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Are Transparency International’s Defense Company Rankings Defensible?

TI

Imagine FCPA Professor ranked the “Top FCPA Law Firms” and one factor in the rankings was whether the law firms either donated to FCPA Professor and/or had lawyers “graduate” from the FCPA Institute.

I sure hope you would look askance at such rankings because they are based on subjective factors that have little relevance to the substantive issue being ranked.

Recently Transparency International UK released this “Defense Companies Anti Corruption Index 2015” – an index that attempted to “assess the ethics and anticorruption programs of 163 defense companies from 47 countries using publicly available information.”  (See also here).

The only companies to receive an “A” ranking were Bechtel, Fluor, Lockheed Martin and Raytheon.

What’s interesting though is that each of these companies are substantial contributors to Transparency International (“TI”).  (See here).

This of course does not automatically mean that Transparency International had a conflict of interest in ranking these four companies. Perhaps the companies are just really committed to Transparency International regardless of whether its financial contributions to the organization could impact such things as the rankings.

However, contributing and/or belonging to Transparency International did indeed elevate a company’s score in the recent rankings.

Such details are found deep within specific company reports.

For instance this specific company report indicates that a factor impacting the company’s “Leadership, Governance and Organization” score was “based on public information, there is evidence that the company is a member of TI-USA …”.  Similarly, this specific company’s score was elevated because “based on public information, there is evidence that the company …  is a member of Transparency International Norway.”

Transparency International is not the only organization that promotes anti-corruption or business ethics with a significant focus on anti-corruption.  Surely, Transparency International factored in a company’s membership or association with all other reputable groups?

Apparently not.

For instance, this specific company report states:

“Based on public information, there is no readily available evidence that the company belongs to one or more national or international initiatives that promote anti-corruption or business ethics with a significant focus on anti-corruption. TI notes the company’s membership of TRACE, but this alone is insufficient evidence” concerning the question of whether “the company belong to one or more national or international initiatives that promote anti-corruption or business ethics with a significant focus on anti-corruption?”

In short, it is troubling that giving money and/or being a member of Transparency International impacted Transparency International’s recent rankings.  It leaves the impression that Transparency International’s scores are a reflection, at least in part, of cooperation in Transparency International initiatives rather than a strict reflection of a specific company’s compliance efforts.

For prior posts critical of Transparency International rankings, etc. see here, here, here, here and here.

DOJ Brings First Corporate FCPA Enforcement Action Of 2015

IAP

No doubt it was a coincidence, but it was hard to ignore the timing.

Hours after the formal conclusion of the DOJ’s latest FCPA trial court debacle in U.S. v. Sigelman (see here, here and here for prior posts), the DOJ announced its first corporate FCPA enforcement action of 2015.

The enforcement action was against IAP Worldwide Services, Inc. (a small Florida-based company that provides facilities management, contingency operations, and professional and technical services in contracting capacities to the U.S. military and other governmental agencies world-wide).

According to its website, approximately 30% of IAP’s workers are veterans and the company was recently recognized by U.S. Veterans Magazine’s as one of the Top Veteran-Friendly Companies in 2014.  IAP has several contracts with the U.S. Government including the U.S. Navy, U.S. Marine Corps and Air Force.

Per the DOJ’s allegations, the improper conduct occurred 7-10 years ago and was engaged in by one individual at IAP who left the company approximately 7 years ago.

The allegations focus on James Rama who was IAP’s Vice President of Special Project and Programs between 2005 and 2007. Prior to arriving at IAP, Rama, while employed in Kuwait by a large American defense contractor not affiliated with IAP, was introduced to a Kuwaiti Consultant and learned that the Kuwaiti Ministry of the Interior (MOI) was planning to build a large-scale homeland security systems called the KSP.

When Rama joined IAP he began pursuing Phase I of the KSP contract on behalf of IAP as well as the more lucrative Phase II of the KSP project.  According to the DOJ, Rama and others formed Ramaco International Consulting LLC “to hide IAP’s involvement in the KSP bidding and contracting process.”

According to the DOJ:

“In or about November 2005, IAP (through Rama) received non-public indications that the MOI would select it for the Phase I contract, although the formal bidding process had not yet begun. In February 2006, at the direction of the MOI and Kuwaiti Consultant, Rama and others agreed to and did set up Ramaco as a shell company to “bid” on the Phase I contract. One purpose of setting up Ramaco was to allow IAP to hide its involvement in Phase I and participate in the later Phase II without any apparent conflict of interest. Ramaco began acting as the agent for IAP on the KSP.

