Lord Woolf, the former Lord Chief Justice, and BAE Systems are negotiating the terms of an independent inquiry into the defence company’s operations and ethical practices.

Meanwhile new claims emerged that the Ministry of Defence had directly processed payments of more than £1 billion to Prince Bandar of Saudi Arabia.

Antiarms industry campaigners are already denouncing the proposed inquiry as a whitewash because it will not investigate BAE’s past activities or allegations of corruption in dealings with Saudi Arabia.

It is understood that BAE’s lawyers and accountants have already done a similar audit and cleared the company, raising the possibility that BAE sees an independent inquiry as merely a publicity tool.

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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• BAE Systems company information

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• Prince Bandar denies BAE bribery claims

Lord Woolf, who led the inquiry into the Strangeways prison riots in 1991, is believed to share some of these concerns and is seeking to clarify the inquiry’s terms of reference. The former law lord is visiting Qatar and talks to set up the panel will continue when he returns. He was unavailable for comment yesterday.

The BAE inquiry is likely to mirror the panel set up by BP under James Baker, the former US Secretary of State, to investigate a fatal accident at its Texas City refinery.

BAE refused to comment yesterday on the possible composition of the panel, but a source close to the company said that there were likely to be a number of Americans invited to join. “With BAE expanding in the US this is about trying to convince the Americans that they are clean,” the source said.

Last night it emerged that BAE had hired a Washington lobbying firm, Blank Rome Government Relations, to press its case with the US Government.

The company, Europe’s largest defence contractor, has been accused of channelling money to Saudi officials and operating an entertainment slush fund as part of the £43 billion al-Yamamah oil-for-arms deal.

BAE is also under investigation by the Serious Fraud Office over six contracts signed with foreign governments where there are allegations of bribes and payments to middlemen. However, the Woolf inquiry will not be able to look into these allegations.

A spokeswoman for Campaign Against Arms Trade said: “There is a danger that this becomes a whitewash. Without looking into the past and the company’s mindset, there is not going to be a full understanding of the way BAE operates.”

City analysts are also concerned that the inquiry will not quell the allegations against BAE. Howard Wheeldon, senior strategist at BGC Partners, said: “I do not think this will draw a line under the Saudi allegations, but it will go a long way to providing investors with reassurance for the future.”

Last night, BBC1’s Panorama programme alleged that Prince Bandar bin Sultan, the former Saudi Ambassador to the US, received £1 billion from BAE as part of the al-Yamamah deal.

According to the programme MoD officials in Whitehall processed quarterly invoices from the Saudi prince for “support services” related to the contract, and passed them on to BAE for payment. BAE then wired the cash to accounts controlled by Prince Bandar in Washington DC.

Prince Bandar said yesterday that the payments had not been made to him personally and were agreed by the Saudi Government.

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