BAE Systems’ proposed $4.5 billion (£2.26 billion) acquisition of Armor Holdings in the United States has been thrown into doubt by the latest allegations of corruption against the defence giant.

Diplomatic sources in the US have revealed that the deal could be in danger as officials threaten a closer examination.

“There are protectionist elements on Capitol Hill and elsewhere who are looking for an excuse to block BAE,” the source said. “This may have just provided them with one.”

The doubts over BAE’s purchase of Armor, which makes armoured panels for Humvee vehicles, come as BAE, Europe’s largest defence company, faces allegations that it paid more than £1 billion to a Saudi prince as part of a 1980s arms deal.

Background

• MoD names Thales and Boeing as ‘battlespace’ team

• Eurofighters go to Saudi Arabia in £4.4bn order

• MoD seeks a way out of Typhoon contract

• Armor wins $4bn contract with US military

• Arms companies showcase latest technology

A long and lucrative relationship

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Al-Yamamah, meaning “dove of peace”, was signed between Saudi Arabia and the UK in 1985 and has been worth more than £43 billion to BAE since.

Under the terms of the oil-for-arms agreement, BAE has supplied the Royal Saudi Air Force with 72 Tornado strike fighters plus other military equipment, including trainer jets and helicopters.

Al-Yamamah has been dogged by allegations of bribery and corruption for years and the Serious Fraud Office was investigating these claims until last December when the Government shut down the case on grounds of national security.

BAE is accused of operating a $100 million slush fund to entertain Saudi officials and of channelling money from the deal into the bank accounts of Saudi royals.

Yesterday the BBC and The Guardian named Prince Bandar, the former Ambassador to the US and a key architect of al-Yamamah, as one of the recipients of money from BAE.

They allege that Prince Bandar received £30 million a quarter for ten years in an arrangement sanctioned by the Ministry of Defence.

The company maintains that it has done nothing wrong and broke no laws. Prince Bandar last night denied receiving any “improper secret commissions or backhanders”.

The furore caused by the latest al-Yamamah revelations may give BAE’s rivals a chance to block the company’s ambitions in the US. BAE has done 15 deals in the US since 1999 and the country now accounts for 42 per cent of its sales.

Both Congress and the US Department of Justice (DoJ) are now expected to take a fresh interest in the corruption allegations.

The DoJ has not launched its own investigation into whether BAE breached the US’s Foreign Corrupt Practice Act but British officials in Washington fear “that may change” after these latest allegations.

Staff members from the Senate Foreign Relations Committee and the House of Representatives’ Foreign Relations Committee have been briefed about the Armor acquisition by BAE and the US State Department.

Congressional aides are questioning whether BAE has operated within corruption laws and whether the Armor deal should go ahead.

Until yesterday, there was a general expectation that the Committee on Foreign Investment in the United States (CFIUS), an interagency panel based in the US Treasury that examines such takeovers, would not raise any significant national security objections to the acquisition of Armor.

But CFIUS could now decide to order a formal 45-day investigation, delaying or even scuppering the takeover plan. A spokeswoman for the panel refused to comment.

Even if the Armor deal is passed by regulators the political pressure building in the US could hinder BAE’s attempts to win more business there.

The corruption allegations are also holding up other BAE contracts.

The £20 billion deal to sell Saudi Arabia 72 Eurofighter Typhoons, which will replace the Tornados at the centre of al-Yamamah affair, is likely to be delayed, The Times has learnt. Defence sources say the contract, which was to be signed this month, will now slip into August.

The Saudis are also understood to be holding up a £1.5 billion upgrade to its fleet of Tornados. BAE has already begun work on some Saudi Tornados at its factory in Warton, Lancashire, but key suppliers and defence sources say that the full upgrade is being delayed as Saudi Arabia and the MoD are still to agree armaments.

The Saudis are pushing for its Tornados to be equipped with the Royal Air Force’s Stormshadow, the most advanced missile in the world.

Selling Stormshadow to the Saudis will be politically sensitive as it is thought to have sufficient range to reach Israel and is more powerful than missiles used by the Israeli Air Force.

The Saudis are understood to be using the embarrassment caused by the aborted SFO investigation and subsequent media revelations to put political pressure on the UK Government to agree the Stormshadow sale.

The MoD refused to comment on al-Yamamah or corruption allegations yesterday.

A spokeswoman for BAE said: “The al-Yamamah programme is a government-to-government agreement and all such payments made under those agreements were made with the express approval of both the Saudi and the UK governments.

"We deny all allegations of wrongdoing in relation to this important and strategic programme and we will abide by the duty of confidentiality imposed on us by the agreement.”

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