IAP agreed with the MOI that it would perform the KSP Phase I contract for approximately $4 million. Of that amount, IAP agreed that half, or approximately $2 million, would not be for actual work executing the KSP Phase I contract, but instead would be diverted to Kuwaiti Consultant.

In or about 2006, IAP, Ramaco, Rama, and others structured an illicit payment scheme to funnel approximately 50% of the payments received on the Phase I contract to Kuwaiti Consultant so that he could pay bribes to Kuwaiti government officials and took numerous steps to hide these payments and prevent the detection of their scheme. IAP, Ramaco, and Rama understood that to pay Kuwaiti Consultant, Kuwaiti Company would first inflate its invoices to IAP by charging IAP for the total amount of both the legitimate services that Kuwaiti Company was providing and the payments that Kuwaiti Company was funneling to Kuwaiti Consultant without listing or otherwise disclosing the payments that were funneled to Kuwaiti Consultant. After the MOI paid Ramaco for work on the KSP Phase I contract, Ramaco would transfer funds to a bank account of IAP, and IAP would then transfer funds to Kuwaiti Company. IAP, Ramaco, and Rama knew that Kuwaiti Company was then paying Kuwaiti Consultant approximately 50% of the KSP Phase I contract amount. IAP, Ramaco, and Rama knew that these payments to Kuwaiti Consultant were often further disguised.

In or about April 2006, Ramaco opened a bank account in Kuwait for Ramaco that would be used, in part, to pay Kuwaiti Consultant a portion of the money that IAP and Ramaco received from the KSP Phase I contract.

On or about May 10, 2006, Rama signed the KSP Phase I contract between Ramaco and the Government of Kuwait, which included a markup of approximately $2 million that would be kicked back, in whole or in part, to Kuwaiti government officials through Kuwaiti Consultant.

On or about September 19, 2006, IAP wired KD 120,000 (approximately $420,000) from its bank account to Kuwaiti Company’s bank account, and, on or about that same day, Kuwaiti Company paid that amount to Kuwaiti Consultant.

In or about October 2006, employees of IAP and G3 met with Rama and others at IAP’s office in Arlington, Virginia, which is in the Eastern District of Virginia, in an effort to persuade IAP to continue making payments to Kuwaiti Consultant.

On or about October 18, 2006, IAP wired KD 63,000 (approximately $220,500) from its bank account to Kuwaiti Company’s bank account, and, on or about that same day, Kuwaiti Company paid that amount to Kuwaiti Consultant.

On or about June 5, 2007, IAP wired KD 29,962.27 (approximately $105,000) from its bank account in the United States to Kuwaiti Company’s bank account in Kuwait so that Kuwaiti Company could pay Kuwaiti Consultant, and, on or about June 13, 2007, IAP wired that amount from its bank account in the United States to Kuwaiti Company’s bank account.

On or about December 6, 2007, Ramaco paid Kuwaiti Consultant KD 52,250 (approximately $183,000). 22. On or about March 10, 2008, Ramaco paid Kuwaiti Consultant KD 44,250 (approximately $155,000).

Between September 2006 and March 2008, IAP and its co-conspirators paid Kuwaiti Consultant at least KD 509,625 (approximately $1,783,688) on the understanding that some or all of that money would be provided as bribes to Kuwaiti government officials to assist IAP in obtaining and retaining the KSP Phase I contract and to obtain the KSP Phase II contract.”

The above allegations were resolved via a non-prosecution agreement in which IAP agreed to pay”a monetary penalty in the present value amount of $7.1 million”.  Pursuant to the NPA, the penalty is to be paid in four yearly installments of $1.775 million. The NPA, which has a three year term, states as follows:

“Among the facts considered were the following: (a) the Company has cooperated with the Offices, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Offices; (b) the Company has engaged in remediation, including disciplining the officers and employees responsible for the corrupt payments or terminating their employment, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for relevant Company contracts; (c) the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement; and (d) the Company has agreed to continue to cooperate with the Offices in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to possible violations under investigation by the Offices.”

