Electric (which included Marconi) in 1968 and thereafter used the Marconi brand for its defence businesses (as GEC-Marconi and later Marconi Electronic Systems). GEC's own defence heritage dates back to World War I, when its contribution to the war effort included radios and bulbs. World War II consolidated this position, as the company was involved in important technological advances, notably the cavity magnetron for radar. Between 1945 and 1999, GEC-Marconi/Marconi Electronic Systems became one of the world's most important defence contractors. GEC's major defence related acquisitions included Associated Electrical Industries in 1967, Yarrow Shipbuilders in 1985, Plessey companies in 1989, parts of Ferranti's defence business in 1990, Vickers Shipbuilding and Engineering in 1995 and Kværner Govan in 1999. In June 1998, MES acquired Tracor, a major American defence contractor, for £830 million (approx. US$1.4 billion c. 1998).

Timeline of British aerospace companies since 1955

Formation

The 1997 merger of American corporations Boeing and McDonnell Douglas, which followed the forming of Lockheed Martin, the world's largest defence contractor in 1995, increased the pressure on European defence companies to consolidate. In June 1997 British Aerospace Defence Managing Director John Weston commented "Europe... is supporting three times the number of contractors on less than half the budget of the U.S.". European governments wished to see the merger of their defence manufacturers into a single entity, a European Aerospace and Defence Company.

As early as 1995 British Aerospace and the German aerospace and defence company DaimlerChrysler Aerospace (DASA) were said to be keen to create a transnational aerospace and defence company. The two companies envisaged including Aérospatiale, the other major European aerospace company, but only after its privatisation. The first stage of this integration was seen as the transformation of Airbus from a consortium of British Aerospace, DASA, Aérospatiale and Construcciones Aeronáuticas SA into an integrated company; in this aim BAe and DASA were united against the various objections of Aérospatiale. As well as Airbus, British Aerospace and DASA were partners in the Panavia Tornado and Eurofighter Typhoon aircraft projects. Merger discussions began between British Aerospace and DASA in July 1998, just as French participation became more likely with the announcement that Aérospatiale was to merge with Matra and emerge with a diluted French government shareholding. A merger was agreed between British Aerospace Chairman Richard Evans and DASA CEO Jürgen Schrempp in December 1998.

Meanwhile GEC was also under pressure to participate in defence industry consolidation. Reporting the appointment of George Simpson as GEC managing director in 1996, The Independent had said "some analysts believe that Mr Simpson's inside knowledge of BAe, a long-rumoured GEC bid target, was a key to his appointment. GEC favours forging a national 'champion' defence group with BAe to compete with the giant US organisations." When GEC put MES up for sale on 22 December 1998, BAE abandoned the DASA merger in favour of purchasing its British rival. The merger of British Aerospace and MES was announced on 19 January 1999. Evans stated that in 2004 that his fear was that an American defence contractor would acquire MES and challenge both British Aerospace and DASA. The merger created a vertically integrated company which The Scotsman described as "[a combination of British Aerospace's] contracting and platform-building skills with Marconi's coveted electronics systems capability", for example combining the manufacturer of the Eurofighter with the company that provided many of the aircraft's electronic systems; British Aerospace was MES' largest customer. In contrast, DASA's response to the breakdown of the merger discussion was to merge with Aérospatiale to create the European Aeronautic Defence and Space Company ( EADS), a horizontal integration. EADS has since considered a merger with Thales to create a "fully rounded" company.

Seventeen undertakings were given by BAE Systems to the Department of Trade and Industry which prevented a reference of the merger to the Monopolies and Mergers Commission. These were largely to ensure that the integrated company would tender sub-contracts to external companies on an equal basis with its subsidiaries. Another condition was the " firewalling" of former British Aerospace and MES teams on defence projects such as the Joint Strike Fighter (JSF). In 2007 the government, on advice from the Office of Fair Trading, announced it had agreed to release BAE from ten of the undertakings due to "a change in circumstances".

BAE Systems inherited the "special" shareholding that was established when British Aerospace was privatised. This special share, with a nominal value of £1, is held on behalf of the Secretary of State for Trade and Industry. This shareholding prevents amendments of certain parts of the company's Articles of Association without the permission of the Secretary of State. These Articles require that no foreign person or persons acting together may hold more than 15% of the company's shares or control the majority of the board and that the CEO and the Chairman of BAE Systems must be British nationals.

