Ethics are dead. Long live BAE! - Dropping the inquiry into the Al-Yamamah arms deal with Saudi Arabia is a triumph of realpolitik over principle. Larry Elliott, economics editor Monday December 18, 2006 The Guardian Imagine that you are the French trade minister, keen to derail the global trade talks for fear that they will result in a wholesale dismantling of the Common Agricultural Policy. It's been an uphill struggle but at last help is at hand. The next time Tony Blair calls Jacques Chirac to insist that he must face down protests from angry French farmers and stand up for free trade, there is a perfect one-word response: BAE. Imagine you are the leader of a small, poor, African country with a troubled past and a cavalier approach to pluralism and democracy. Indeed, the crackdown on dissidents has become so blatant in recent months that the Department for International Development will cut off British aid unless the standard of governance is improved. As Hilary Benn repeats his prime minister's mantra - help for Africa is a deal for a deal, aid in return for a crackdown on corruption - you whisper one word: BAE. It all seems a long time since we were told that Labour, in contrast to the sleazy Tories, would have an ethical foreign policy. The decision to order the Serious Fraud Office to drop the inquiry into the Al-Yamamah arms deal with Saudi Arabia signed in the 1980s is the triumph of realpolitik over principle. As revealed yesterday, ministers may face a legal challenge; the Organisation for Economic Cooperation and Development wants to know why Britain seems to have flouted its obligations under an international anti-bribery code. But to those who argue the SFO inquiry should have been allowed to run its course, the retort is simple: join the real world. The defence industry is a complicated business and there are plenty of jobs at stake here. That's true, but ministers are now exposed to the charge not just of hypocrisy but of economic illogicality. 'Call girls' Although the intervention of the attorney general, Lord Goldsmith, means that the courts are now unlikely to hear details of alleged slush funds and call girls, the public would be forgiven for suspecting that the defence contract stank to high heaven. The Saudis would prefer not to have baskets full of allegedly dirty linen washed in public and Labour has duly halted the inquiry. What does this say about the interface between politics and economics? Firstly, that there are some countries you bully and some countries you don't. There is a world of difference in getting tough with, say, Ethiopia, over its standards of government procurement and doing the same with the world's biggest oil producer. Abuses of human rights are always less serious in a big country with clout (eg China) than in a country where the high moral ground can be occupied without fear of economic consequences (eg Zimbabwe). But it is good to have double standards so clearly highlighted. The government's argument that its appeasement was due to concerns about national security, rather than fear that BAE would lose a £6bn contract for the next phase of the Al-Yamamah deal, suggests delusions of grandeur. What matters in the geopolitics of the Middle East is the relationship between Saudi Arabia and the United States; anything Britain does is a sideshow. The idea that the Saudis would abandon their pro-west stance because a few executives came up before the UK courts is risible. No, this was really about money. With Britain's own oil and gas reserves falling, Whitehall has justifiable concerns about energy security. Saudi is the world's No 1 supplier of oil and is too powerful to upset. Given that Russia has the world's biggest reserves of gas, those expecting the incorruptible British justice system to deliver up the killers of Alexander Litvinenko may be in for a long wait. It's not just about energy, though, because BAE is vital to what remains of British industry. The UK only has a global presence in pharmaceuticals and defence. It is no accident that both have benefited from strong and consistent government support for many decades. In an increasingly competitive world, the government has used its enormous procurement powers in the NHS and the Ministry of Defence to favour British firms. Pharma and defence account for 70% of the UK's annual spending on research and development; they represent the hi-tech, knowledge-based sectors that ministers want to foster. What's more, problems for BAE would mean problems for other companies, such as Rolls-Royce, which has gone from bankruptcy to world-beater in three decades. The UK is not so blessed with world-class firms that it can afford to let them go without a struggle. If that means turning a blind eye to alleged wrongdoing or failing to investigate whether palms may have been greased to win a deal, then that's what happens. 