As noted in the DOJ’s release:

“[The] non-prosecution agreement requires IAP to conduct a review of its existing internal controls, policies and procedures, and make any necessary modifications to ensure that the company maintains accurate record keeping and a rigorous anti-corruption compliance program.  The non-prosecution agreement further requires IAP to report periodically to the Criminal Division and to the U.S. Attorney’s Office of the Eastern District of Virginia regarding remediation and implementation of the aforementioned compliance program and internal controls, policies and procedures.”

Typical of most corporate FCPA enforcement actions, the NPA contains a “muzzle clause” in which IAP agreed that it shall not directly or indirectly make any public statement contradicting the information set forth in the NPA.

Based on the same core conduct alleged in the NPA, the DOJ announced a plea agreement with James Rama to one count of conspiracy to violate the FCPA.  See here for the plea agreement, here for the Statement of Facts, and here for the criminal information.

For additional coverage of the enforcement action see here from Reuters.

 

SEC Returns To “World Tour” Allegations In Administrative Action Against FLIR Systems

World Tour

As highlighted in this prior post, in November 2014 the SEC brought an administrative FCPA enforcement action against Stephen Timms and Yasser Ramahi (individuals who worked in sales at FLIR Systems Inc., – an Oregon-based company that produces thermal imaging, night vision, and infrared cameras and sensor systems).

The conduct at issue was alleged expensive travel, entertainment, and personal items for Saudi foreign officials in order to influence the officials to obtain or retain business for FLIR with the Saudi Arabia Ministry of the Interior.

Based on the same conduct, the SEC yesterday announced this administrative action against FLIR Systems.

In summary fashion, the order states:

“This matter concerns violations of the anti-bribery, books and records and internal controls provisions of the FCPA by FLIR. In 2009, employees of FLIR provided unlawful travel, gifts and entertainment to foreign officials in the Kingdom of Saudi Arabia to obtain or retain business. The travel and gifts included personal travel and expensive watches provided by employees in FLIR’s Dubai office to government officials with the Saudi Arabia Ministry of Interior (the “MOI”). The extent and nature of the travel and the value of the gifts were concealed by certain FLIR employees and, as a result, were falsely recorded in FLIR’s books and records. FLIR lacked sufficient internal controls to detect and prevent the improper travel and gifts. Also, from 2008 through 2010, FLIR provided significant additional travel to the same MOI officials, which was booked as business expenses, but for which there is insufficient supporting documentation to confirm the business purpose. As a result of the unlawful conduct, FLIR earned over $7 million in profits from the sales to the MOI.”

Under the heading “FLIR’s Business with the Saudi Ministry of Interior” the order states:

“Stephen Timms (“Timms”) was the head of FLIR’s Middle East office in Dubai during the relevant time period, and was one of the company executives responsible for obtaining business for FLIR’s Government Systems division from the MOI. Yasser Ramahi (“Ramahi”) reported to Timms and worked in business development in Dubai.2 Both Timms and Ramahi were employees of FLIR.

In November 2008, FLIR entered into a contract with the MOI to sell binoculars using infrared technology for approximately $12.9 million. Ramahi and Timms were the primary sales employees responsible for the contract on behalf of FLIR. In the contract, FLIR agreed to conduct a “Factory Acceptance Test,” attended by MOI officials, prior to delivery of the binoculars to Saudi Arabia. The Factory Acceptance Test was a key condition to the fulfillment of the contract. FLIR anticipated that a successful delivery of the binoculars, along with the creation of a FLIR service center, would lead to an additional order in 2009 or 2010.”

Under the heading “World Tour,” the order states:

“In February 2009, Ramahi and Timms began preparing for the July 2009 Factory Acceptance Test. Ramahi and Timms then made arrangements to send MOI officials on what Timms later referred to as a “world tour” before and after the Factory Acceptance Test. Among the MOI officials for whom Ramahi and Timms provided the “world tour” were the head of the MOI’s technical committee and a senior engineer on the committee, who played a key role in the decision to award FLIR the business.”