Expansion and restructuring

BAE Systems' first annual report identified Airbus, support services to militaries and integrated systems for air, land and naval applications as key areas of growth. It also stated the company's desire to both expand in the US and participate in further consolidation in Europe. BAE described 2001 as an "important year" for its European joint ventures, which were reorganised considerably. BAE has described the rationale for expansion in the US; "[it] is by far the largest defence market with spend running close to twice that of the Western European nations combined. Importantly, US investment in research and development is significantly higher than in Western Europe." When Dick Olver was appointed Chairman in July 2004 he ordered a review of the company's businesses which ruled out further European acquisitions or joint ventures and confirmed a "strategic bias" for expansion and investment in the US. The review also confirmed the attractiveness of the land systems sector and, with two acquisitions in 2004 and 2005, BAE moved from a limited land systems supplier to the second largest such company in the world. This shift in strategy was described as "remarkable" by the Financial Times.

In 2000 Matra Marconi Space, a joint BAE/Matra company, was merged with the space division of DASA to form Astrium. On 16 June 2003 BAE sold its 25% share to EADS for £84 million, however due to the lossmaking status of the company BAE invested an equal amount for "restructuring". In January 2001 Airbus Industrie was transformed from an inherently inefficient consortium structure to a formal joint stock company. In November 2001, BAE announced the closure of the Avro Regional Jet ( Avro RJ) production line at Woodford and the cancellation of the Avro RJX, an advanced series of the aircraft family, as the business was "no longer viable". The final Avro RJ to be completed became the last British civil airliner. In December 2001 BAE's share of Matra BAe Dynamics and the missile division of Alenia Marconi Systems (AMS) were merged into MBDA, which thus became the world's second largest missile manufacturer. Although EADS has been reported to be interested in acquiring full control of MBDA, BAE has said that, unlike Airbus, MBDA is a "core business".

In June 2002, BAE confirmed it was in takeover discussions with TRW, an American aerospace, automotive and defence business. This was prompted by Northrop Grumman's £4.1 billion (approx. US$6 billion c. 2002) hostile bid for TRW in February 2002. A bidding war between BAE, Northrop and General Dynamics ended on 2002- 06-01 when Northrop's increased bid of £5.1 billion was accepted. On 11 December 2002, BAE issued a shock profit warning due to cost overruns of the Nimrod MR4 maritime reconnaissance/attack aircraft and the Astute SSN projects. On 2003- 02-19 BAE Systems took a charge of £750 million against these projects and the Ministry of Defence (MOD) agreed to pay a further £700 million of the cost. In 2000 the company had taken a £300 million "loss charge" on the Nimrod contract which was expected to cover "all the costs of completion of the current contract".

In July 2003 BAE Systems and Finmeccanica announced their intention to set up three joint venture companies, to be collectively known as Eurosystems. These companies would have pooled the avionics, C4ISTAR and communications businesses of the two companies. However the difficulties of integrating the companies in this way led to a re-evaluation of the proposal; BAE's 2004 Annual Report states that "recognising the complexity of the earlier proposed Eurosystems transaction with Finmeccanica we have moved to a simpler model". The main part of this deal was the dissolution of AMS and the establishment of SELEX Sensors and Airborne Systems. In late March 2007 BAE Systems sold its 25% share of SELEX Sensors and Airborne Systems to Finmeccanica for €400 million (approx. £270 million c. 2007).

BAE's £2.5 billion purchase of United Defense in 2005 added the M2/M3 Bradley family of armoured vehicles to its product line.
BAE's £2.5 billion purchase of United Defense in 2005 added the M2/M3 Bradley family of armoured vehicles to its product line.