'Dark arts' The clinching argument, certainly as far as BAE is concerned, is that everybody is at it. The French would happily step in and sell the Saudis warplanes if BAE got the push but does anybody believe that our neighbours are whiter than white? Of course not. We know that the billions spent by the Pentagon help to subsidise the US defence industry. We know that the French are experts in the "dark arts" of securing military contracts. It seems only fair that British firms compete on the same terms, particularly since any alleged wrongdoing was a long time ago. The problem is that the attorney general's support for BAE amounts to protectionism, which the government in all its public statements considers to be a Very Bad Thing indeed. If Labour truly believes in the sanctity of market forces, it's hard to justify feather-bedding a company - even one as important as BAE - in this way. According to its own ideology, there should be no assured MoD contracts, no bowing to lobbying, no favours. Defence procurement would be done on the basis of free-market principles, with taxpayers getting the best value for money, savings used to boost other parts of the economy and the message to BAE workers the same as that given to those who lost their jobs in textiles or steel: that's globalisation. That is certainly a logical position for the government to take. Another logical stance is that the perfect world of global market forces simply does not exist, and that there are powerful arguments for states using their financial power to support industries they consider strategically or economically vital. A third position, and one that perhaps ought to appeal to a Labour government, is that it is proper for public money to be used to nurture and support industry, and that if a fraction of the money that has been spent over many decades on safeguarding Britain's position as one of the world's leading arms dealers had been spent on renewable energy and procuring green technology from the UK's environmental industries, we might all be a lot better off.

Flashback: US accuses British over BAE arms deal bribery bid Rob Evans and Ian Traynor in Prague Thursday June 12, 2003 The Guardian The US has accused Britain's biggest weapons company, BAE Systems, and its British government sponsor of "corrupt practice" over a Czech arms deal, according to documents obtained by the Guardian. The American government made the accusation after receiving reports from the CIA and rival firms. A Guardian investigation in Prague has obtained first-hand evidence confirming bribery attempts on behalf of the BAE deal. The bribery of foreigners is now a criminal offence under British law. However, the Ministry of Defence's permanent secretary, Sir Kevin Tebbit, to whom Washington's accusations were made personally last year, failed to call in the police to investigate the allegations. Instead, Sir Kevin claimed in a letter to the US state department assistant secretary, Anthony Wayne, that the complaint had been investigated and was groundless. The MoD told the Guardian this week that the allegation "has never been substantiated by any evidence whatsoever". In Prague, the allegations are well-documented. The bribery attempts to promote the BAE deal were confirmed by the Czech police, although BAE flatly denies authorising any such attempt. Two senior Czech politicians separately claimed they were offered bribes last summer in an attempt to prevent them voting against the £1bn deal to buy Gripen fighter jets from a BAE-Saab joint venture. Those attempts were directed at opposition politicians, but it is also claimed in Prague that larger sums of money went to people linked to politicians in the governing Social Democrat coalition. "I am convinced that money went to the Social Democrats," a senior Czech government official said. BAE admits that it offered corporate financial favours to the head of a Czech television station which it wanted to support its campaign in 2001. British laws banning corrupt acts abroad only came into force the following year. Prague sources say BAE Systems had a £1.5m annual lobbying budget to influence Czech opinion. Four rival companies, two of them American, pulled out of the bidding in May 2001 in a coordinated protest against what they alleged was a rigged deal in favour of BAE. The disclosure of the US confrontation with Britain is particularly serious because both Tony Blair and the defence secretary, Geoff Hoon, flew to Prague and lobbied the Czechs unsuccessfully on BAE's behalf. The deal is currently shelved. An email obtained under the US Freedom of Information Act in the course of a major Guardian investigation into British arms sales describes the clash in July last year between Sir Kevin and Mr Wayne, a senior state department official in charge of US-foreign business deals. After Mr Wayne made his accusations of bribery, Sir Kevin wrote rejecting them. On September 6, a commerce department official, Thomas Barlow, emailed a colleague, William Denk, telling him of Sir Kevin's "sharp response". The letter expresses surprise at being "confronted... with repeated but unsubstantiated allegations of corrupt practice by BAE Systems in the dealings with the Czech Republic... [and that he] is satisfied that all reasonable steps have been taken to investigate US claims... [and that] unless you have any information to provide in the form of firm evidence, we need to draw a line under this subject". The MoD could not tell the Guardian of any steps Sir Kevin took to investigate the claims. It said: "If anyone believes they have evidence to support this allegation, they should present it to the police. If MoD had received any such evidence we would certainly have reported it to the police. We have not." BAE said: "BAE Systems did not pay bribes in the Czech Republic in order to influence any decisions in Gripen's favour. Nor did BAE Systems ever authorise or direct anyone to pay bribes to that end."