The trip proceeded as planned, with stops in Casablanca, Paris, Dubai and Beirut. While in the Boston area, the MOI officials spent a single 5-hour day at FLIR’s Boston facility completing the equipment inspection. The agenda for their remaining seven days in Boston included just three other 1-2 hour visits to FLIR’s Boston facility, some additional meetings with FLIR personnel, at their hotel, and other leisure activities, all at FLIR’s expense. At the suggestion of Timms’ manager, a U.S.-based Vice President responsible for global sales to foreign governments, Ramahi also took the MOI on a weekend trip to New York while they were in Boston. In total, the MOI officials traveled for 20 nights on their “world tour,” with airfare and luxury hotel accommodations paid by FLIR. There was no business purpose for the stops outside of Boston.

Timms forwarded the air travel expenses for the MOI to his manager for approval, attaching a summary reflecting the full extended routing of the travel. The manager approved the travel, directing him to make the expenses appear smaller by “break[ing] it in 2 [submissions.]” Timms also forwarded the travel charges and an itinerary showing the Paris and Beirut stops, to FLIR’s finance department. FLIR’s finance department processed and paid the approved air expenses the next day. Neither Timms’ manager nor anyone in FLIR’s finance department questioned the itinerary or the travel expense, although the itinerary reflected travel to locations other than Boston.

After receiving questions from Timms’ manager, Ramahi and Timms later claimed that the MOI’s “world tour” had been a mistake. They told the FLIR finance department that the MOI had used FLIR’s travel agent in Dubai to book their own travel and that it had been mistakenly charged to FLIR. They then used FLIR’s third-party agent to give the appearance that the MOI paid for their travel. Timms also oversaw the preparation of false and misleading documentation of the MOI travel expenses that was submitted to FLIR finance as the “corrected” travel documentation. FLIR finance then made an additional payment to the Dubai travel agency for the remaining travel costs.

Following the equipment inspection in Boston, the MOI gave its permission for FLIR to ship the binoculars. The MOI later placed an order for additional binoculars for an approximate price of $1.2 million. In total, FLIR earned revenues of over $7 million in profits in connection with its sales of binoculars to the MOI.”

Under the heading “Additional Travel,” the order states:

“From 2008 through 2010, FLIR paid approximately $40,000 for additional travel by MOI officials. For example, Ramahi took the same MOI officials who went on the “world tour” to Dubai over the New Year holiday in December 2008 and again in 2009. FLIR paid for airfare, hotel, and expensive dinners and drinks. FLIR also paid for hotels, meals and first class flights for the MOI officials to travel within Saudi Arabia to help FLIR win business with other Saudi government agencies. Although the trips were booked as business expenses, the supporting documentation is incomplete and it is not possible to determine whether all the trips in fact had a business purpose.

Moreover, in June and July of 2011, a FLIR regional sales manager accompanied nine officials from the Egyptian Ministry of Defense on travel paid for by a FLIR partner. The travel centered on a legitimate Factory Acceptance Test at FLIR’s Stockholm factory. The travel, however, also included a non-essential visit to Paris, during which the officials spent only two days on demonstration and promotion activities relating to FLIR products. In total, the government officials traveled for 14 days and most of the officials only participated in legitimate business activities on four of those days. Three officials engaged in two additional days of training in Sweden. The total travel costs were approximately $43,000. FLIR subsequently reimbursed the partner for the majority of the travel costs, based upon cursory invoices which were submitted without supporting documentation.”

Under the heading “Expensive Watches,” the order states:

“At Timms’ and Ramahi’s instruction, in February 2009, FLIR’s third-party agent purchased five watches in Riyadh, paying approximately 26,000 Saudi Riyal (about U.S. $7,000). Ramahi and Timms gave the watches to MOI officials during a mid-March 2009 trip to Saudi Arabia to discuss several business opportunities with the MOI. The MOI officials who received the watches included two of the MOI officials who subsequently went on the “world tour” travel.

Within weeks of his visit to Saudi Arabia, Timms submitted an expense report to FLIR for reimbursement of the watches. The expense report clearly identified the watches as “EXECUTIVE GIFTS: 5 WATCHES” costing $1,425 each. Shortly thereafter, Timms specified that the watches were given to MOI officials, and identified the specific officials who received the watches.

Despite these red flags, the reimbursement was approved by Timms’ manager and, based on that approval and the submitted invoices, FLIR’s finance department paid the reimbursement to Timms.

