UK: BAE "Accounting Offence" Settlement Grudgingly allowed by Court

Last Updated: 5 January 2011
Article by Omar Qureshi and Joe Smith

On 21 December 2010, BAE Systems Plc ("BAE") was fined £500,000 (plus £225,000 in costs) after pleading guilty under a settlement agreement with the Serious Fraud Office ("SFO"), to an offence under section 221 of the Companies Act 1985 of failing to keep adequate accounting records.  The offence related to the accounting of very substantial commission payments made to an overseas agent for his services in assisting a BAE company to obtain a contract from the Tanzanian Government to supply a radar defence system.

The case is a further example of the tensions between the SFO and the Courts in relation to settlements concerning corrupt conduct.  The judgment includes some strikingly critical comments about the settlement agreement concluded with BAE and of the SFO's handling of the case generally

To view the article in full, please see below:

Full Article

On 21 December 2010, BAE Systems Plc ("BAE") was fined £500,000 (plus £225,000 in costs) after pleading guilty under a settlement agreement with the Serious Fraud Office ("SFO"), to an offence under section 221 of the Companies Act 1985 of failing to keep adequate accounting records. The offence related to the accounting of very substantial commission payments made to an overseas agent for his services in assisting a BAE company to obtain a contract from the Tanzanian Government to supply a radar defence system.

The case is a further example of the tensions between the SFO and the Courts in relation to settlements concerning corrupt conduct. The judgment includes some strikingly critical comments about the settlement agreement concluded with BAE and of the SFO's handling of the case generally.


The sentencing hearing followed almost six years of investigation by the SFO into allegations of bribery and corruption in a number of deals that BAE had concluded in the Czech Republic, Romania, Saudi Arabia, South Africa and Tanzania. The chequered history of the investigations and, in particular, the dropping of the investigations into the Al-Yamamah contract with the Saudi government are well known. Therefore, the circumstances and terms of the penalty imposed on BAE may be considered something of an anti-climax, but it must also be considered in light of the procedural and legal difficulties faced by the SFO in bringing corporate corruption cases to the Court.

On 5 February 2010, BAE agreed to plead guilty, as part of a plea agreement with the SFO which included an agreed set of facts (or "basis of plea"), to aiding, abetting, counselling or procuring an offence under section 221(5) of the Companies Act 1985, by the officers of its subsidiary, British Aerospace Defence Systems Ltd, ("BAEDS") "to keep accounting records which were insufficient to show and explain payments" made pursuant to contracts with certain companies owned by a Tanzanian agent, Mr Vithlani.

BAE could only be prosecuted for aiding and abetting the offence, because the section 221 offence can only be committed by the officers of the company in question. (The offence under section 221, with some minor variations, is now at section 387 of the Companies Act 2006.) It is worth noting that no officer of BAEDS or BAE has been or now can be prosecuted for the main offence, in light of the terms of the settlement the SFO agreed with BAE.

As part of the settlement, BAE also agreed to pay up to £30 million (less any fine imposed by the Court for the offence) as an ex gratia payment to compensate Tanzania, in return for the SFO:

(i) terminating all further investigations into BAE (i.e. not just its investigations of the radar contract)

(ii) not prosecuting or bringing civil claims against any member of the BAE group for conduct preceding 5 February 2010, nor naming them as, or alleging them to be, a co-conspirator in any proceedings against anyone else (this element of the settlement was neither limited in time nor by reference to the events that the SFO had previously been investigating – it was described by the Judge as a "blanket indemnity").

(iii) agreeing not to prosecute "any person in relation to conduct other than conduct connected with the Czech Republic or Hungary". Given the prosecution of this case related to Tanzania, this wide-ranging promise not to prosecute appears most unusual.

In addition, the SFO made no allegations against BAE or its officers of involvement in any corruption offences.

The accounting offence committed by BAE in this case was concerned with the sale of a $39.97 million contract to supply a radar system to the Government of Tanzania.

Although the facts are complex, the key points may be summarised as follows:

  • In 1999, BAE concluded a contract to supply a radar defence system for Dar-es-Salaam International Airport. As part of the contract negotiations, BAE employed an individual called Shailesh Vithlani ("Vithlani") as a marketing advisor.
  • Vithlani owned two companies, Merlin International Ltd ("Merlin") and Envers Trading Corporation ("Envers"), a Panamanian company.
  • Under the contracts concluded with Vithlani, Merlin was to receive 1% of the radar contract price though an arrangement with a BAE company, British Aerospace (Operations) Limited, and Envers was to receive 30% of the radar contract price through Red Diamond Trading Ltd ("Red Diamond"), a company registered in the British Virgin Islands and controlled by BAE, but known only to a very small number of executives within BAE. The purpose of Red Diamond was to enable BAE to pay agents "covert" commissions.
  • Vithlani acted as an "overt" adviser through Merlin, i.e. he operated openly as BAE's in-house representative. However, while acting through Envers, he was a "covert" advisor whose work was highly confidential.
  • The need for confidentiality regarding the use of intermediaries in some cases was justified because of: (1) rules in relevant countries prohibiting their use; (2) tax implications where the agent wished to pass money to third parties but could not declare it; and (3) general sensitivities around publication of such large fees being paid. The SFO in their opening submission stated, "This was a legitimate commercial aim".
  • Vithlani's contracts were approved by Sir Richard Evans, then BAE's chairman, and Mike Turner, who later became the company's Chief Executive.
  • Between January 2000 and December 2005 around $12.4 million was paid to Vithlani's two companies, the vast majority being sent via Red Diamond to Envers.
  • These payments were recorded in the accounting records of the relevant BAE entities as payments for the "provision of technical services".