Flashback: BAE faces corruption claims around world - Disclosures on Czech deal to be referred to police Rob Evans, Ian Traynor in Prague, Luke Harding in New Delhi and Rory Carroll in Johannesburg Saturday June 14, 2003 The Guardian Allegations of corruption involving BAE Systems, the government-sponsored arms firm, have been identified by the Guardian in a further three countries. The new allegations are in India, where BAE is currently renewing efforts to sell the Hawk fighter/trainer; Qatar, where a relative of the ruler was paid £7m; and South Africa, where the then defence minister is alleged to have been bribed, also to buy Hawks. The claims mirror the advice of the businessman Sir Donald Stokes nearly 40 years ago to the government's newly created arms sales unit, DESO - revealed this week in the Guardian. He said it should target key officials and use local agents to dispense "the less orthodox inducements". Roger Berry, the Labour chairman of the Commons quadripartite committee that examines the arms trade, said of the Guardian's series that he was writing to the government demanding answers: "These are extremely important issues which parliament should investigate." He said companies could be made to declare that they will not bribe to get an export licence. Vincent Cable, the Liberal Democrat trade spokesman, said he was referring to the police the Guardian's earlier disclosures of BAE bribery allegations in the Czech Republic and DESO's involvement in authorising bribes. "The traditional, cosy special relationship between the Ministry of Defence and BAE must not be allowed to get in the way of a proper examination of these serious allegations," Mr Cable said. He called for DESO, the defence exports services organisation, to be shut down. "There are far too many unhealthy relationships involving DESO, the export credits guarantee department, the defence industry and overseas governments. The government should clean up its act and get out of this business altogether." In India, undercover transcripts obtained by investigators allege an agent for BAE Systems - manufacturer of the Hawk jet - made corrupt approaches to a party treasurer linked to the Indian defence minister, George Fernandes. This was revealed when a team of local journalists disguised themselves as Indian arms sellers. Their undercover videotapes recorded a claim by the treasurer of the defence minister's party of an approach by an alleged confidential agent for BAE, a businessman named Sudheep Chaudhury. BAE said: "It does not matter what is said in whatever manufactured document you have. BAE does not and has not used agents in India." According to the tapes, the treasurer rejected the approach - but for one reason only. He had already been signed up by the Hawk's Russian rivals, he said, for a "special commission" of 10% of the value of the deal. The tapes, which were made by Tehelka.com, an online team of journalists, caused a huge scandal in India because they implicated the defence minister in a wide range of bribery allegations. DESO is heavily involved in the Indian bid. In 1988 the then head of DESO, BAE's own Sir Colin Chandler, told a private meeting in London of plane firms: "Doing business in India has always required the use of agents. Following the Bofors scandal the official Indian view on the matter has been quite emphatic. The word is, as I was told: 'There shall be no agents'. However, it is not quite as simple as that ..." In the Bofors scandal, three millionaire traders, the Hinduja brothers, still face a belated trial, accused of hiding multi-million pound "commissions" from the Swedish howitzer company in Swiss banks. When the Tehelka "sting" was taped, an Indian army general told them: "There is a famous bloody arms dealer called Mr Chaudhury. You must have heard of him. Bloody everywhere, he roams around in a 500SEL Mercedes. His claim to fame was that his brother-in-law was a chairman of Hindustan Aeronautics [the Indian state plane-makers]." Subsequently, the undercover journalists met RK Thain, the treasurer of the Samata party, to which the defence minister belonged. Thain was filmed explaining to them how he passed on shares of commissions to party funds and politicians, and described a meeting he had in 1998 in Delhi: "That Sudheep Chaudhury. That guy approached me. He is the man who was looking after the Hawk interest. I went to Sudheep Chaudhury's house _ He says, 'Mr Thain, why you want to go with MiG? They will not get the order. Both of us, let us _ let us make an understanding. Why competition? If you want, I can give you a letter where all positive points of the British Hawks are there ..." Thain said he was forced to tell him: "But I am sorry. I cannot shake hands with British Hawk ..., I don't like to run around, run after two companies in the same job. I have feeling that I must work for MiG. So, I am sorry, I cannot work for British Hawk." In Delhi, Mr Chaudhury's assistant told us: "He is medically unfit at present. He has been away for most of the time". Mr