The London-based Guardian newspaper on Thursday reported it had obtained a confidential letter from Britain's Serious Fraud Office (SFO) to the Ministry of Defence (MoD), which also highlighted an alleged major fraud operation in which BAE executives helped themselves to some of the money.
The daily said BAE's chairman Sir Richard Evans might have shown personal complicity in the operation of the £20 million ($32 million) slush fund, used to offer senior Saudis enticements, including prostitutes, sports cars and yachts.
Turner refuted the allegations, which cast a shadow over the group's interim results published on Thursday.
"Clearly we deny all such allegations. We always operate in line with the laws of the UK and any other country we do business in," he told journalists on a conference call.
The SFO's head sent a letter to the MoD's permanent secretary, Sir Kevin Tebbit, on 8 March 2001, in which she alleged BAE executives might have been helping themselves to some of the money.
Rosalind Wright, who was SFO head at the time, wrote, "According to (an ex-employee), chairman of BAE Sir Richard Evans has been made aware of it, but either is prepared to tolerate it or, conceivably, is in some way complicit."
BAE is alleged to have paid more than £20 million into its slush fund since the late 1980s, The Guardian said.
"Concerns remain, and I thought it right to draw this to your attention since it is conceivable that government money has been misused”
Serious Fraud Office
Part of the money was subsequently used to "entertain" top Saudis, it said.
"Ultimately, these services are paid for by the Ministry of Defence to whom BAE is a contractor for the supply of planes to the government of Saudi Arabia," the SFO's letter said.
Papers sent to Tebbit along with Wright's letter included alleged bogus invoices paid out for "visitor support" for Saudi officials monitoring the arms programmes.
Wright wrote, "There is evidence of excessive expenses, hospitality etc and some evidence of assets being used for private purposes..."
Wright told Tebbit she did not have enough evidence to justify an SFO inquiry but she said, "Concerns remain, and I thought it right to draw this to your attention since it is conceivable that government money has been misused.”
"If evidence of financial misconduct is uncovered we would be pleased to look at it again with a view to criminal investigation,” she said.
Tebbit is said to have withheld the letter from Defence Secretary Geoff Hoon.