Sir Kevin prevented the MoD's fraud squad from investigating the case, and also withheld the SFO's warnings from the defence secretary, Geoff Hoon.

Vince Cable, the Liberal Democrat industry spokesman, said last night that he was asking the attorney general, Lord Goldsmith, to intervene.

"The fact that the MoD is taking refuge in assurances from BAE reinforces the widespread belief that the relationship between BAE and MoD is incestuous and unhealthily close," he said.

Once the Guardian revealed the existence of the slush fund allegations last month, Sir Kevin defended himself in a second private letter to the head of the SFO.

On September 12, he wrote to Robert Wardle, SFO director, saying his failure to follow up the matter, as promised, was "a bureaucratic hitch".

Sir Kevin maintained "somewhat to my embarrassment" that it had been forgotten about, due to "a move of office location and changeover of private secretaries at exactly that time".

He also tried to persuade Mr Wardle that the MoD had no responsibility for allegedly fraudulent BAE invoices submitted to the Saudi government under the Al-Yamamah government-to-government arms deals.

"The MoD only endorses invoices under the Al-Yamamah project which relate to specific goods and services provided to Saudi Arabia," he wrote. Sir Kevin said the suspect invoices "do not fit into this category and are entirely a matter for BAE".

Last night the original complainant, Edward Cunningham, a former employee of RLI, a front company involved, said this claim was false.

All the payments made through RLI were recharged by BAE to the Saudi government under the budget heading "visa services" he said. "The Saudis were defrauded and the MoD endorsed it."

The Saudi government pays the MoD a hefty annual fee to ensure that BAE meets its contractual arrangements under the arms deals. Last year they paid in the region of £30m. (The MoD does not release the exact figure.)