Chaudhury did not respond to invitations to comment. Mr Thain has not commented since the tapes were published. Mr Fernandes was forced to resign after the Tehelka exposures, but was later reinstated. A commission of inquiry is taking place into his activities and those of Mr Chaudhury but has produced no result so far. In another part of the world, in Qatar, Sheikh Hamad bin Jassim bin Jaber, the ruler's influential cousin, was paid a £7m commission into a secret Jersey trust run by Grindlay's bank. The Serious Fraud Office traced the payment to BAE and to a deal to sell Piranha armoured cars, originally brokered in 1996 by Michael Portillo, then the Tory defence secretary, now on the BAE board. However, police investigations into the sheikh were halted when he paid £6m to the Jersey authorities to compensate them for "inconvenience". The government admits the Foreign Office had a report of this commission payment in 1998, the year the Piranhas were delivered. In South Africa, the successful £1.5bn sale of a consignment of BAE Hawks to the poverty-stricken country has been consumed by scandal since it was signed in 1999. One politician from the ruling African National Congress who was close to an official investigation alleged: "The defence minister, Joe Modise, was bribed." He said investigators believed "money was paid to the ANC for their 1999 election fund, and £500,000 also went to Modise. It was paid into a Saudi bank, transferred to their Algerian branch, and moved from there to Mozambique." He said that Aermacchi, the Italian rival to BAE, was informed that, to win, a deal had to be done with "sub-contractors" - in reality a front company owned by associates of Modise. (A US company, Bell, which lost out on a helicopter contract, revealed that it had been pressured in the same way.) Documents show that Modise intervened to prevent the cheaper Aermacchi trainer being selected. They also show the BAE-Saab partnership promised lavish investment in South Africa by way of industrial "offsets". This was to include the enrichment of Conlog, a company in which Modise was a shareholder. The heavily sanitised 2001 report by the South African auditor general contented itself with saying that Mod-ise's behaviour had been "extremely undesirable" and was under further investigation - investigations which have never been concluded. Modise subsequently died. BAE never proceeded with the Conlog investment and told us it "did not pay bribes". BAE said the authorities had thoroughly investigated and found the allegations to be baseless.

Flashback: Homes for executive's mistress 'bought from BAE fund' David Leigh and Rob Evans Monday September 15, 2003 The Guardian The mistress of an executive of the arms firm BAE has admitted that she personally acquired two houses worth more than £300,000, which it is alleged were fraudulently charged to a big arms deal contract as part of a £20m BAE slush fund. Sylvia St John admitted to the Guardian that she was the occupant of both a house in Putney, south-west London, and a Northern Ireland holiday home in Ballygally. Documents in the Guardian's possession suggest that both houses were charged to the slush fund allegedly designed to bribe top Saudi officials involved in the long-running Al Yamamah arms deals. Ms St John's then lover, a retired RAF wing commander, Tony Winship, is alleged to have been in charge of the slush fund on BAE's behalf. The £300,000 payments were passed through the books as confidential payments, purportedly to a member of the Saudi royal family, the deputy head of the Saudi air force, Prince Turki bin Nasser. But there is no evidence that Prince Turki was aware of the transactions, and it is alleged that his name was fraudulently used. Ms St John lives in the Putney house. She and Mr Winship used to live there together. "We were in love," she said. Although the house has been officially registered in the name of Prince Turki, she told us she had the title deeds. The house in Northern Ireland, where Ms St John told us she had family connections, is registered in her own name; she claimed she had bought the house herself. But in a signed statement, the owner of the front company used by BAE, known as Robert Lee International, admits that BAE's alleged slush fund paid for the houses. In the statement, John Sharp, managing director of RLI says Prince Turki wanted Ms St John to have the houses as a gift and that "BAE authorised and approved the expenditure". In a letter obtained by the Guardian, Mr Sharp tells Ms St John how the alleged slush fund will pay the council tax and utility bills for the Northern Ireland house. Bills ranging from building renovation to the cost of a "a pair of an tique brass firedogs" for the Putney house were also charged to BAE. Mr Winship, employed at the time as BAE's Saudi "customer relations officer", has refused to comment on the allegation that he set up a love nest for his mistress with money from BAE's slush fund. BAE has not yet sought to rebut any of the detailed allegations about a slush