UK fraud watchdog set to bare teeth in BAE case

LONDON (Reuters) - Smarting from criticism about its ineffectiveness, the UK's Serious Fraud Office will likely look to prove its mettle by seeking heavy fines if a criminal prosecution is mounted against BAE Systems

Lawyers believe that this could leave Europe's biggest defense contractor, charged with bribery, vulnerable to penalties running into hundreds of million pounds as the SFO looks to match the severity of fines handed out by regulators in other countries.

Siemens agreed to pay just over $1.3 billion to settle corruption probes last year in the United States and Germany while the former head of Samsung Lee Kun-hee was found guilty in Korea of bribery and tax evasion and hit with a $109 million fine.

KBR, the former engineering unit of Halliburton, in February pleaded guilty to federal charges it paid $180 million in bribes to Nigerian officials to secure contracts and was fined $402 million, plus costs.

"The UK authorities will want to show that there is some sort of comity in relation to the way in which one deals with international corruption," said George Brown, Partner in the Global Regulatory Enforcement team at law firm Reed Smith.

'DEMORALISED' SFO

Lawyers say the SFO will be keen for BAE to be hit hard as it looks to re-establish its reputation after former New York prosecutor Jessica de Grazia, in a review of the way of the way the SFO approaches its cases, branded the body "unfocused" and said its investigators were "demoralized."

"The SFO want to show that they are effective and that they are behaving in an efficient manner, especially since de Grazia's report," said Reed Smith's Brown.

In December 2006, the SFO had to drop an investigation of allegations of bribery of Saudi Arabia officials in an arms deal involving BAE after then-Prime Minister Tony Blair said the probe threatened national security.

Gavin Cunningham, the head of corruption investigations at accountants BDO Stoy Hayward, said this latest probe gives the SFO a chance to redeem itself after dropping the Saudi enquiry.

"The level of criticism leveled against the SFO over the dropping of the Saudi case means this is an opportunity to show it doesn't have a light touch when it comes to the enforcement of its corruption laws," Cunningham said.

"This case should be seen as a first step toward a continuing and more frequent enforcement of a tougher line, which is essential in restoring the SFO's tarnished international reputation."

Christopher Grierson, bribery and corruption task force partner at law firm Lovells, said the SFO had made moves to improve its effectiveness since de Grazia's report.

"It looks a little bit like saber-rattling. But I think the reality is that the SFO is sharpening up its act. It's a completely different place now and they don't want to be put into the shade by U.S. prosecutors," he said.

BIG FINES

The two sides may yet seek to settle out of court but if the case does go to trial, penalties sought are likely to be hefty.

"I would have thought it would go into hundreds of millions (of pounds)," said Reed Smith's Brown.

BDO's Cunningham agreed fines could reach that sort of level, pointing out that contesting the charges at trial would only add to BAE's woes.

"In the wake of both Siemens and Halliburton .... those two fines raised the bar significantly," Cunningham said.

"If one looks at information in the public domain on the potential scale of BAE's involvement over the years, then the level of their fine could logically exceed the Siemens fine."

Christophe Menard, analyst at brokerage Bryan, Garnier & Co, said reports on the scale of likely penalties appeared excessive, however.

"A 1 billion pound figure that has been talked about in the British press is insane and is unrealistic compared to what is being alleged. I would guess the fine to be in the tens of millions of pounds but not more than that."

Either way, both sides will want to avoid going to trial if possible given the enormous amounts of money and time involved and, as far as the SFO is concerned, the likely difficulty in securing a conviction.

"To get a prosecution of the company you have to prove that the person who is the controlling mind and body of the company was involved in making the decisions," said Reed Smith's Brown. "If there is a board of directors and there is dispersal of management ... that is virtually impossible."

(Additional reporting by John Bowker, Paul Hoskins and Kirstin Ridley, Editing by Sitaraman Shankar)