The Court's decision

Mr Justice Bean upheld the settlement agreement between SFO and BAE, but not without expressing unusually strong criticism of it, and of the SFO's conduct of the case more generally. For example, he was highly critical of the "with respect, loosely and perhaps hastily drafted" settlement agreement, which offered BAE "a blanket immunity for all offences committed in the past, whether disclosed or otherwise".

The SFO stated that it was "not now possible to establish precisely what Vithlani did with the money which was paid to him. However, it was no part of the Crown's case that any part of those payments were in fact improperly used in the negotiation process to favour BAEDS, nor is it any part of the Crown's case that BAE was party to an agreement to corrupt". Bean J described this as "astonishing". He considered it "naive in the extreme" to suggest that Vithlani was "simply a well paid lobbyist", rather than a middleman who made improper payments to win the contract.

In his judgment, the assertion that Vithlani was just a lobbyist was inconsistent with the wording of BAE's basis of plea that "there was a high probability that part of the $12.4m would be used in the negotiation process to favour [BAE]". Added to the SFO's opening that, "Accordingly, BAE has accepted that there was a high probability that the payments to Vithlani were intended to compensate him for work done in seeking to persuade relevant persons to favour [BAE] in respect of the radar project" (our emphasis), it is perhaps difficult to understand how it was not part of the Crown's case that the payments were used improperly.

However, Bean J held that he had no power to vary or to set aside the settlement agreement. He also could not "sentence for an offence which the prosecution has chosen not to charge" (e.g. conspiracy to corrupt), or decide who should be prosecuted. These were pointed comments.

Although he accepted "the basis of the plea itself" he could not (and would not), without hearing further evidence on the matter, accept any argument that what BAE was concealing by the accounting offence "was merely a series of payments to an expensive lobbyist". If some of the monies had not been used improperly, "it is inexplicable... why the payments... exceeded $12m; and even more inexplicable why 97% of that money should have been channelled via Red Diamond, an offshore company controlled by BAE, and paid to Envers, another offshore company controlled by Mr Vithlani". Bean J offered to adjourn the proceedings to allow the parties to adduce evidence on this point, but they declined to do so.

Bean J expressed real scepticism as to the appropriateness of the accounting offence with which BAE had been charged. In response to the question as to what description should have appeared in BAE's accounts for the Vithlani payments instead of "technical services", which inaccurate statement was the basis for the prosecution, prosecuting Counsel said that they should have been recorded as "public relations and marketing services". Bean J considered if that had been a "true and accurate description" of the services rendered by Vithlani, whether it would have been appropriate to prosecute at all: "Certainly the s.221 offence would have been suitable for being sentenced in the magistrates' court. I would myself have imposed a fine of at most £5,000".

In the event, Bean J said he would not sentence on that basis, but instead on the basis that BAE had been "concealing from auditors and ultimately the public the fact that they were making payments to Mr Vithlani, 97% of them via two offshore companies, with the intention that he should have free reign to make such payments to such people as he thought fit in order to secure the radar contract for the defendants, but that the defendants did not want to know the details". Interestingly, in recent media reports of the hearing, Bean J was quoted as having said that the "obvious inference" was that at least part of the money paid to Vithlani was "used to bribe decision makers".

In sentencing, Bean J noted some "important points in mitigation", including that BAE was charged with a single offence, could not be sentenced for an offence that it had not admitted, had already paid $400m in fines in the USA for offences outside Tanzania (it is not clear how this was a point in mitigation), had committed to internal reform following the Woolf Report, and that they had agreed to pay "voluntary reparation" of £30 million less any fine imposed for the benefit of the people of Tanzania – Bean J decided a fine of £500,000 was appropriate. However, in doing so he noted that: (1) there had never been a previous decision of this kind under s.221 so far as he could discover; and (2) "the structure of this Settlement Agreement places moral pressure on the Court to keep the fine to a minimum so that the reparation is kept to a maximum".


It is noteworthy that the settlement was concluded prior to the Court's decision in March this year in R v Innospec in which Thomas LJ had very reluctantly approved the terms of an agreed settlement between Innospec and the SFO (see our earlier Law-Now here). If the plea agreement in the BAE case had been concluded after Innospec, it is possible that the Court may have taken a different approach.

Nevertheless, although the Judge was clearly unhappy with the settlement terms agreed by the SFO, he ultimately chose to accept the basis of plea and sentenced BAE accordingly.

If the SFO and its counsel considered they were unable on the evidence available to them to satisfy the threshold and offence tests for prosecuting BAE, its employees, officers or agents for corruption, that is perhaps more an indication of the failings in the criminal process and the nature of the offences themselves, rather than a failing by the SFO to take a robust approach; if so, it would be unfair to criticise the SFO.

Parliament has already taken steps to remove one of these possible obstacles by enacting the Bribery Act 2010, sweeping away the need to prove a "corrupt" intent and any direct involvement in the bribe of the directing mind and will (i.e. board) of the corporate that benefitted from it. The agreed facts of this case are such that had it been tried under the new Act, BAE may not only have been found guilty under the strict liability corporate offence under section 7, but would have had almost no hope of satisfying the court that it had adequate procedures in place designed to prevent corruption. On the contrary, the evidence presented to the court was that BAE had deliberately set up a structure involving a secret offshore corporate known only to the most senior executives in the company, in order to pay large commissions to intermediaries to assist them to win business, without wishing to know how they did it. Absent an available defence of adequate procedures, corporates will in future also face the prospect of debarment from tendering for EU public contracts.

This case constitutes a further warning to corporates doing business in the UK that they should take steps now to instigate appropriate anti-bribery procedures before the Bribery Act comes into force in April 2011.

Click here to read the full judgment.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 24/12/2010.

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