Saudi Arabia threatened to stop sharing vital intelligence -- particularly intercepted communications between al-Qaeda members active there -- unless Britain suspended its investigation into a controversial arms deal.
Senior British government sources said the Saudis warned they would also kick out British military and intelligence personnel based in the country.
"They were threatening everything, intelligence, everything. The US and the UK have got their bases in Saudi; that is their `in' to the Middle East," one source said.
"Essentially, the line was that British lives could be lost if this relationship broke down. It would have been them freezing everybody out and speaking to nobody about anything," the source said.
The investigation into allegations that BAE Systems paid bribes to senior Saudis was dropped on Thursday following a detailed report from the security services.
Saudi sources insisted yesterday the real reason was that the firm -- which had said it risked losing a large deal for the Saudis to buy 72 Typhoon jets -- could have gone bust if it lost contracts.
Nevertheless, the intelligence threats appear to have been made after several months of commercial threats failed to get the desired result. One senior intelligence expert said the Saudis' contribution to the battle against al-Qaeda could not be underestimated.
"The Saudis are very, very important. Mucking up that relationship is something you do not do," the expert said.
Serious Fraud Office (SFO) Director Robert Wardle confirmed on Saturday in an interview with the Financial Times that he was convinced to drop the case by national security considerations.
However, government sources said the attorney-general, Lord Goldsmith, had gone further by concluding there was little chance of bringing charges.
Goldsmith believed the main evidence gathered so far dated back to before the introduction of Britain's current anti-corruption laws, which meant it might not be prosecutable.
Goldsmith also thought the SFO would be obstructed by the constitutional position of the Saudi royal family in their country's government -- they are only held liable under law when acting in a government capacity, rather than as royals.
Members of parliament, however, are reluctant to let the issue drop. Members of the powerful Commons public accounts select committee are now pushing to be allowed to see the findings of the National Audit Office report -- suppressed by the then Conservative government -- into the original Al-Yamamah deal.
That contract was signed in 1988, agreeing that BAE would supply the Saudis with fighters, jet trainers, air bases and personnel. The present Typhoon contract forms part of its third and most recent phase.
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