In May 2004, it was reported that BAE Systems was considering selling its shipbuilding divisions, BAE Systems Naval Ships and BAE Systems Submarines. It was understood that General Dynamics wished to acquire the submarine building facilities at Barrow, while VT Group was said to be interested in the remaining yards on the Clyde. As of 2007 BAE Systems is in the process of merging its naval shipbuilding operations with those of VT Group, an aim which is central to the British Government's Defence Industrial Strategy. On 4 June 2004, BAE Systems outbid General Dynamics for Alvis Vickers, the UK's main manufacturer of armoured vehicles. Alvis Vickers was merged with BAE's RO Defence unit to form BAE Systems Land Systems. Recognising the lack of scale of this business compared to General Dynamics, BAE executives soon identified the US defence company United Defense Industries (UDI) as a main acquisition target. On 7 March 2005 BAE announced the £2.25 billion (approx. US$4.2 billion c. 2005) acquisition of the UDI. UDI, a major competitor to General Dynamics, was primarily a land systems manufacturer, boosting BAE Systems' involvement in this sector. UDI, now BAE Systems Land and Armaments, manufactures combat vehicles, artillery systems, naval guns, missile launchers and precision guided munitions.

In December 2005, BAE announced the sale of its German naval systems subsidiary, Atlas Elektronik, to ThyssenKrupp and EADS. The sale was complicated by the requirement of the German government to approve any sale. The Financial Times described the sale as "cut price" due to the fact that French company Thales bid €300 million, but was blocked from purchasing Atlas on national security grounds. On 31 January 2006 BAE announced the sale of BAE Systems Aerostructures to Spirit AeroSystems, Inc. BAE said as early as 2002 that it wished to dispose of what it did not regard as a "core business".

On 18 August 2006 Saudi Arabia signed a contract worth £6 billion to £10 billion for 72 Eurofighter Typhoons, to be delivered by BAE Systems. On 10 September 2006 BAE was awarded a £2.5 billion contract for the upgrade of 80 Royal Saudi Air Force Tornado IDSs. One of BAE's major aims, as highlighted in the 2005 Annual Report, was the granting of increased technology transfer between the UK and the US. The F-35 (JSF) programme became the focus of this effort, with British government ministers such as Lord Drayson, Minister for Defence Procurement, suggesting the UK would withdraw from the project without the transfer of technology that would allow the UK to operate and maintain F-35s independently. However on 12 December 2006, Lord Drayson signed an agreement which allows "an unbroken British chain of command" for operation of the aircraft. On 22 December 2006 BAE received a £947 million contract to provide guaranteed availability of Royal Air Force (RAF) Tornados.

On 7 May 2007 BAE Systems announced its subsidiary BAE Systems Inc. was to purchase Armor Holdings for £2.3 billion (approx. US$4.5 billion c. 2007). The company is a manufacturer of tactical wheeled vehicles and a provider of vehicle and individual armour systems and survivability technologies. Following the approval of regulators and Armor Holdings shareholders, BAE announced the completion of the merger on 31 July 2007.

On 28 November 2007, BAE Systems acquired the Swedish high-tech company Pitch Technologies AB, an innovator of computer-based research simulation and training technologies.

Airbus shareholding

BAE Systems inherited British Aerospace's share of Airbus Industrie, which consisted of two factories at Broughton and Filton. These facilities manufactured wings for the Airbus family of aircraft. In 2001 Airbus was incorporated as Airbus SAS, a joint stock company. In return for a 20% share in the new company BAE Systems transferred ownership of its Airbus plants (known as Airbus UK) to the new company.

Despite repeated suggestions as early as 2000 that BAE wished to sell its 20% share of Airbus, the possibility was consistently denied by the company. However on 6 April 2006 BBC News reported that it was indeed to sell its stake, then "conservatively valued" at £2.4 billion. Due to the slow pace of informal negotiations, BAE exercised its put option which saw investment bank Rothschild appointed to give an independent valuation. Six days after this process began, Airbus announced delays to the A380 with significant effects on the value of Airbus shares. On 2 June 2006 Rothschild valued BAE's share at £1.87 billion, well below BAE's, analysts' and even EADS' expectations. The BAE board recommended that the company proceed with the sale. On 4 October 2006 shareholders voted in favour and the sale was completed on 13 October. BAE's sale of its Airbus share saw the end of UK owned involvement in civil airliner production. Airbus UK continues to be the Airbus "Centre of Excellence" for wing production, employing approximately 140,000 directly and indirectly, but is entirely owned by EADS.

Products

Image:Sdd f35test 009.jpg
BAE Systems is a partner in the F-35 Lightning II programme. It manufactures the aft fuselage, horizontal and vertical tails, as well as various aircraft systems.