In July 2009, in connection with an unrelated review of expenses in the Dubai office, FLIR’s finance department flagged Timms’ reimbursement request for the watches. In response to their questions, Timms claimed that he had made a mistake and falsely stated that the expense report should have reflected a total of 7,000 Saudi Riyal (about $1,900) for the watches, rather than $7,000 as submitted. Ramahi also told FLIR investigators that the watches were each purchased for approximately 1,300-1,400 Saudi Riyal (approximately $377) by FLIR’s third-party agent. In September 2009, at Timms’ direction, FLIR’s agent maintained the false cover story in response to emailed questions from FLIR’s finance department. Timms and Ramahi also obtained a false invoice reflecting that the watches cost 7,000 Saudi Riyal, which Timms submitted to FLIR finance in August 2009. The false, revised invoice was processed by FLIR.”

Under the heading, “FLIR’s FCPA-Related Policies and Training and Internal Controls,” the order states:

“During the relevant time, FLIR had a code of conduct, as well as a specific anti-bribery policy, which prohibited FLIR employees from violating the FCPA. FLIR’s policies required employees to record information “accurately and honestly” in FLIR’s books and records, with “no materiality requirement or threshold for a violation.” FLIR employees, including Timms and Ramahi, received training on their obligations under the FCPA and FLIR’s policy, although the company did not ensure that all employees, including Ramahi, completed the required training.

FLIR had few internal controls over travel in its foreign sales offices at the time. Although FLIR had policies and procedures over travel for its domestic operations, there were no controls or policies in place governing the use of foreign travel agencies. Instead, FLIR foreign sales employees worked directly with FLIR’s foreign travel agencies to arrange travel for themselves and others. Sales managers, such as Timms, were solely responsible for expense approvals for their sales staff. Timms’ manager was responsible for approving travel-related expenses for all non-U.S.-based senior sales employees (such as Timms) and approving the payment of large invoices to the foreign travel agencies.

FLIR also had few controls over the giving of gifts to customers, including foreign government officials. Sales staff and managers were responsible for all expense approvals for gifts and accounts payable was not trained to flag expenses that were potentially problematic. To the contrary, the initial expense submission for the watches was labeled in large English print “EXECUTIVE GIFTS: 5 WATCHES” for a total of $7,123, and was accompanied by email confirmation that the watches were provided to 5 MOI “officers,” when it was approved by Timms’ manager and processed and paid by FLIR accounts payable department.”

Under the heading, “Remedial Efforts,” the order states:

“In November 2010, FLIR received a complaint letter from FLIR’s thirdparty agent, and began an investigation that lead to the discovery of the improper watches and travel. FLIR subsequently self-reported the conduct to the Commission and cooperated with the Commission’s investigation.

Subsequent to the conduct described herein, FLIR undertook significant remedial efforts including personnel and vendor terminations. FLIR broadened its relevant policies and trainings and implemented a gift policy. FLIR enhanced access by its employees to its anti-bribery policy by providing translations into languages spoken in all countries in which it has offices. FLIR is in the process of enhancing its travel approval system in its foreign offices, including requiring all non-employee travel to be booked through either one large, designated travel agency or a limited number of designated regional travel agencies after receiving advance written approval from senior business personnel and the legal department. All travel agencies will be vetted through FLIR’s full FCPA due diligence framework, be subject to all of FLIR’s current FCPA training obligations, and cannot be reimbursed for travel bookings for non-employees in the absence of appropriate approvals. FLIR added additional FCPA training and procedures for its finance staff, and enhanced its third-party diligence process and contracts. FLIR also engaged outside counsel and forensic accountants to conduct a compliance review of travel and entertainment expenses in its operations outside the U.S.”

Under the heading, “Legal Standards and FCPA Violations,” the order states, in pertinent part:

“FLIR violated [the anti-bribery provisions] by corruptly providing expensive gifts of travel, entertainment, and personal items to the MOI officials to retain and obtain business for FLIR. [FLIR] also violated [the internal control provisions], by failing to devise and maintain a sufficient system of internal accounting controls to prevent the provision and approval of the watches and the travel and the falsification of FLIR’s books and records to conceal the conduct. As a result of this same conduct, FLIR failed to make and keep accurate books and records in violation of [the books and records provisions].”

