British media reports have accused BAE of paying $1.99bn over a decade to Bandar bin Sultan, a Saudi prince, in connection with al-Yamamah.

 

Al-Yamamah dates back to the 1980s and was worth an estimated $86bn.

 

A BAE company statement said on Tuesday: "BAE Systems has been notified by the US department of justice that it has commenced a formal investigation relating to the company's compliance with anti-corruption laws including the company's business concerning the Kingdom of Saudi Arabia."

 

A spokesman for Blair said: "We can't comment on legal proceedings that haven't started yet, but we will be watching the proceedings with interest."

 

'Fabrication'

 

Bandar, a former ambassador to the US and secretary-general of the Saudi National Security Council, has denied the sums involved were secret commissions to him, describing this as "a zenith in fabrication".

 

His solicitors have said the US accounts at Riggs Bank into which the funds were paid were in the name of the Saudi Arabian ministry of defence and aviation.

 

Any monies paid from them were exclusively for ministry purposes.

   

BAE has said al-Yamamah was a government-to-government agreement and so all payments were made with the approval of both the Saudi and British governments.

 

BAE has denied making wrongful payments in its dealings with Saudi Arabia.

 

Takeover

 

In connection with the Armour Holdings takeover, the companies announced last week that the US treasury department had concluded that the takeover did not pose any security dangers.

 

BAE, which hopes to seal the deal later this year, is waiting for the US justice department to finish its investigation.

 

BAE's North American subsidiary proposed the acquisition on May 7 in a bid to tap into heavy demand from the American military for vehicles in Iraq and other war zones.

  

BAE, under pressure from the media and some politicians, said earlier this month that it had asked a former English law official, Lord Woolf, to lead a review of its business ethics.