BAE plays important roles in military aircraft production. The company's Typhoon, Tornado and Harrier fighter-bombers are all front line aircraft of the RAF. BAE is a major partner in the F-35 Lightning II programme. Its Hawk advanced jet trainer aircraft has been widely exported. In July 2006, the British government declassified the HERTI (High Endurance Rapid Technology Insertion), an Unmanned Aerial Vehicle (UAV) which can navigate autonomously. BAE Systems' interests in commercial aviation are vested in BAE Systems Regional Aircraft. This unit no longer produces aircraft, however it continues to lease and support its products, the BAe 146/Avro RJ family, BAe ATP, Jetstream and BAe 748.

BAE Systems Land Systems manufactures the British Army's Challenger II, Warrior Tracked Armoured Vehicle, M777 howitzer, Panther Command and Liaison Vehicle and L85 Assault Rifle. BAE Systems Land and Armaments manufactures the M2/M3 Bradley fighting vehicle family, the US Navy Advanced Gun System (AGS) and the M109 Paladin.

Major naval projects include the Astute class nuclear submarine, the Type 45 air defence destroyer and the Queen Elizabeth class aircraft carrier. Protector USV, an unmanned surface vehicle, is being developed with RAFAEL and Lockheed Martin.

Areas of business

BAE Systems defines its "home markets" to be Australia, Saudi Arabia, South Africa, Sweden, the UK and US.

UK

BAE Systems is the predominant supplier to the UK Ministry of Defence, being the only company to receive more than £1 billion from the MOD in 2004/2005. Oxford Economic Forecasting states that in 2002 BAE's UK businesses employed 111,578 people, achieved export sales of £3 billion and paid £2.6 billion in taxes. These figures exclude the contribution of Airbus UK.

Since its creation BAE Systems had a difficult relationship with the MOD. This was attributed to deficient project management by the company, but also in part to the deficiencies in the terms of "fixed price contracts". BAE CEO Mike Turner said in 2006 "We had entered into contracts under the old competition rules that frankly we shouldn't have taken". These competition rules were introduced by Lord Levene during the 1980s to shift the burden of risk to the contractor and were in contrast to "cost plus contracts" where a contractor was paid for the value of its product plus an agreed profit.

BAE was operating in "the only truly open defence market", which meant that it was competing with US and European companies for British defence projects, while they were protected in their home markets. The US defence market is competitive, however largely between American firms, while foreign companies are excluded. In December 2005 the MOD published the Defence Industrial Strategy (DIS) which has been widely acknowledged to recognise BAE as the UK's "national champion". The DIS identifies key industrial capabilities which must be maintained within the UK through long-term government commitments to support research spending and procurement. Of these capabilities, several are dominated by BAE, including naval vessels and submarines, armoured fighting vehicles, fixed wing aircraft, general munitions (with the exception of certain "niche capabilities abroad") and Network Enabled Capability (defined as C4ISTAR in the DIS).

After the publication of the DIS BAE Systems CEO Mike Turner said "If we didn't have the DIS and our profitability and the terms of trade had stayed as they were... then there had to be a question mark about our future in the UK". Lord Levene said in the balance between value for money or maintaining a viable industrial base the DIS "tries as well as it can to steer a middle course and to achieve as much as it can in both directions. ...We will never have a perfect solution."

The company's charitable support includes donations to the charity Uk4u-Thanks!, which supports UK service personnel at Christmas.

United States

The attraction of MES to British Aerospace was largely its ownership of Tracor, a major American defence contractor. Since its creation the company has steadily increased its investment in and revenues from the US. Major European companies such as Thales and EADS have yet to be awarded, for example, a position relative to BAE Systems' involvement in the F-35 Lightning II programme.

BAE now sells more to the US Department of Defense (DOD) than the UK MOD. The company has been allowed to buy important defence contractors in the US, however its status as a UK company requires that its US subsidiaries are governed by American executives under Special Security Arrangements. BAE Systems faces less impediments in this sense than its European counterparts, as there is a high degree of integration between the US and UK defence establishments. BAE's purchase of Lockheed Martin Aerospace Electronic Systems in November 2000 was described by John Hamre, CEO of the Centre for Strategic and International Studies and former Deputy Secretary of Defense, as "precedent setting" given the advanced and classified nature of many of that company's products.