fund, which were secretly reported to the Serious Fraud Office (SFO) in 2001 and disclosed by the Guardian last week. Chief executive Mike Turner said BAE vigorously denied any illegality or wrongdoing. The chairman, Sir Richard Evans, has remained silent about the extent of his knowledge. A letter from the then head of the SFO, Rosalind Wright, contained allegations that he might have been per sonally complicit in the operation of the slush fund. A former BAE security official, Martin Bromley, who was head of investigations for BAE group security at their Farnborough headquarters, told the Guardian yesterday that he had compiled a five-page report in 1996 on the fraud allegations. The Guardian has a copy of the report. Mr Bromley gave the original to BAE's head of security, Michael McGinty, he said. "Mr McGinty told me he had taken it to Dick Evans personally who had reassured him that the situation was under control." Ms St John, a former film make-up artist, was given a salary by BAE's front company and, in correspondence we have obtained, described herself as "customer families offi cer, Saudi Arabian support department, British Aerospace [Military Aircraft] Ltd". She said she had visited and comforted in hospital a sister of Prince Turki, who was dying of cancer. When it was put to her that BAE's alleged slush fund had paid for her house she said: "Yes, but I had earned the money." Investigations into the BAE allegations have so far been blocked by the MoD, whose own officials are implicated in the scandal. The MoD paid BAE for the allegedly fraudulent invoices, and then endorsed them for repayment by the Saudi government, the ultimate losers in any fraud. Both the SFO and the national audit office have now been asked to investigate.

Blair defends decision to drop fraud probe into Saudi arms deal - Business Profits Supercede the Rule of Law? The Associated Press December 15, 2006 LONDON: Prime Minister Tony Blair has defended a government decision to halt an investigation into alleged bribery in a multibillion dollar arms deal between BAE Systems PLC and Saudi Arabia, saying Friday that he took full responsibility for the controversial move. Blair said advising the Serious Fraud Office to drop its long-running investigation was necessary to ensure national security, but lawmakers from all political sides accused him of bowing to Saudi demands. "Our relationship with Saudi Arabia is vitally important for our country, in terms of counterterrorism, in terms of the broader Middle East, in terms of helping in respect of Israel/Palestine, and that strategic interest comes first," Blair told reporters at a European Union summit in Brussels. "Particularly in circumstances where if this prosecution had gone forward there would have been months and possibly years of ill feeling between us and a key partner and ally, and probably to no purpose," he said. "I take full responsibility for the advice I gave." The Serious Fraud Office was investigating allegations that BAE ran a 60 million-pound (US$110 million; €90 million) "slush fund" offering sweeteners to officials from Saudi Arabia in return for lucrative contracts as part of the Al-Yamamah arms deal in the 1980s. Al-Yamamah, meaning "the dove," was the name given to an agreement under which BAE supplied Tornado fighter jets and other military equipment to Saudi Arabia, which paid the British government with barrels of oil. The full extent of the deal was never revealed but it was widely believed to be Britain's largest-ever export agreement. Reports earlier this month said that the Saudi government had told Britain to drop the probe or lose a 10 billion pound (US$19.6 million; €14.9 million) contract to buy Typhoon Eurofighter jets, a deal that will supersede the Al-Yamamah agreement. That left Blair open Friday to accusations of political interference in a criminal case in a bid to protect BAE's commercial interests. The company's shares soared almost 7 percent Friday, adding almost 900 million pounds (US$1.8 billion; €1.36 billion) to its market value. "We appear to be giving businessmen carte blanche to do business with Saudi Arabia which may involve illegal payments or illegal inducements," said Eric Illsley, a member of Blair's Labour Party who sits on the Foreign Affairs Select Committee. "We have been leaned on very heavily by the Saudis," Illsley added when asked about possible blackmail in the decision. Liberal Democrat Leader Menzies Campbell said the government should reveal details of advice it received from its legal advisers and conversations between Blair and his Cabinet ministers before the decision was announced Thursday by Lord Goldsmith, the government's chief legal adviser. "If the government does not come completely clean about how, when and why this decision was reached, it will be impossible to resist the conclusion that political and diplomatic pressure has carried more weight than a proper legal assessment," Campbell said. A leading pressure group, the Campaign Against Arms Trade, said it had instructed