Challenge to Financial Reporting Council decision to end BAE-KPMG investigation

Campaign Against Arms Trade (CAAT) and The Corner House are challenging the decision by the Financial Reporting Council (FRC) to close the investigation, started in 2010, into the conduct of KMPG when auditing the accounts of BAE Systems from 1997-2007. The FRC said that, to proceed, it would have to look at audits prior to 1997 and this would not be in the public interest.

Acting for the two organisations, solicitors Leigh Day have sent a letter to the FRC, disputing the need to look at the period prior to 1997.

1. The deal to supply BAE’s &28 million military air traffic control system to Tanzania, which was the subject of BAE’s 2010 plea bargain with the Serious Fraud Office (SFO), was concluded in 2001.
2. The three named offshore companies mentioned in the announcement of the investigation were all established in a timeframe which would have enabled them to have been picked up during audits after 1997.
3. Media coverage from 2003 onwards contained detailed accounts of how the BAE payments were made. This should have prompted the auditors to look further.

In addition, a Private Eye story (9 August 2013) suggests a possible conflict of interest for two members of the FRC: Paul George, head of FRC’s Conduct Division, which dropped the BAE case, was a KMPG partner from 1995 to 2000; and Sir Steve Robson, FRC Non-Executive Director, who chairs KMPG’s Public Interest Committee. Leigh Day asks for confirmation whether either was involved in the investigation or in the decision to discontinue the case.

The letter concludes:

The public interest in the FRC pursuing these issues is great. A failure to detect potential corrupt payments is a manifest audit failure and poses enormous risks to the public interest and the proper functioning of commerce.

Kaye Stearman from CAAT said:

BAE Systems corrupt and illegal activities in its efforts to sell weaponry are already well documented in the media and elsewhere. After Prime Minister Tony Blair forced the SFO to drop its investigation into the Saudi arms deals in 2006, and the BAE secured plea bargains with the US and UK authorities in 2010, the FRC inquiry provided one last avenue of information and redress, yet after three years this has been closed without proper explanation.

Auditors such as KPMG are supposed to be independent investigators of company accounts, yet KMPG signed off BAE accounts without, seemingly, investigating the detailed allegations of illegal payments being made in the media. The only way forward is to reopen the FRC inquiry.

Notes

1. BAE Systems is one of the world’s largest arms producers. It makes fighter aircraft, warships, tanks, armoured vehicles, artillery systems, missiles, munitions and much more. BAE has military customers in over 100 countries, with about 95 per cent of sales being military. Its focus is on increasing sales to the Middle East, notably to Oman and United Arab Emirates, and continuing to supply Eurofighters and other arms to Saudi Arabia.
2. In 2004, the UK’s Serious Fraud Office began investigating BAE deals with numerous countries including Saudi Arabia, South Africa, Tanzania and the Czech Republic. In December 2006 the SFO dropped its corruption investigations into BAE’s arms sales to Saudi Arabia, following pressure from BAE and the Saudi regime and a direct intervention from then Prime Minister Tony Blair. The decision was subject to severe criticism and prompted CAAT and The Corner House to launch a Judicial Review of the decision. In April 2008, the High Court ruled that the SFO Director had acted unlawfully by stopping the investigation – a decision subsequently overturned by the House of Lords.
3. In February 2010, BAE Systems agreed a plea bargain with the US Department of Justice. The company was to pay a $400 million criminal fine, for corruption on arms deals with Saudi Arabia, the Czech Republic and Hungary, although BAE only had to admit to making false statements in regulatory filings. Simultaneously, the SFO agreed a &30m settlement over BAE’s dealings in regard to the Tanzanian radar system contract, although BAE only admitted to false accounting.
4. On 8 August 2013, the SFO admitted that it had lost thousands of documents relating to the closed BAE investigation, which had been sent to the wrong recipient.
5. In February 2010, the Accountancy and Actuarial Discipline Board (AADB) announced an investigation into the conduct of KPMG Audit plc as auditors to BAE Systems with the following remit:
   

   The scope of the investigation is as follows:

   The conduct of Members and Member Firms in relation to:

   The audits of British Aerospace / BAE Systems Group plc and any of its subsidiaries by KPMG from 1997-2007 in relation to the commissions paid by BAE through any route to subsidiaries, agents and any connected companies. Also any other professional advice, consultancy or tax work provided to BAE by KPMG between those dates in respect of (i) commission payments paid by BAE and (ii) the status, operation or disclosability of Red Diamond Trading Ltd., Poseidon Trading Investments Ltd. and Novelmight Ltd.

6. On 1 August 2013, the Financial Reporting Council, AADB’s successor body, announced that it had closed the inquiry because it would have to include audits done before the 1997 to 2007 period it originally targeted, and there was no realistic prospect of a conviction – therefore it was not in the public interest to proceed.
7. Campaign Against Arms Trade (CAAT) works for the reduction and ultimate abolition of the international arms trade. The arms business has a devastating impact on human rights and society and damages economic development. Large-scale military procurement and arms exports only reinforce a militaristic approach to international problems. In 2012, CAAT was awarded a Right Livelihood Award – the Alternative Nobel Prize – for its innovative and effective campaigning against the arms trade.
8. The Corner House is an environmental and social justice organisation.

ENDS