The Serious Fraud Office (SFO) felt that Britain was powerless to resist Saudi Arabia's threat that it would end co-operation on security issues unless corruption investigations into a BAE Systems arms deal with the Middle East state were dropped, a court heard yesterday.

Lawyers for the SFO told the High Court that Robert Wardle, the SFO director, had taken into account security fears “in light of the Islamist terrorist threat” and the possibility of another 7/7-style bombing attack in Britain when deciding to drop the inquiry in December 2006.

The investigation, which related to the £43billion al-Yamamah deal for fighter jets and other military equipment in 1985, had been running for two years when it was called off.

The High Court heard a legal challenge this week brought by two campaign groups, the Campaign Against Arms Trade and Corner House Research, which campaigns on anti-corruption and social justice issues, that ending the inquiry was unlawful.

Courting compromise for the sake of stability

Britain has the unenviable role, at the US’s urging, of trying to sound out a compromise with King Abdullah of Saudi Arabia

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BACKGROUND

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• SFO in High Court over dropped BAE probe

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On Thursday, lawyers for the campaigners told the court that Tony Blair, then Prime Minister, had put “irresistible pressure” on the SFO to drop the investigation. The two groups claim that the motivation was commercial, as a new multibillion-pound order for BAE from Saudi Arabia was being discussed, rather than based on security.

To persistent questioning from Lord Justice Moses, Peter Sales, a lawyer for the SFO, said: “We in the UK can't compel the Saudi Arabian Government to adopt a different stance. It may be a matter of regret that the UK doesn't have the power to ensure that other states, big or small ... don't do what we want them to do. The world doesn't work that way.”

Lord Justice Moses had asked: “You're saying that nothing can be done, it's out of our control ... it's a friendly powerful state and nothing can be done?”

Although Mr Sales said that security had been the only issue, Mr Justice Sullivan, who is sitting alongside Lord Justice Moses, said that the court had 500 documents that showed other issues had been taken into account.

The campaign groups said that the Government had not denied that Prince Bandar bin Sultan, the former Saudi Ambassador to the United States and now head of Saudi Arabia's National Security Council, had advised Mr Blair in a meeting in July 2006 to stop the inquiry or BAE would lose the contract to buy Typhoon Eurofighter jets. That contract was signed in September last year.

Documents presented to the court also revealed that BAE had sent a “strictly private and confidential memo” to Lord Goldsmith, the Attorney-General, pressing for the inquiry to be called off because it was jeopardising the contract. Lord Goldsmith's office said that it was not appropriate for him to read such a memo.

Central to the SFO's investigation was whether BAE ran a £60million “slush fund” offering incentives to Saudi officials in order to secure lucrative orders. BAE has always maintained that it acted within the law and has said that the arms deals were handled government-to-government. Prince Bandar denies that he profited from the deal.

The High Court can determine only whether or not stopping the decision was legal. It can order the SFO to reconsider its decision if it was illegal.

The judges did not reach a decision and said that they would give their ruling as soon as possible.

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