Sole source procurement generally refers to a contract executed without a competitive bidding process. Most governments, including the U.S., use sole source procurement in connection with certain goods and services.
There is nothing inherently wrong with sole source procurement from a Foreign Corrupt Practices Act perspective. However, the bribery risk is that a government contracting official with discretion over the procurement process may request money or something of value to convert what would otherwise be a competitive bidding process into a sole source procurement. The end result may be that the company providing or offering money or something of value to the foreign official will get the contract – which is an FCPA issue.
As highlighted below certain FCPA enforcement actions have involved – in some way – sole source procurement.
United Industrial Corporation / Thomas Wurzel
In this settled complaint, the SEC alleged that Thomas Wurzel (President of ACL Technologies, Inc., an indirect,
wholly-owned subsidiary of United Industrial Corporation):
“authorized multiple payments to an ACL foreign agent in connection with a military aircraft depot ACL was building for the Egyptian Air Force (“EAF”) in Cairo, Egypt, while he knew or consciously disregarded the high probability that the agent would offer, provide. or promise at least a portion of such payments to active EAF officials for the purpose of influencing such officials to obtain or retain business for UIC through ACL. As a result, ACL was awarded a Contract Engineering Technical Services (“CETS”) contract with gross revenues and net profit to ACL of approximately $5.3 million and $267,571, respectively.”
As stated in the complaint:
“In October 1999, the UI.S. Air Force awarded ACL a project by to build a F-16 combat aircraft depot for the EAF, and to provide, operate and train Egyptian labor to use the associated testing equipment for the depot (the “Egyptian F-16 Depot Project”). ACL was awarded the ‘Egyptian F-16 Depot Project as part of the U.S. Department of Defense’s foreign “military sale (“FMS”) program, FMS contracts generally are purchases by foreign governments. from the U.S. Government of weapons and other defense items, services and military training, which the U.S. Government fulfills by entering into contracts with private-sector defense contractors. Accordingly, as the purchaser and ultimate end-user for the F·16 depot facility that would be built, the EAF directed when, to what extent and how money would be spent on the project. Moreover, the EAF could select a particular contractor for a project it desired through its use of “sole source” requests. A sole source request, if approved by the U.S. Department of Defense and the U.S. Air Force, would avoid the competitive bidding process. In connection with the Egyptian F-16 Depot Project, the EAF submitted a “sole source” request for ACL’s services, and ACL in 1999 was awarded the contract for the Project.”
Among other allegations, the SEC alleged that:
“Wurzel had enlisted the assistance of a foreign agent, a retired EAF General (the “EAF Agent”), to act as a consultant to ACL to help influence the EAF in moving the Egyptian F-16 Depot Project forward. […] Wurzel also authorized monthly stipends of $4,000 to the EAF Agent~ although ACL did not maintain any due diligence files for the agent at that time and did not have a formal consulting contract with the agent until March 13, 1998 (at which time the agent’s monthly stipends were raised to. $20,000).”
The SEC charged Wurzel with violating the FCPA’s anti-bribery provisions, books and records provisions, and internal controls provisions. Without admitting or denying the SEC’s allegations, Wurzel agreed to pay a $35,000 civil penalty. (See here).
Based on the same core conduct, the SEC also brought this administrative action against UIC.
Halliburton / Jeannot Lorenz
The enforcement action against the company and its former Vice President Lorenz concerning conduct in Angola involved sole sourcing (albeit Halliburton’s existing internal controls concerning sole sourcing of vendors).
At its core, the enforcement action concerned Halliburton’s efforts to partner with a local Angolan company sufficient to satisfy Angola’s local content requirements in connection with business with Sonangol.
As explained in the SEC’s order:
“As a result of the internal disapproval, Lorenz abandoned the idea of retaining the local Angolan company as a commercial agent. Lorenz then proposed to directly outsource some of Halliburton’s in-house functions to the local Angolan company without competitive bidding. However, in order to comply with the company’s internal accounting controls, Halliburton’s procurement personnel required a competitive bidding process to outsource real estate maintenance, travel and ground transportation services in which the preferred local Angolan company would compete.
Halliburton’s internal accounting controls required that the supplier qualification process begin with an assessment of the criticality or risk of a material or service, not with a particular supplier. Instead, Lorenz started with a particular supplier (the local Angolan company) and then backed into a list of services it could provide. Lorenz also violated Halliburton internal accounting controls by entering into the interim consulting agreement without either seeking competitive bids or providing an adequate single source justification. Lorenz failed to comply with an internal accounting control that required contracts over $10,000 in countries with a high risk of corruption, such as Angola, to be reviewed and approved by a Tender Review Committee.
By again selecting a particular supplier – rather than determining the critical services and then selecting the appropriate supplier – and doing so without competitive bidding or substantiating the need for a single source, Lorenz violated Halliburton’s internal accounting controls.
According to Halliburton’s internal accounting controls, using a single source is justified when “there is a significant advantage to the Company in soliciting a bid from only one supplier, although more than one supplier may be capable of supplying the product or service.” Halliburton’s internal accounting controls indicated that using a single source “typically occurs when a supplier is clearly preferred for quality, technical, execution or other reasons.” In this case, the supplier was not preferred for quality or technical reasons or its ability to execute. Instead it was chosen to fulfill Halliburton’s local content commitment to Sonangol. Halliburton internal accounting controls also mandated that when using a single source vendor without competitive bidding, the underlying reasons “should be clearly identified and justified by referencing an existing approved Single Source justification.” The purpose of this control is to provide needed information to company auditors in their effort to test whether transactions were undertaken for legitimate reasons and not due to improper considerations.”
As highlighted in this prior post, Halliburton, without admitting or denying the SEC’s findings that it violated the FCPA’s books and records and internal controls provisions, agreed to pay $29.2 million. The SEC also found that Lorenz caused the company’s violations, circumvented internal accounting controls, and falsified books and records. Without admitting or denying the SEC’s findings, Lorenz agreed to pay a $75,000 penalty.
In terms of risk management, business organizations confronted with sole source contracting issues should inquire about the justification for the sole source arrangement, whether the specifics of the sole source arrangement are written and transparent, and be particularly cognizant if a third party suggested or is otherwise involved in the sole source procurement.
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