The possibility of a merger between BAE and major North American defence contractors has long been reported; including Boeing, General Dynamics, Lockheed Martin and Raytheon.

Rest of world

BAE Systems Australia is the third largest defence contractor in Australia and employs 2,600 people. The Al Yamamah agreements between the UK and Saudi Arabia require "the provision of a complete defence package for the Kingdom of Saudi Arabia"; BAE employs 4,600 people in the kingdom. BAE Systems Land Systems South Africa, 75% owned by BAE, is the largest military vehicle manufacturer in South Africa, and is currently taking part in the US MRAP programme. Apart from its share of Saab, BAE's interests in Sweden are a result of the purchases of Alvis Vickers and UDI, which owned Hägglunds and Bofors respectively; The companies are now part of BAE Systems AB and have a combined workforce of approximately 1,750.

Corporate governance

As of mid-2007 the members of the board of directors of BAE Systems are Dick Olver (Chairman), Mike Turner (CEO), Philip J. Carroll, Ulrich Cartellieri, Chris Geoghegan, Michael Hartnall, Walt Havenstein, Andy Inglis, Ian King, Peter Mason, Roberto Quarta, George Rose, Nigel Rudd and Peter Weinberg.

The previous CEO, John Weston, was forced to resign in 2002 in a boardroom "coup" and was replaced by Mike Turner. The Business reported that Weston was ousted when non-executive directors informed the Chairman that they had lost confidence in him. Further, it was suggested that at least one non-executive director was encouraged to make such a move by the MOD due to the increasingly fractious relationship between BAE and the government. As well as the terms of the Nimrod contract, Weston had fought against the MOD's insistence that one of the first three Type 45 destroyers should be built by VT Group. The Business said he considered this "competition-policy gone mad".

It is understood that Turner has a poor working relationship with senior MOD officials, (for example with former Defence Secretary Geoff Hoon). Significantly the first meeting between Olver and Hoon was said to have gone well, a MOD official commented "He is a man we can do business with. We think it is good to be taking a fresh look at things." Reports in 2005 suggested that relations between Olver and Turner were strained. In June 2005 Turner heightened concerns of boardroom tensions by criticising Olver's knowledge of the defence industry, "[he] has a low knowledge base and knows nothing about our industry". Turner did suggest however that Olver was on a learning curve, "He'll fully understand it [in 5 years]. This is a business that takes time to understand. It's not just business, it's political." On 16 October 2007 BAE Systems announced that Mike Turner will retire in August 2008. The Times called his departure plans "abrupt" and a "shock", given previous statements that he wished to retire in 2013 at the age of 65.

Financial information

BAE Systems revenue by division (2006).
BAE Systems revenue by division (2006).
Table 1 BAE Systems financial results.
Year ended Turnover (£ million) Profit/(loss) before tax (£m) Net profit (£m) Earnings per share (p)
2006- 12-31[a] 13,765 1,207 1,054 19.9
2005- 12-31[a] [b] 12,581 909 761 13.9
2005- 12-31[a] 15,411 845 555 22.5
2004- 12-31[a] 13,222 730 3 17.4
2003- 12-31 15,572 233 8 16.6
2002- 12-31 12,145 (616) (686)[c] 17.3
2001- 12-31 13,138 70 (128) 23.4
2000- 12-31 12,185 179 (19) 18.8
1999- 12-31 8,929 459 328 29.4

[a]: IFRS. Other data prepared using UK GAAP procedures.
[b]: Restated to exclude Airbus contributions. Included for comparison.
[c]: Reflects £750 million charges for problems with Nimrod MRA4 (£500 million) and Astute class submarine (£250 million) programmes.

Of all the company's activities, the most profitable are the Al Yamamah contracts to supply and support the Royal Saudi Air Force. This deal has contributed substantially to BAE's profits; it was 42% in 2003, however in 2005 it was less than 18% (see graph).

Criticisms

HMS Coventry was one of two frigates sold to Romania. The terms of the sale have been controversial.
HMS Coventry was one of two frigates sold to Romania. The terms of the sale have been controversial.

