At the heart of the Department of Justice investigation into BAE Systems will be a secret account held by the Bank of England on behalf of the Saudi Arabian Government.

This escrow account is the conduit through which £43 billion has been passed to BAE over the past 22 years to pay for Tornado fighter jets and other military equipment.

It was set up as part of the 1985 al-Yamamah oil-for-arms agreement between Britain and Saudi Arabia.

Over the years the account has fallen into deficit but more recently has held a significant surplus.

It is this surplus that has sparked the recent allegations of corruption in BAE’s dealings with the Saudis.

Payments totalling more than £1 billion made to Prince Bandar bin Sultan, the former Saudi Ambassador to the US, are believed to have come from this surplus at the request of the Saudi Government.

The money was signed off by the Ministry of Defence, as agreed under the al-Yamamah contract, and transferred through BAE to the projects identified by the Saudis. In the case of Prince Bandar, the money is alleged to have been transferred to an account held by Riggs Bank in the US.

The MoD claims that it is unaware of the existence of the account but government officials have confirmed its use.

The account was set up because, in the1980s, Saudi Arabia paid for its arms with oil. It transferred oil production to BP and Shell and they paid cash into the Bank of England account. The money was then forwarded to BAE to pay for arms.

When the price of oil slumped in the early 1990s the account fell into deficit, embarrassing the Saudis who were forced to make cash top-ups. Since then the account has been kept in surplus.

In distributing the surplus, the Saudis have maintained the payment method agreed under al-Yamamah and that is why BAE has become embroiled. The DoJ investigation into BAE will therefore lead directly back to the MoD and a Bank of England account that the Government claims does not exist.

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