Financial Crime and Development

Further Written Evidence from bae systems plc

I wrote to the Committee on Thursday 21 April 2011, with a submission from BAE Systems, and on Friday 17 June 2011 to inform the Committee of the establishment of the chairman and deputy chairman of the Advisory Board, established to advise the company on how best to achieve the objective of ensuring that an ex gratia payment is made to the benefit of the people of Tanzania. In the light of further developments in the Company's plans, and some recent media reporting, we thought it would be helpful to send the Committee a further statement on the background to the radar contract, and the plan to make an ex-gratia payment. This is attached.

The Committee has also indicated its desire to speak to a director of BAE Systems with 'executive responsibility' for the radar contract with Tanzania. This may be the result of a misunderstanding of the situation. The radar contract with Tanzania was under negotiation from 1993 to 1999. Once the contract was signed in 1999, work began and the radar system was commissioned in December 2002.

The events in question, therefore, go back between ten and twenty years. In 1999, British Aerospace merged with Marconi Electronic Systems, leading to substantial management re-organisation. In the intervening decade, BAE Systems as a Company has changed considerably and no current directors of BAE Systems have had any substantive involvement with or responsibility for the radar contract in

question. In those circumstances, there is no serving director who could sensibly address the Committee.

Philip Bramwell who is the Group General Counsel of BAE Systems, took up his post in 2007, and is a member of the Executive Committee of the Company. He had responsibility for the SFO settlement. He will attend the hearing with me. Lord Cairns has also agreed to be present, should the Committee wish to discuss his role as the chairman of the Advisory Board. In that capacity he does not, of course, speak for the Company, and it is important to stress that his role is independent.

I hope that this is helpful.

Yours sincerely

Bob Keen

Head of Government Relations

Thank you for inviting BAE Systems plc (the Company) to submit evidence to and appear before the Committee. Since the Company submitted its initial summary evidence, there have been a number of material developments in relation to the Company’s plans to make an ex gratia payment for the benefit of the people of Tanzania. In addition, a number of speculative media articles have been published and it is clear from some of these that there is a degree of confusion, both as to the basis of the Company’s settlement with the Serious Fraud Office (SFO) and as to the Company’s plans to fulfil its obligations under that settlement. The Company is therefore submitting this additional briefing in order to provide members of the Committee with further information by way of background as well as an update on recent developments.

The following summarises the background to the radar contract and the ex gratia payment that the Company has agreed to make for the benefit of the people of Tanzania.

1. The radar contract

 

1.1 In 1991/2 (i.e. nearly 20 years ago), the Tanzanian Government invited bids for a radar system. What was then Siemens Plessey Electronic Systems Ltd (Siemens Plessey) put in a bid and was successful in competition with four other bidders in April 1993. Siemens Plessey was then entirely independent of BAE Systems or its predecessor British Aerospace.

1.2 Extensive negotiations followed between the Tanzanian Government, Siemens Plessey and various financing banks, in the course of which there was, in 1995, a change in government in Tanzania. In September 1997, a contract was signed, under which the radar system was to be purchased and installed for US$88m, subject to certain conditions precedent. The conditions were not met and as a result the contract did not come into effect.

1.3 In autumn 1997, what was then British Aerospace agreed to purchase Siemens Plessey, together with some of its affiliates. The acquisition was completed in April 1998. Siemens Plessey was renamed British Aerospace Defence Systems Ltd (BADSL).

1.4 Further negotiations then took place with the Tanzanian Government. Eventually, in September 1999, well over a decade ago, a new contract for the supply of two land-based radars and associated communication equipment was entered into, under which the radar system was to be purchased and installed for US$39.97m (£24.5m) i.e. less than half the previously agreed price.

1.5 At this stage, both the Tanzanian Government and BADSL publicly expressed their belief that the contract represented good value for money for Tanzania. Indeed in December 1997, the World Bank had recommended that the contract be entered into. It was expected that the Tanzanian Government would use the Watchman radar system to track aircraft flying through Tanzanian airspace and levy air space utilisation fees upon them. Watchman radar systems are in operation at many airports across the UK and internationally, including Heathrow, Gatwick, Stansted, Manchester, Edinburgh, Rome and Majorca.

1.6 The radar system, therefore, had an upfront cost, but was expected over time to be a tool for generating revenue for the Tanzanian Government. The Tanzanian Government estimated at the time that the annual revenue would be in the order of US$2-5m. Work began on providing the radar and an export licence was granted by the UK Department of Trade & Industry in December 2001.

