Defense Contractors Increasingly Targeted in Corruption Investigations
Earlier this year, British Aerospace agreed to plead guilty in the United Kingdom and United States and pay fines totaling 30 million pounds — a record criminal fine in the U.K. — and $400 million to the United States. The average corporate penalty remained relatively low through 2006, usually less than $5 million — but from 2007 to 2009 the average corporate penalty exceeded $45 million.
While corporate penalties are climbing, the Department of Justice, and Securities and Exchange Commission, which carry out enforcement of the Foreign Corrupt Practices Act, are trying to stamp out bribery by holding individuals responsible. In 2005 through 2007, fewer than 10 individuals were charged under bribery laws by the Department of Justice, but the agency brought more than 10 enforcement actions in 2008, over 15 in 2009 and almost 25 through April of 2010 — including 22 individuals arrested on FCPA charges in January at the SHOT Show in Las Vegas, most of whom were executives for defense-related companies.
When an indictment is issued, agencies are permitted to suspend an individual or company from government contracts pending the outcome of the case. Given the risks involved, companies are taking steps to evaluate their compliance programs.
One of the keys to understanding the latest uptick in enforcement actions is the considerably broader application given to the FCPA’s terms by the U.S. government. Congress passed the FCPA in 1977 to curb participation of domestic corporations, foreign subsidiaries of U.S. corporations and individuals in the corruption of foreign governments. In its broadest terms, the FCPA criminalizes corrupt payments — defined broadly as “anything of value” — to a foreign government official that are intended to obtain or maintain business.
Payments to foreign officials, whether they are direct or through third parties or labeled as “fees” or “commissions,” will violate the FCPA if they are intended to obtain or maintain business from the foreign official’s government.
One of most common misconceptions of the FCPA is that conduct outside the United States cannot violate the law. Christian Sapsizian, a French citizen, was sentenced to 30 months in prison in 2008 for bribes arranged and paid entirely outside of the United States. DoJ claimed jurisdiction was appropriate because his former employer had American depositary receipts listed in the United States, and Sapsizian had caused related payments to be wired from U.S. banks. U.S authorities arrested Sapsizian during a layover at a Florida airport while he was traveling to Paris.
In light of this broad application of the FCPA, U.S. companies are obligated to ensure subsidiaries, employees, agents and distributors act properly and in conformity with anti-bribery laws. FCPA violations can be based on the wrongful acts of others under the FCPA’s third-party payment provision, which prohibits improper payments made to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly to any foreign official.”
For each FCPA violation, corporate fines can be assessed up to $2 million. Corporate officers, directors, stockholders, employees and agents are subject to fines of up to $100,000 for each violation of the FCPA and are not permitted to pass the cost of fines to the company. Penalties can also be higher under the Alternative Fines Act.
In 2008, Siemens settled global anti-bribery allegations for $800 million to the United States and another $800 million to German authorities. This year, Daimler AG settled alleged violations for $185 million and in 2009 Halliburton and KBR settled alleged anti-bribery allegations for $579 million.
Another important number is the amount Siemens paid to lawyers as a result of the anti-bribery allegations: $200 million. This brings the total paid by Siemens to resolve the anti-bribery allegations to $1.8 billion.
Cosmetics giant Avon Products Inc. has been investigating alleged anti-bribery violations by operations in China, where is it alleged that the company gave extended improper entertainment, travel and gifts to Chinese officials. In 2009, Avon spent $35 million on the investigation. In 2010, Avon expects to spend approximately $95 million.
DoJ and SEC expect companies to maintain robust compliance programs. In 2007, the SEC complaint against the oil-services company Baker Hughes alleged that it failed “to implement sufficient internal controls to determine whether … payments were for legitimate services, whether … payments would be shared with government officials, or whether … payments [were] accurately recorded in [Baker Hughes’] books and records.”
In the defense industry, compliance programs are arguably more important than in other sectors because, as is seen with the Las Vegas sting, DoJ is specifically targeting the defense industry.
Each anti-bribery compliance program must be created to fit each particular company, but still fall within the expectations of Justice and SEC. There must be regular and systematic monitoring while ensuring that the company continues to improve profitably in a lawful manner. For example, companies now require that employees complete well-documented due diligence for foreign deals, including background investigations into the activities of foreign agents, discussions with references and searches of publically available records to ensure no history of illegal activity.
The corporation should also require that foreign agents and partners provide written certification of FCPA compliance, and, where possible, include FCPA compliance representations within a contract with the agent.
Anti-bribery and anti-corruption enforcement and compliance carry significant costs. To avoid exorbitant fees and penalties, companies must be proactive and address compliance and monitoring. Once a company is negotiating fees, penalties or plea deals, the damage has been done.
Michael Patrick is counsel with the Renzulli law firm based in New York. He represents corporations in several countries with respect to U.S. and international anti-corruption/anti-bribery compliance and represents individuals and corporations before government entities. Patrick can be reached at email@example.com. John Renzulli is the founding partner of the Renzulli law firm. He can be reached at firstname.lastname@example.org.