The newspaper and the BBC television broadcaster said the payments were channelled through a US bank in Washington controlled by Bandar, who is currently secretary-general of the Saudi National Security Council.

He was a key figure in arranging the oil-for-arms deals between the UK and Saudi Arabia which have generated billions of dollars a year in revenue for Britain.

Bandar's denial

Prince Bandar has issued a statement "categorically denying" having received any "improper secret commissions or backhanders" over the arms deal.

"The al-Yamamah programme is a government-to-government agreement and all such payments ...
were made with the express approval of both the Saudi and the UK governments"


BAE Systems statement
Money was paid into accounts in the name of the Saudi Arabian ministry of defence and aviation, the statement said.

The Guardian, which cited insider legal sources for its report, said it understood that details of the payments had been uncovered by Britain's Serious Fraud Office (SFO) during an investigation into transactions behind the al-Yamamah deal.

"The al-Yamamah programme is a government-to-government agreement and all such payments made under those agreements were made with the express approval of both the Saudi and the UK governments," BAE Systems said in a statement.

"After an exhaustive investigation, it was concluded, over and above the interests of national security, that there was and is no case to answer."

The Serious Fraud Office inquiry into the Saudi deal, for which BAE has been the prime contractor, providing Tornado fighter jets, Hawk trainer aircraft and other defence equipment along with support and maintenance services, was dropped in December.

National security

Tony Blair, the prime minister, said at the time that pursuing the inquiry would have harmed national security and relations with Saudi Arabia.

During a news conference at the G8 summit on Thursday he defended his decision saying: "I don't believe the investigation would have led to anywhere except to the complete wreckage of a vital strategic relationship to our country."

The British decision was criticised by the Organisation for Economic Co-operation and Development, and the US also lodged a formal complaint with Britain about the case.

Simon Hill from the UK-based Campaign Against the Arms Trade told Al Jazeera that there are a long string of allegations of bribery against BAE Systems.

"Given the existence of those allegations it is totally unreasonable for the government to have dropped a corruption investigation, it shows how much influence BAE has over the government. These allegations, whether true or not, are crying out for investigation," he said.