Britain's fraud office said on Thursday it aimed to prosecute Europe's biggest defense contractor, BAE Systems, for bribery, but lawyers said an out-of-court settlement remained the most likely outcome.

Legal experts said BAE could face penalties of hundreds of millions of pounds if found guilty but that securing a prosecution would be very difficult, and that both sides would probably prefer to avoid a criminal trial.

BAE is facing allegations it used bribery and corruption in arms deals in South Africa, Tanzania, Romania and the Czech Republic dating back to the 1990s.

Reuters last week quoted sources close to the case as saying that the Serious Fraud Office (SFO) wanted BAE to plead guilty and agree to a substantial fine by September 30 or face possible criminal prosecution.

I would think it is an uphill struggle because, as the law stands, they (the SFO) are not going to be successful against the company, said George Brown, partner in the Global Regulatory Enforcement team at law firm Reed Smith, adding it was a lot easier to charge individuals than companies.

BAE said it would only go to court if necessary, and continues to expend considerable effort seeking to resolve (the issues), at the earliest opportunity.

The SFO said it would prepare its papers to be submitted to the Attorney (General) when the SFO considers it is ready to proceed, but did not give a timeframe.

The Attorney General's spokesman said, As in all consent cases when a file is received, the Attorney will assess whether there is sufficient evidence for a prosecution and whether it is in the public interest to do so.

BAE shares were down 4 percent at 334.8 pence by 1319 GMT, valuing the business at 11.8 billion pounds ($18.8 billion).


TRACE International, a not-for-profit body that helps companies combat bribery, said the SFO would appear more credible if it had sought the Attorney General's backing for prosecution first.

The SFO's strategy on the BAE matter is not at all clear ... For the original deadline to have been credible, it seems, the SFO should have had the Attorney General's consent in hand, said Alexandra Wrage, TRACE president and author of Bribery and Extortion: Undermining Business, Governments and Security.

Howard Wheeldon, a senior strategist at BGC Partners, said BAE should settle if the potential fine was relatively low.

If the SFO says BAE should pay a 10 million pound fine, BAE should get on with it (and pay) ... If we are talking hundreds of millions -- upwards of 500 million -- the categorical answer is that BAE should not accept, and say to the SFO, 'Bring it on', he told Reuters.

In December 2006, the SFO dropped an investigation of allegations of bribery of Saudi Arabian officials in an arms deal involving BAE after then-Prime Minister Tony Blair said the probe threatened national security. The investigation continued, however, into bribery allegations related to BAE sales to the other four countries.

Lawyers said the SFO would want to follow the lines of Germany and the U.S. in dealing with international corruption.

Late last year German industrial conglomerate Siemens agreed to pay just over $1.3 billion to settle corruption probes.

(Additional Reporting by Matt Scuffham, Rhys Jones and Kirstin Ridley, editing by Will Waterman)

($1=.6273 Pound)