'David vs. Goliath': City Takes On BAE Systems

Prince Bandar bin Sultan bin Abdul Aziz al-Saud allegedly benefited from a BAE contract. i i

Harper Woods, Mich., alleges that BAE Systems paid Prince Bandar bin Sultan bin Abdul Aziz al-Saud $2 billion over a period of about 20 years to win a fighter-jet contract. Patrick Kovarik/AFP/Getty Images hide caption

itoggle caption Patrick Kovarik/AFP/Getty Images
Prince Bandar bin Sultan bin Abdul Aziz al-Saud allegedly benefited from a BAE contract.

Harper Woods, Mich., alleges that BAE Systems paid Prince Bandar bin Sultan bin Abdul Aziz al-Saud $2 billion over a period of about 20 years to win a fighter-jet contract.

Patrick Kovarik/AFP/Getty Images
Cheryl Constantino is Harper Woods mayor pro tem.

Cheryl Constantino, Harper Woods mayor pro tem, describes the city's case against BAE Systems as "like David vs. Goliath, only instead of using a rock we're using attorneys." City of Harper Woods hide caption

itoggle caption City of Harper Woods
BAE Systems Chief Executive Officer Mike Turner  was briefly detained by U.S. authorities. i i

U.S. authorities briefly detained BAE Systems Chief Executive Officer Mike Turner when he entered the United States a few weeks ago. He was served with a subpoena before being released. Leon Neal/AFP/Getty Images hide caption

itoggle caption Leon Neal/AFP/Getty Images
BAE Systems Chief Executive Officer Mike Turner  was briefly detained by U.S. authorities.

U.S. authorities briefly detained BAE Systems Chief Executive Officer Mike Turner when he entered the United States a few weeks ago. He was served with a subpoena before being released.

Leon Neal/AFP/Getty Images

Corporate Ethics Investigation

In June 2007, BAE Systems asked an independent panel to examine its ethics practices. The Woolf Committee issued recommendations to the company last Friday. But the report did not examine any specific past behaviors of the company, nor did it address the "Al Yamamah" deal in which BAE allegedly paid Saudi Prince Bandar $2 billion over a period of about 20 years.

This is a story that might seem straight out of a James Bond movie. It involves a massive arms deal, British fighter jets, a Saudi prince and billions of dollars in payments to a longtime ambassador to the United States. But the plot veers away from thriller territory when it lands in a leafy suburb of Detroit.

Harper Woods, Mich., has filed a lawsuit against a massive defense contractor, BAE Systems, over allegations that the company funneled payments to a member of the Saudi royal family.

In the process, this small city has become a central player in an investigation that spans continents, involves accusations of corruption on an unimaginable scale, and has players ranging from former British Prime Minister Tony Blair to a substitute teacher.

Harper Woods is an almost archetypal American suburb. The streets are lined with trees, the houses are small, the yards big, and just about everyone has a dog. Its residents are big into Little League, and there's an annual parade featuring the mayor driving by in one of his classic cars. One of the finalists for national teacher of the year teaches seventh grade here. And rocker Bob Seger played at the now-closed Hideout dance club before he made it big.

"One of the funny things about Harper Woods is there nothing terribly special about it," says Kim Silarski, who has lived there since 1996. "And so in its normalness, in its normality, I think that is its beauty and its charm."

The Arms Deal

While it's technically a city, the place has only about 14,000 residents living in an area of 2.6 square miles.

This little corner of America is intimately involved in a $100 billion international arms deal between Saudi Arabia and BAE Systems, a giant British defense contractor that makes aircraft carriers, armored vehicles and a superadvanced cannon. BAE also manufactures fighter jets — and those jets have gotten the British defense contractor into trouble.

"In the mid-'80s, the Brits were negotiating a large defense contract with Saudi Arabia, nearly $100 billion. Obviously a huge, huge contract and very important to the U.K. and to BAE certainly," says Patrick Coughlin, a lawyer representing the Harper Woods public employees retirement fund.

"As part of the contract there was a side agreement that basically allowed for payments to be funneled to Prince Bandar," Coughlin alleges. "Bank examiners and people looking at this have estimated it was nearly $100 million a year or a total of $2 billion that was funneled through various U.S. banks."