lawyers to look into the possibility of taking legal action against the government. "We think it's a serious possibility," said spokesman Symon Hill. The controversial decision has piled further pressure on Blair amid the news that he was interviewed Thursday by police investigating allegations that peerages and other honors were bestowed in return for contributions to Labour Party funds. The 90-minute interview did not take place "under caution" - meaning it was unlikely police suspected Blair of any criminal offense. However, it is extremely rare for a serving prime minister to be quizzed by police and it will be seen as a further dent to his reputation. BAE issued a brief statement welcoming the Serious Fraud Office decision, but declined to comment further. Lyndsay Hoyle, the ruling Labour Party's representative in Lancashire county where BAE is the largest industrial employer, said the company's staff were celebrating "an early Christmas present." "Tens of thousands of jobs were put at risk by a 1980s issue," Hoyle said.

Arms and the man - Blair and the Saudi Arms Deal Probe Leader Friday December 15, 2006 The Guardian For a prime minister who once taunted his predecessor as someone "knee deep in dishonour" over an arms deal and who promised that he would be "purer than pure" in office, yesterday was a shabby, shaming day, among the most inglorious he has spent in office. First Tony Blair was interviewed by Scotland Yard at Downing Street, which in itself was an extraordinary thing. Nothing like it has ever happened before. Then, in the House of Lords, the attorney general hauled up the flag of surrender in the face of Saudi demands that the Serious Fraud Office stop its investigation into BAE Systems' arms deals with Saudi Arabia, amid fears for its vast contract to sell Typhoon fighters. This meek announcement was made worse by Lord Goldsmith's assertion that "it has been necessary to balance the need to maintain the rule of law against the wider public interest". To some of those at the top of government, legality appears to be a flexible concept. The rule of law - a concept the government enshrined in statute only last year - surely requires that the executive does not intervene in the operation of the course of justice. The precedent set yesterday in the BAE investigation is dismaying for the cash-for-honours inquiry, where Lord Goldsmith has the power to stop any prosecution. The Serious Fraud Office, which in theory took yesterday's decision, had not completed its investigation, or decided that it would not result in a prosecution. Pressure to stop came from Saudi Arabia, and ministers including the foreign and defence secretaries. The government cited advice from intelligence chiefs, a fig leaf that should have been shed after Iraq. Yesterday will leave stains on Mr Blair that will survive any amount of scrubbing. They are serious contributions to the air of evasion and shabby practice which has already enveloped this government and which threatens to become Mr Blair's legacy to his successor. Things were not helped by the heavy-handed sense that Downing Street had scheduled the police interview, and perhaps the BAE announcement too, for a day when other news would minimise its impact. Of two events, it was the decision on BAE Systems which was the more breathtaking. The Conservative response was feeble; only the Liberal Democrats resisted - one suggesting that the government had given in to "blackmail". "No weight has been given to the commercial impact," said the attorney general, citing the "serious" damage that would be done to UK-Saudi diplomatic relations instead. But that was a thin cover for a nakedly political decision. It is two decades since Margaret Thatcher secured the first of the big Al-Yamamah arms deals with Saudi Arabia, and arms sales have coloured relations with Saudi ever since. The sway BAE Systems holds over the top of the British establishment is extraordinary. Earlier this month Stephen Day, a senior retired diplomat once involved in the negotiations, urged the SFO to "stick to its guns". The British state seems to be more interested in selling them. Yet on a day heavy with difficult news, it was the police's arrival to interview Mr Blair which will attract the greater attention. Downing Street was quick to portray it as something of a triumph, since it did not happen under arrest or caution. The nature of yesterday's interview, kept deliberately low-key by both parties involved, suggests that prosecutions are not the most likely outcome. Yet, whatever the Crown Prosecution Service decides, the way in which loans were raised and disguised (by both parties) was wrong, an avoidance of the law even if not explicitly a breach of it. If Mr Yates's inquiry peters out into nothing, some in Downing Street may hope to protest at the way they have been treated. They would do well to stay silent. Enough has already been exposed, on party funding and on the Saudi deals, to make Mr Blair's decade-old promise of an excess of purity ring awfully hollow.

