The US Department of Justice (DoJ) is in talks to establish whether it can launch a formal inquiry into alleged bribery and corruption in BAE Systems, The Times has learnt.

Mike O’Brien, the Solicitor-General, acknowledged that the UK’s Serious Fraud Office (SFO) has met the DoJ to discuss allegations of corrupt practices by BAE.

The DoJ is understood to be looking into whether it has the jurisdiction to pursue BAE over payments allegedly made to win defence contracts from foreign governments. The British Government terminated a similar investigation by the SFO in December amid fears that it would cause a breakdown in relations with Saudi Arabia.

The SFO has six continuing investigations into BAE, involving contracts won from South Africa, Chile, Romania, Tanzania, Qatar and the Czech Republic. Last week it emerged that an official at the US Embassy in London had complained formally to the British Government over the decision to stop the SFO’s Saudi investigation.

The DoJ’s discussions with the SFO are thought to have focused on payments made by Red Diamond, a British Virgin Islands company, to middlemen and officials involved in awarding BAE contracts in various countries. Red Diamond apparently is a subsidiary of BAE.

If President Bush’s Corporate Fraud Task Force, which is operated by the DoJ, can establish that money or communications from Red Diamond entered US jurisdiction, even in the form of electronic data, then BAE could be pursued under the Foreign Corrupt Practices Act.

Penalties under the Act are severe. Companies can be fined millions of dollars, forced to pay back profits from corrupt deals and excluded from US government contracts.

Vince Cable, the Deputy Leader of the Liberal Democrats, told the Commons last night that the allegations of corruption against BAE were damaging the reputation of Britain overseas. He also asked what help the UK authorities were giving to the DoJ and what the Department of Trade and Industry was doing to investigate Red Diamond and its links to BAE. Dr Cable said yesterday: “How can we allow an operation like Red Diamond to be hidden offshore, given the concerns about money laundering and corrupt practices?”

In a written answer to a question from Dr Cable, Mr O’Brien said: “The Serious Fraud Office has met with representatives of the US Department of Justice to discuss case-related matters.”

The DoJ declined to comment. A spokeswoman for BAE said: “We are not aware of any investigation or any intent to investigate by the DoJ.”

Michael Marinelli, an international trade lawyer with Cooley Godward Kronish in Washington, said: “The DoJ will look for any kind of thread that runs through the US, including wire instructions.”

Baker Hughes, the oil services company, paid $44 million (£22 million) in fines last week for breaching the Foreign Corrupt Practices Act.

The Investigators

The President’s Taskforce on Corporate Fraud at the US Department of Justice

The Law

Foreign Corrupt Practice Act

Potential Penalties

Loss of profits, debarred from government contracts, civil and criminal fines, executives can be jailed

US Sales: £5.5bn
Total Sales: £13.7bn
US employees: 36,000
Total employees: 88,000

BAE is the world’s fourth largest defence company. It is the seventh largest in the US domestic market

Explore Industry Sectors

• Banking & Finance

• Construction & Property

• Consumer Goods

• Engineering

• Health

• Industrials

• Leisure

• Media

• Natural Resources

• Retailing

• Support Services

• Technology

• Telecoms

• Transport

• Utilities

Times Recommends

• BA chief waives bonus after T5 fiasco
• Prospects of cheaper loans hit as Libor soars
• Rice price dives as US and Japan set to unlock grain pact