1.7 The Watchman Air Traffic Control Radar was supplied to the Tanzanian Civil Aviation Authority (TCAA) in 2002; the radar achieved full CAA (Civil Aviation Authority) acceptance in early 2003 and continues in service today to provide Dar es Salaam Airport with a Control Approach and Area En-route service, critical to aviation safety in the country. The system gives very effective service in Dar es Salaam Instrumented Air Space and the TCAA receive revenue for the services provided. Utilising the Tanzanian Government’s own estimates in 2001 economics, revenues of US$16-40m should have been generated by the system since its acceptance, ensuring that the system has already, or will in due course, have paid for itself whilst delivering critical air safety capability.

2. the role of the marketing adviser

 

2.1 To assist it in a market in which it had no established business presence, Siemens Plessey had engaged a marketing adviser called Shailesh Vithlani in Tanzania in 1993. The use of marketing advisers by companies with no in-country staff was common across many industrial sectors and offered a lower cost base for long lead time programmes. As far as we can now tell, throughout the 1990s, Mr Vithlani regularly participated in meetings with the Tanzanian Government with or on behalf of Siemens Plessey, so that it was quite clear for whom he was acting. There were no legal restrictions upon the use of marketing advisers in Tanzania.

2.2 British Aerospace inherited the relationship with Mr Vithlani at the time that it acquired Siemens Plessey in 1998. Its standard processes for dealing with marketing advisers were applied to Mr Vithlani at that stage and contracts with him, or companies associated with him, contained express warranties as to his business conduct including that that he had not, and would not, pay bribes. The percentage commission payable to Mr Vithlani was also substantially reduced to 31% of the radar contract price.

2.3 Mr Vithlani was paid on a commission-only basis, investing his personal time, money and resources in representing Siemens Plessey and its successors over an extended period. He assumed the business risk that Siemens Plessey would be unsuccessful in winning the radar contract in competition with other bidders and he received no commissions between 1993 and 2000, when the first payment for the radar was made by the Tanzanian Government. In accordance with his contract with the Company, the final payments to him in respect of the radar contract were made in December 2005 and were subject to express confirmation from him and from relevant employees that no bribes had been, or would be, paid. In total, approximately US$12.4m was paid to Mr Vithlani or companies associated with him over a period of 12 years.

2.4 All relationships between the BAE Systems group and Mr Vithlani were terminated by April 2007, when BAE Systems undertook a very wide-ranging further review of its relationships with all marketing advisers. This pre-dated the Woolf Committee report, published in May the following year, which led to further efforts by the Company to become recognised as a leader in standards of business conduct.

3. investigation AND settlement

 

3.1 As is well known, the SFO began investigating allegations against what had by then become the BAE Systems group in July 2004. That investigation included the sale of the radar system to Tanzania. In the course of the ensuing five years or more of that investigation, the Company provided hundreds of thousands of documents to the SFO and made every effort to preserve documents and make relevant employees available to the SFO, at a cost to the Company of tens of millions of pounds. As far as the Company is aware, the SFO obtained documents from others, both in the UK and abroad. The SFO also conducted a number of interviews of individuals.

3.2 In February 2010, over five and half years after the investigation had started, the SFO and BAE Systems agreed the basis upon which the investigation should be terminated. The key points of that settlement were as follows:

(a) BAE Systems plc agreed to plead guilty to one charge of failing to ensure that the books and records of its UK subsidiary BADSL were reasonably accurate, contrary to s221 of the Companies Act 1985, in that the commissions paid to Mr Vithlani were described in certain of BADSL's accounting records as being for "technical services", rather than the marketing services actually provided by Mr Vithlani. This offence does not involve any allegation of dishonesty or corruption, and neither was alleged by the SFO nor accepted by BAE Systems plc. Equally, this offence did not take place in Tanzania nor does it expressly or by implication suggest that the radar system supplied by the Company to Tanzania was anything other than fit for purpose and value for money.

(b) The SFO would terminate all of its investigations against the BAE Systems group and would take no other proceedings against the group for matters arising from its investigations. (The SFO remained free to take proceedings against any individual.)

(c) BAE Systems plc agreed to make an ex gratia payment for the benefit of the people of Tanzania in a manner to be agreed between the SFO and BAE Systems plc. The amount of the payment was to be £30m, less any financial orders imposed by the court pursuant to the guilty plea. The figure of £30m was arrived at by negotiation and not by reference to the value of the radar contract in Tanzania or indeed to any other contract.

3.3 At the same time, the Company also reached a settlement with the US Department of Justice in relation to certain statements made to the US Government and certain export control violations. These did not involve the Company pleading guilty to any offence of bribery.

