The dropping of the investigation could have huge commercial ramifications for BAE Systems, Britain’s biggest and most influential arms company, with some sources raising the possibility of it being frozen out of U.S. defence contracts as a result of allegations that the group used a a $US110-million “slush fund” to bribe Saudi officials into granting lucrative contracts as part of the Al-Yamamah arms-for-oil deal in the 1980s. The U.K.’s Serious Fraud Office (SFO) was ordered by the British government to drop its investigation into the BAE bribery allegations last December.The Blair administration defended its decision by saying that national security was the imperative. Mr. Blair claimed that the Saudis had threatened to withdraw co-operation in the fight against terrorism if the SFO continued to pursue its inquiries. However, critics accused the government of dropping the investigation for commercial reasons and to safeguard a new multi-billion-dollar order for Eurofighter Typhoon jets which the Saudis are about to sign. The decision to carry out the “phase-two” inquiry into Britain’s record on combatting bribery came after a two-day meeting of the OECD working group in Paris last month, attended by the 36 countries which have signed up to the OECD’s anti-bribery convention.

The new inquiry, to be carried out by the OECD’s working group on bribery, will focus on what it sees as the continued shortcomings of the U.K.’s anti-bribery legislation and its failure to mount a single successful prosecution since a new treaty took effect in 1999 to which all the organisation’s members are signatories.

Cases the OECD investigation will look at include [PDF] the SFO’s probe of BAE’s activities in other countries and its recently launched probe into companies which may have breeched the United Nation’s oil for food sanctions to Iraq.

Meanwhile, the SFO is considering ways to resurrect [PDF] its investigation of BAE. SFO director Robert Wardle said he is looking into suggestions that BAE gave untruthful information to the U.K.’s Exports Credits Guarantee Department about the arms deals. By switching to alleged deception of a government department, the SFO may be able to short-circuit objections its previous BAE inquiry faced in regard to endangerment of national security.

Mr. Blair’s decision to kill the BAE probe drew a storm of controversy when it was announced earlier this year. Following the announcement, 140 international charities, churches and NGOs mounted a campaign to demand the prime minister reopen the investigation. Petitioners also alleged that in dropping the probe, Mr. Blair had breached Article 5 of the OECD Anti-bribery Convention, which requires that the investigation and prosecution of foreign bribery “. . . shall not be influenced by considerations of national economic interest” or “the potential effect upon relations with another State. . . .” Britain is a signatory of the OECD convention.