Britain’s Ministry of Defence moved questionable payments through its own bank account amid one of the biggest corruption scandals in history, despite concerns the money could be pocketed by the Saudi royal family.

Previously confidential documents show how the MoD agreed to make the payments to a Saudi bank account after the transactions came under scrutiny following an investigation by the UK anti-corruption agency, the Serious Fraud Office (SFO).

The documents reveal a senior MoD official expressing concern that turning down the Saudi requests for payments could risk “displeasing key Saudis” and emphasising the need to “keep the Saudis on side at this critical time”.

The new payment system, detailed in the documents, was set up after the SFO began investigating allegations that BAE, Britain’s biggest arms company, had paid large bribes to the Saudi royal family to land the notorious UK-Saudi al-Yamamah contract.

The SFO investigation was abruptly terminated in 2006 after Tony Blair’s government stepped in following pressure from the Saudis. The international furore that followed severely damaged Britain’s reputation for curbing corruption.

The documents came to light in a court case that concluded on Wednesday. Emails and memos, many marked “highly sensitive” and “restricted”, relating to the £40bn al-Yamamah contract were aired in court. Under the contract, Britain supplied 120 Tornado aircraft, Hawk warplanes and other military equipment to Saudi Arabia.

Dr Susan Hawley, the director of Spotlight on Corruption, said it was “utterly shocking” that after the termination of the SFO inquiry, the MoD had established an opaque new system to facilitate the continued flow of payments.

The MoD said the Saudis were responsible for the disbursement of the funds under the new arrangement. “All such funds remained at all times the property of the Saudi Arabian government,” a spokesperson said.

When asked if similar arrangements were currently in place, the spokesperson said: “We cannot comment on existing contractual arrangements.”

Covert payments

The new documents, which the Guardian is publishing, confirm that the British MoD and BAE, which was not a party to the recent London court case but which was the main contractor in the al-Yamamah deal, operated a covert system to send quarterly payments to Prince Bandar bin Sultan between 1988 and 2007.

The documents contradict persistent claims over decades from British ministers that there was no corruption in the deal, which had been struck by Margaret Thatcher’s government in the 1980s. Bandar, the son of Prince Sultan, the then Saudi defence minister, played a key role in the negotiations.

“The normal process,” according to one of the memos, was for Bandar to write each quarter to the senior British official who was in charge of promoting arms sales “requesting that the next instalment be paid”. The official would “instruct” another senior MoD official “to take the necessary action, and he in turn would task [BAE] to make the payment”.

Part of the payments funded a £75m jet, an Airbus A340, for Bandar’s private use.

The MoD said the BAE payments to Bandar were made according to agreements between the British and Saudi governments, and that the Saudis decided how the funds were spent. It added that “it is conjecture” to say the payments were corrupt.

Investigation dropped

In 2004, the SFO started investigating alleged worldwide bribery by BAE. By late 2006, it had made a formal legal request to authorities in Switzerland for access to information about bank accounts, which, they believed, had been receiving corrupt payments in connection with al-Yamamah.

Bandar reportedly demanded that Blair’s government stop the inquiry. In December 2006, Peter Goldsmith, the then attorney general, ruled that it was in Britain’s national interest to drop the investigation. Blair said he took “full responsibility” for the decision.

In June 2007, the Guardian revealed the existence of the payments, worth £1bn, to Bandar, and that they had been authorised by the MoD. Bandar denied any impropriety, saying the payments had been approved by the Saudi defence ministry.

The new documents show that a week after the revelation, Stephen Pollard, a senior MoD official, wrote that it would be difficult to continue the payments to Bandar. He wrote: “In the current climate, the continuation of such arrangements was less easy to defend or justify, and that it would be preferable if we could avoid engaging in them in future.” He called the payments “increasingly anachronistic”.

In late June 2007, the US Department of Justice announced it had opened a corruption inquiry into BAE. It would result in a £255m fine for the company, after it pleaded guilty to false accounting to settle allegations over the al-Yamamah deal.

A month later, the new documents show, Pollard told colleagues the Saudis had requested further payments to fund Bandar’s private plane. He said that turning down the request would “run the risk of displeasing key Saudis”. He recommended that “it is arguable that it is more important to keep the Saudis on side at this critical time”.

In August, Nick Ayling, another senior MoD official, recorded in a memo that British officials wanted to advise Bandar that “however unfair, the recent publicity about these payments had been extremely damaging to him and to the British government.

“There were further risks if it were to be discovered that these payments were continuing, so it was in both our interests that these arrangements should be put on to a more regular footing as soon as possible.”

By 2008, the new system had been implemented. Under it the Saudis would make monthly payments to an MoD bank account as part of the official arrangements for buying military equipment from Britain, according to memos written by Pollard.

Crucially, however, the MoD would then return a portion of this money to a different Saudi government account for spending on “non-operational requirements”. The payments continued under the system until 2011. The arrangement was illustrated later in a diagram drawn up by another civil servant.

Pollard wrote in 2010 that the “difficulty” for the MoD was “we have no visibility” on what this money was then being used for. “We could be accused of not taking steps to ensure that the funds returned to the [Saudi defence ministry] were not being spent inappropriately or illegally,” he wrote. He declined to comment when contacted by the Guardian.

BAE has previously denied any impropriety, saying all payments were made with UK government “express approval” and were confidential.

In a response to the Guardian, a spokesperson for BAE described the settlement agreement reached with the US in 2010 as “relating to legacy issues”, adding: “We are committed to responsible and ethical business conduct and have a zero tolerance policy regarding corruption in all its forms.”

• This article was amended on 11 March 2024 to clarify the circumstances of the £255m fine paid by BAE in 2010, and to emphasise that the company was not a party to the court case that concluded in London last week. A response from BAE, received after publication, was added to the article.