Prince Bandar bin Sultan bin Abdul-Aziz Al-Saud was Saudi Arabia's ambassador to the United States for decades. Coughlin is alleging that to get that defense contract for a bunch of fighter planes, known as the "Al Yamamah" or the Dove deal, BAE paid Bandar $2 billion over a period of about 20 years.

'David vs. Goliath'

"The Saudi princes sometimes feel that the rules don't apply to them," says Cheryl Constantino, Harper Woods mayor pro tem and a full-time substitute teacher. "This is like David vs. Goliath, only instead of using a rock we're using attorneys."

Harper Woods got involved because its $40 million employee pension fund includes about $135,000 invested in BAE Systems. That's not a lot, but this is not a big town.

Now the Harper Woods fund has taken BAE and Prince Bandar to court. But Constantino says what local officials care most about is not the politics but the money.

"We don't look at this as sort of an international incident," Constantino says. "We just look at it as, 'Hey, here's our retirees' pension money and we just want to make sure that everything is right with it.' And then the next thing we know is that, this whole Prince Bandar thing comes up and we're like 'whoa.' "

Coughlin, the fund's lawyer, says the city wants BAE to recover as much money as possible and put it back into the company. The city also wants to reform the governance of the company so that this kind of thing doesn't happen again, he says.

"Corruption just inflates contracts, destroys competition and is not good for anybody," Coughlin says. "And corruption with a defense contractor, of course, is the most dangerous, because where are the arms going? Where are they ultimately [going]? You have to have real accountability in this area because of the world that we live in today."

BAE: Claims Have 'No Substance'

Asked to comment on the Harper Woods case, BAE replied with this brief e-mail: "The Company believes these proceedings have no substance and will be vigorously contested."

The Saudi Arabian Embassy in Washington did not respond to requests for comment.

The U.S. Department of Justice is investigating BAE Systems as well. Department officials didn't give specifics about the investigation, but U.S. authorities briefly detained Mike Turner, the chief executive officer of the company, when he entered the United States a few weeks ago. That is not something that happens every day.

A BAE spokesman says that FBI agents took Turner's BlackBerry away for a short while before returning it to him, and served him with a subpoena before releasing him. Federal officials also served subpoenas on several other BAE executives who live in the United States.

Another Twist

The British government was also investigating the deal. That probe had gotten so far as to gain access to Swiss bank accounts. But then the investigation was shut down. According to British court documents, Saudi Arabia threatened to kill another fighter plane deal with BAE that was being negotiated at the time. The Saudis also threatened to end their close intelligence and diplomatic relationship with the British government.

The Saudi threat to call off intelligence cooperation was taken very seriously. As the former director of Britain's Serious Fraud Office testified, the Saudi ambassador to the U.K. put it to him this way: "British lives on British streets were at risk."

But a British court recently ruled that bowing to those threats was unacceptable.

The court ruled that "when the Serious Fraud Office, under pressure from the government — in particular Tony Blair — decided to drop the investigation into allegations of bribes, it was wrong,"

BBC defense and security correspondent Rob Watson says, "They said it was wrong because British justice should not give in to threats from wherever they might come."

The British government is appealing that ruling to the House of Lords.

A Battle Over Jurisdiction

Meanwhile, the Harper Woods case is moving through the U.S. courts. BAE maintains that U.S. courts don't have jurisdiction over the British company.

Coughlin, the Harper Woods pension fund lawyer, argues that with tens of thousands of employees in the United States, and more than 40 percent of its business here, the U.S. courts should have jurisdiction.

Constantino, the mayor pro tem, says she simply wants to get to the bottom of the allegations, and if there is a problem, it needs to be fixed. As shareholders, no matter how small, the Harper Woods employees have the right to do it.

"Even though we've got Britain and the United States investigating it, and we're little teeny tiny Harper Woods, even smaller than little teeny tiny Harper Woods is the little teeny tiny Harper Woods pension board," she says. "And here we are with the nerve to investigate this and the nerve to do something about it — the nerve to stand up to it."

So far that nerve has had one tangible result: Prince Bandar's real estate assets in the United States, and proceeds from their sales, have been frozen by U.S. courts. They've been valued at more than $150 million.

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