Like many arms manufacturers, BAE has received criticism from various human rights and anti-arms trade organisations due to the human rights records of governments to which it has sold equipment. These include Indonesia, Saudi Arabia, Zimbabwe, and Israel. BAE's US subsidiary makes several subsystems for F-16s, 236 of which have been supplied to the Israel Defense Forces.

In September 2003 The Sunday Times reported that BAE had hired a private security contractor to collate information about individuals working at the Campaign Against Arms Trade and their activities. In February 2007, it again obtained private confidential information from CAAT.

BAE has been subject to allegations of corruption. On 7 February 2007 the Solicitor General Mike O'Brien announced that BAE contracts in six countries were being investigated by the Serious Fraud Office (SFO) for "suspected international corruption"; Chile, the Czech Republic, Qatar, Romania, South Africa and Tanzania. In September 2005 The Guardian alleged that banking records showed that BAE paid £1 million to Augusto Pinochet, the former Chilean dictator.The Guardian has also reported that "clandestine arms deals" have been under investigation in Chile and the UK since 2003 and that British Aerospace and BAE made a number of payments to Pinochet advisers.

The SFO's Czech Republic investigation relates to alleged bribery as part of the deal to lease BAE/Saab Gripen fighters to that country. BAE has been criticised for its role in disposing of surplus Royal Navy warships. HMS Sheffield was sold to the Chilean Navy in 2003 for £27 million, however the government's profit from the sale was £3 million after contracts worth £24 million were placed with BAE for upgrade and refurbishment of the ship. BAE is alleged to have paid "secret offshore commissions" of over £7 million to secure the sale of HMS London and HMS Coventry to the Romanian Navy. BAE received a £116 million contract for the refurbishment of the ships.

In January 2007 BBC News highlighted concerns of arms campaigners regarding arms sales to South Africa, primarily in relation to the £2.3 billion deal which saw BAE supply Hawk trainers and Gripen fighters. The Tanzania inquiry relates to the sale of a radar system to that country in 2002. The sale was criticised by then Secretary of State for International Development Clare Short, opposition MPs and the World Bank.

Responding to allegations of bribery and corruption, BAE Systems' 2006 Corporate Responsibility Report states "we continue to reject these allegations. ...We take our obligations under the law extremely seriously and will continue to comply with all legal requirements around the world."

Nuclear weapons

BAE has been criticised for its indirect engagement in production of nuclear weapons. Through its 37.5% share of MBDA it is involved with the production and support of the ASMP missile, an air launched nuclear missile which forms part of the French nuclear deterrent. BAE is also the UK's only nuclear submarine manufacturer and thus produces a major element of the UK's nuclear deterrent. Due to this BAE was excluded from the portfolio of the government pension fund of Norway in 2006.

Saudi Arabian contracts

One of 24 Panavia Tornado ADVs delivered to the Royal Saudi Air Force as part of the Al Yamamah arms sales.
One of 24 Panavia Tornado ADVs delivered to the Royal Saudi Air Force as part of the Al Yamamah arms sales.

BAE (and British Aerospace previously) has long been the subject of allegations of bribery in relation to its business in Saudi Arabia. The UK National Audit Office (NAO) investigated the Al Yamamah contracts and has so far not published its conclusions, the only NAO report ever to be withheld. The MOD has stated "The report remains sensitive. Disclosure would harm both international relations and the UK's commercial interests." The company has been accused of maintaining a £60 million Saudi slush fund and was the subject of an investigation by the SFO. However on 14 December 2006 it was announced that the SFO was "discontinuing" its investigation into BAE. It stated that representations to its Director and the Attorney General Lord Goldsmith had led to the conclusion that the wider public interest "to safeguard national and international security" outweighed any potential benefits of further investigation. The termination of the investigation has been controversial. In June 2007 the BBC's Panorama alleged BAE Systems "paid hundreds of millions of pounds to the ex-Saudi ambassador to the US, Prince Bandar bin Sultan" in return for his role in the Al Yamamah deals. In late June 2007 the United States Department of Justice began a formal investigation into BAE's compliance with anti-corruption laws.

A judicial review of the decision to drop the investigation was granted on 9 November 2007. It will take place in late January or early February 2008.

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