As noted in the SEC’s release:

“The SEC’s order finds that FLIR violated the anti-bribery provisions of [the FCPA] and the internal controls and books-and-records provisions of [the FCPA].  FLIR self-reported the misconduct to the SEC and cooperated with the SEC’s investigation.  FLIR consented to the order without admitting or denying the findings and agreed to pay disgorgement of $7,534,000, prejudgment interest of $970,584 and a penalty of $1 million for a total of $9,504,584.”

In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“FLIR’s deficient financial controls failed to identify and stop the activities of employees who served as de facto travel agents for influential foreign officials to travel around the world on the company’s dime.”

As a condition of settlement, FLIR is required to report to the SEC “periodically, at no less than nine-month intervals during a two-year term, the status of its compliance review of its overseas operations and the status of its remediation and implementation of compliance measures.”

FLIR Systems issued this release stating:

“FLIR Systems … announced an agreement with the Securities and Exchange Commission (SEC) resolving previously disclosed violations of the Foreign Corrupt Practices Act (FCPA) committed by two former FLIR employees dating back to 2008.

FLIR discovered the FCPA violations related to approximately $40,000 in excessive travel related to factory acceptance tests and miscellaneous gifts valued at approximately $7,000. FLIR subsequently self-reported the actions to the SEC and the U.S. Department of Justice (DOJ) and then terminated the involved employees, who knowingly violated and actively circumvented the Company’s policies and financial controls. As part of its act of self-reporting, FLIR conducted a thorough investigation of its international business activities with the assistance of independent legal specialists. The settlement fully resolves all outstanding issues related to these investigations.

In announcing the settlement, the SEC recognized FLIR for self-reporting the violations.

“FLIR takes compliance very seriously and has policies and procedures in place to prevent such conduct,” said FLIR President and CEO,Andy Teich. “We self-reported the employees’ activities to the relevant authorities upon discovering them and cooperated with the government’s investigation. We have taken action to bolster our training, controls, and policies. The actions of the two former employees involved do not reflect the values of FLIR or the high standards to which we hold ourselves accountable. I am very pleased that we have fully resolved this matter and put it behind us.”

The DOJ declined to pursue any case against FLIR.”

Bruce Yannett (Debevoise & Plimpton) represented FLIR.

Yesterday, FLIR’s stock closed down approximately .9%.

BAE – The Non-Bribery Bribery Allegations

Back in law school, a professor was fond of the phrase ““if it walks like a duck, quacks like a duck, looks like a duck, it must be a duck.”

Among other allegations, DOJ’s criminal information (here) against BAE alleges that BAE served as the “prime contractor to the U.K. government following the conclusion of a Formal Understanding between the U.K. and the Kingdom of Saudi Arabia (“KSA”)” in which BAE sold to the U.K. government, which then in turn sold to the Saudi government several Tornado and Hawk aircraft, “along with other military hardware, training and services.” The information refers to these frequent arrangements as the “KSA Fighter Deals.”

In connection these deals, the information alleges that “BAE provided substantial benefits to one KSA public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.” The indictment alleges that BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.”

WALKS LIKE A DUCK!

This allegation is important from an FCPA perspective because the FCPA only applies to a company like BAE (a foreign company with no shares listed on a U.S. exchange) if conduct in furtherance of a bribery scheme has a U.S. nexus. See 78dd-3. [BAE does have a wholly-owned U.S. subsidiary – a “domestic concern” under the FCPA – but the information states that this entity was not involved in the conduct alleged in the information].

In addition, the information contains additional allegations which clearly demonstrate that BAE’s bribery scheme had a U.S. nexus. For instance, the information alleges that BAE “provided support services to [the] KSA Official while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The information alleges that over $5 million in invoices for benefits provided to the KSA Official were submitted by just one BAE employee during a one year period.

QUACKS LIKE A DUCK!

The information also alleges that BAE “used intermediaries and shell entities to conceal payments to certain advisers who were assisting in the solicitation, promotion and otherwise endeavoring to secure the conclusion or maintenance of the KSA Fighter Deals.”

Specifically, the information alleges that “in connection with the KSA Fighter Deals, BAE agreed to transfer sums totaling more than £10,000,00 and more than $9,000,000 to a bank account in Switzerland controlled by an intermediary. BAE was aware that there was a high probability that the intermediary would transfer part of these payments to the KSA Official.”

