UPDATE: UK Court Ratifies BAE Systems Plea Agreement

By Jonathan Buck


LONDON (Dow Jones)–A U.K. court Tuesday ratified a plea agreement between BAE Systems PLC (BA.LN) and the Serious Fraud Office, tacitly endorsing U.S.-style plea deals for corporate wrongdoing and allowing the defense giant to draw a line under an embarrassing episode in the company’s history.

BAE Systems, which Monday pleaded guilty to a charge of improper accounting, was fined GBP500,000 and ordered to pay GBP225,000 in court costs. But the hearing wasn’t straightforward and both parties were given a night to sweat after the judge had adjourned proceedings Monday to give himself time to pore over the terms.

At London’s Southwark Crown Court Tuesday, Justice David Bean voiced his disapproval at the process, saying that “once criminal courts are involved, sentencing cannot be conducted on an artificial basis.”

Farnborough, England-based BAE Systems in February announced that it had reached settlements with the SFO and the U.S. Department of Justice to resolve long-running investigations into accounting and regulatory filings.

Under the terms of those deals, the company agreed to pay a fine of $400 million in the U.S. and to make commitments on compliance following a probe of its business dealings in the Czech Republic, Hungary, Saudi Arabia and elsewhere.

In the U.K., it agreed to plead guilty to one charge of breach of duty to keeping accounting records in relation to payments to Shailesh Vithlani, former marketing adviser in Tanzania, and to pay GBP30 million in penalties.

Those penalties in the U.K. comprised the fine imposed by the court and the balance of the GBP30 million to be allocated to charitable payments “for the benefit of Tanzania.”

That irked Justice Bean. He said such an agreement placed “moral pressure” on the court to keep any fine to a minimum and, consequently, reparations to a maximum.

He was critical of the fact that the deal between BAE and the SFO had been “loosely and perhaps hastily drafted” and meant that no executives of the company would be prosecuted in the U.K. He noted that the U.S. Department of Justice had made no such agreement.

BAE Systems in 1998 employed Vithlani, a businessman based in Dar-es-Salaam, to act as a marketing adviser to help the company secure a contract to provide a radar defense system to Tanzania. His appointment was approved by a committee that included Michael Turner, who retired as CEO in 2008, and was approved by then-chairman Richard Evans.

The contract price for the radar system agreed in 1999 was about $40 million, and Vithlani’s fee was 31% of that amount, or roughly $12.4 billion.

Justice Bean said it was “naive in the extreme to accept that Mr. Vithlani was just a well-paid lobbyist,” and that there was “a high probability” that part of that money was “used to favor” BAE Systems.

But he added that the company may have avoided the charge of breaching its duty to keep accounting records if it had booked payments to Vithlani as “public relations and marketing services” instead of “technical services.”

In response to the verdict, the SFO made no mention of the criticism of the plea agreement. “I am delighted that the judge stressed the seriousness of BAE’s actions and that he recognized that the true victims were the people of Tanzania,” said SFO Director Richard Alderman.

However, some observers considered the punishment little more than a slap on the wrist.

“It is clear that BAE Systems has got off lightly,” said Chandrashekhar Krishnan, executive director of Transparency International U.K. “The best that can now happen is that the company demonstrates it has turned a new leaf and is irrevocably committed to clean business. We hope that it will treat this as a wake-up call and not a nod-and-wink to return to its past practices.”

The company, which employs about 107,000 workers around the world, in 2008 commissioned a committee to draft new guidelines for ethical business conduct. Those recommendations were implemented at the beginning of 2009.

“In the decade since the conduct referred to in this settlement occurred, the company has systematically enhanced its compliance policies and processes with a view to ensuring that it is as widely recognized for responsible conduct as it is for high-quality services and advanced technologies,” BAE Systems said in a statement.

It already has made provision for the penalties.

At 1615 GMT, its shares up 7 pence, or 2.1%, at 334 pence, while the benchmark FTSE 100 index traded up 0.9%. The stock has shed 2.4% in value since the start of the year largely due to concerns about defense spending as governments look to cut costs.

-By Jonathan Buck, Dow Jones Newswires; +44 (0)207 842 9237; jonathan.buck@dowjones.com


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