3.4 Between February 2010 and 21 December 2010, pending the outcome of the court proceedings, the matter was sub judice. In the UK, BAE Systems plc pleaded guilty in Westminster Magistrates Court on 23 November 2010 on the agreed charge. The matter was transferred to Southwark Crown Court for sentencing and on 21 December 2010, Mr Justice Bean handed down a sentence of £500,000, plus an agreed sum of £250,000 representing the SFO's costs. This was paid in January 2011.

3.5 Under the terms of the agreement with the SFO, the Company was then due to pay £29.25m for the benefit of the people of Tanzania. However, the Company decided to pay the element of the SFO's costs itself and so preserve the full amount of £29.5m to be applied as an ex gratia payment.

4. application of the ex gratia payment

 

4.1 Once the amount to be paid had been fixed by the Court, the Company took steps to put in place a mechanism to discharge its obligations under the Settlement Agreement with the SFO. The wording of the Settlement Agreement reflects accurately the nature of the Company’s offer during discussions with the SFO. It contains no deadline by which the funds have to be applied, no requirement that the funds be paid out for the benefit of any one class of beneficiary and no restrictions stipulating the payment of a single lump sum or multiple payments over time.

4.2 The Company is, above all, concerned to ensure that a measured and thoughtful approach is applied such that the funds are used in an open manner to create a sustained benefit for the people of Tanzania. To the extent that such benefit can be enhanced by the pro bono contribution of some of the Company’s significant technological capability, the Company has indicated its willingness in principle to make such a contribution.

4.3 To ensure that the Company had available the necessary expertise in international aid and development to achieve its objectives, the Company decided to establish an independently-chaired Advisory Board. In January 2011, soundings were taken in a variety of quarters, including the Foreign and Commonwealth Office, as to the range of individual experience the Company should look for in its independent Advisory Board members. In February 2011, the Company sought and obtained confirmation from the SFO that it approved the Company’s approach.

5. From March 2011 onwards, the company sought to identify candidates to assume the leadership of the advisory board. The company is delighted to have secured the services of Lord Cairns and Philippa Foster Back as independent chair and deputy chair respectively of the Advisory Board. Following a distinguished career in the City, Lord Cairns served as chairman of the Commonwealth Development Corporation, where he was heavily involved in Tanzania and other African countries and he is currently a board member of the Mo Ibrahim Foundation, which seeks to promote good governance in sub-Saharan Africa. Philippa Foster-Back has 30 years of business experience and has been the director of the Institute of Business Ethics since 2001. She was also a member of the Woolf Committee which looked at ethical business practices in the Company.

 

5.1 The Advisory Board is actively seeking further independent members. It would, in particular, welcome Tanzanian representatives.

5.2 The Company understands that Lord Cairns is presently consulting representatives of government, the legislature of Tanzania, and non-governmental organisations who have an interest, and we have received representations and proposals from a number of individuals and NGOs with an interest and involvement in Tanzania. It has become apparent to the Company in light of a meeting with members of the Tanzanian Parliament in recent weeks that the Tanzanian Government may have been led to believe that the terms of the Settlement Agreement between the Company and the SFO entitle the Tanzanian Government to receive payment from the Company. The payment of £29.5m is an ex gratia payment from shareholder funds and the Company intends to apply it as it considers appropriate having taken advice from those with appropriate expertise and subject to agreement of the SFO and adherence to the law and to its corporate policies and processes.

5.3 BAE Systems plc does not owe money to the Tanzanian Government, but has agreed to apply the sum of money in question for the benefit of the Tanzanian people. Moreover, there is real doubt, in the Company’s view, as to whether it is appropriate for the Company to make payments directly to the Tanzanian Government. This is for a variety of reasons including the fact any such payment may be characterised (and indeed is being treated in certain quarters in Tanzania) as a political contribution as defined by the Companies Act 2006 and it is the Company's expressed policy not to make such contributions. [1] That is not to say that the Company is unwilling to ensure that the Government of Tanzania contributes fully to the considerations of the Advisory Board, should it agree to do so, nor that the Company would not consider fully schemes proposed by the Tanzanian Government. The Company would welcome the involvement of the Government of Tanzania in its deliberations, and Lord Cairns will, we are sure, continue to make that clear in his consultations with them.

5.4 For the avoidance of doubt, the Company has formed no view as to how the money should be applied and is awaiting the outcome of the deliberations of the Advisory Board.

5.5 Pending payment, the money has been placed in a designated account within the Company’s corporate treasury department and interest is being accrued to it.

20 July 2011