Such “high probability” language is a direct quote from the FCPA’s so-called third party payment provisions which prohibit making improper payments to any person “while knowing that all or a portion” of the money will be given to a foreign official in order to obtain or retain business. The FCPA specifically provides that “[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”

In order words, the “high probability” language used in the BAE criminal information is no mere coincidence. In fact, that language (i.e. a company was aware that there was a high probability that the intermediary would transfer part of its payments to a foreign official) is frequently used by the DOJ in resolving FCPA antibribery actions.

For instance, in the InVision FCPA enforcement action, the “investigations by the DOJ and SEC revealed that InVision, through the conduct of certain employees, was aware of a high probability that its agents or distributors” in Thailand, China and the Philippines “had paid or offered to pay money to foreign officials or political parties in connection with transactions or proposed transactions for the sale by InVision of its airport security screening machines.” (See here). Specifically, the non-prosecution agreement (here) notes that: (i) InVision “was aware of a high probability that part of the source of funds” to an agent was to be used by the agent “to fund an offer to promise to make payments” to Thai officials; (ii) InVision authorized a payment to an agent “with awareness of a high probability” that the agent “intended to use part of that payment to influence” Chinese officials; and (iii) InVision sought authorization for a payment to an agent “with awareness of a high probability that” the agent “intended to use part of that payment to influence officials of the government of the Philippines” – all in an effort to obtain or retain business for InVision.

LOOKS LIKE A DUCK!

Yet, the DOJ’s criminal information merely charges one count of conspiracy and it lacks any FCPA antibribery charges. Moreover, the conspiracy charge relates only to “making certain false, inaccurate and incomplete statements to the U.S. government and failing to honor certain undertakings given to the U.S. government, thereby defrauding the United States” and “caus[ing] to be filed export license applications with [various U.S. government entities] that omitted a material fact” concerning fee and commission payments.” Among the false statements BAE is alleged to have made to the U.S. government is its commitment to not knowingly violate the FCPA.

This is the only mention of the FCPA in the information despite the above allegations concerning the KSA Fighter Deals – facts which clearly implicate the FCPA’s antibribery provisions.

In other words, NO DUCK!

For a prior post on BAE (see here).

BAE

In a joint enforcement action that is sure to generate much discussion and controversy, the U.K. Serious Fraud Office (SFO) and the U.S. DOJ announced today resolution of an enforcement action against BAE Systems.

The SFO announced (here) that it has “reached an agreement with BAE systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.”

BAE’s press release (here) notes that “[i]n connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”

The SFO and company release note that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”

In a strange turn of events, the SFO also announced (here) that it has withdrawn charges filed last week (see here) against a former agent charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”

The SFO release notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.”

So what happened to the charges and allegations involving certain Eastern and Central European governments, including the Czech Republic, Hungary, and Austria?

Good question.

Much like the wave of magician’s wand, they have simply disappeared.

Closer to home, the DOJ announced that it:

“filed a criminal charge (here) in the U.S. District Court for the District of Columbia against BAE Systems plc charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”

The DOJ and BAE release note that the company “will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.”

According to the DOJ release (which is available through the DOJ Office of Public Affairs, but not yet publicly posted on DOJ’s website) “BAE Systems is charged with intentionally failing to put appropriate, anti-bribery preventative measures in place, contrary to the representations it made to the United States government, and then making hundreds of millions of dollars in payments to third parties, while knowing of a high probability that money would be passed on to foreign government decision makers to favor BAE in the award of defense contracts. BAE Systems allegedly failed to disclose these payments to the State Department, as it was required to do so under U.S. laws and regulations in order to get necessary export licenses.”

The bold language above would expose most companies to an FCPA enforcement action, but BAE is no ordinary company. It is a major defense contractor on both sides of the Atlantic (as noted in the criminal information “in 2008, BAE was the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales”).

You can bet that these charges were the subject of much negotiation so as to not upset current or future government contracts as well as foreign policy issues and concerns.

The BAE charges and thus similar to those against Siemens in December 2008. In that case, despite the company engaging in bribery “unprecedented in scale and geographic scope” and despite the company being one in which “bribery was nothing less than standard operating procedure” (both direct DOJ quotes), the company avoided FCPA antibribery charges. (See here for prior posts about Siemens).

These two cases seriously raise the issue of whether certain companies in certain industries are simply “above” the FCPA.

Can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?

Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today.

The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”

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