Blackmailed by dictators - Blair has shamefully flouted the law to protect the arms industry's bungs. It's an all-time low John Kampfner Saturday December 16, 2006 The Guardian This much we knew already: Tony Blair's administration is riddled with double standards and hypocrisy in its international dealings. But Lord Goldsmith's announcement that the Serious Fraud Office was calling off its investigation into alleged corruption involving BAE Systems and Saudi Arabia dragged matters to an all-time low. The explanations given are startling. Goldsmith has form in being flexible with the law and the truth - as with his legal advice in advance of Iraq. He said the following, to a near-empty House of Lords on Thursday evening as the media's attention was on the police questioning of the prime minister and the report on Diana's death: "It has been necessary to balance the need to maintain the rule of law against the wider public interest." In this respect, he was nothing if not candid: the law is not sacrosanct. He and others went on to say that this interest was not commercial, but based in diplomacy and security. As not a shred of evidence has been provided, one can be fairly safe in dismissing this as disingenuous. The economic concerns are understandable. BAE is one of the UK's largest corporations and the world's fourth largest arms company. The Al-Yamamah deal, signed in 1988, has been worth £43bn. These and other justifications were eloquently set out on the radio yesterday by the former Conservative convict, Jonathan Aitken. The problem here is not really BAE. Companies flog arms around the world, if they are allowed or encouraged to. The job of politicians is to ensure that economic activity is consistent with the law and other standards. The response of Labour MPs and trade unions has been shoddy. Jobs are important, but the need to preserve them should not supersede the law. There is, indeed, no evidence that the arms industry is the best way of creating and sustaining employment. It is the one sector that has been allowed to buck the rigours of the market, where cartels are rampant and state subsidies in the UK alone are estimated at close to £1bn a year. The arms industry has long enjoyed special treatment from government. Documents obtained by this newspaper three years ago showed how the Defence Export Services Organisation, an arm of the Ministry of Defence, has been officially authorising what it calls "special commissions" - in other words, bungs. In so doing it was conspiring to break Britain's own laws. None of this is new. According to those same documents, the head of DESO acknowledged back in 1977 bribes paid to the Shah of Iran. Just as then, just as now, we seek to ingratiate ourselves with odious regimes. Irrespective of the morality of this approach, it rarely pays dividends in terms of security and intelligence. What is most disconcerting is that this government, briefly, pledged to be different. Robin Cook's mission statement of May 12 1997, quietly disparaged by Downing Street, still bears remembering. "Our foreign policy must have an ethical dimension and must support the demands of other peoples for the democratic rights on which we insist for ourselves," he said. This code of conduct has since been unpicked to such a degree that it is now meaningless. Now, thanks to Blair, Britain can be blackmailed at will by dictatorships, and will do whatever it takes to stay on good economic terms with them. When in future a foreign government cocks a snook at us over civil liberties, when children are killed by oppressive governments using weapons made in the UK, greet the howls of outrage from our ministers with derision. When Blair or Gordon Brown or any future prime minister cite morality in waging war in a foreign land, treat their words with scorn. - John Kampfner is editor of the New Statesman Newstatesman.com