The Foreign Corrupt Practices Act of 1977 (15 U.S.C. 78 et seg, as amended) (aka the FCPA) applies to any SEC-registered entity doing business outside the United States.  It has two main provisions—(1) an anti-bribery provision (which is enforced by the DOJ and gets most of the attention), and (2) a books-and-records provision, which is enforced by the SEC. 

The first provision prohibits covered entities from making corrupt payments to foreign officials for the purpose of obtaining or retaining business.  But it’s a bit more comprehensive than that simple entence might lead one to believe.  Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provision or if they conspire to violate those provisions.  The provision prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. 

There’s more:  Corrupt payments made through intermediaries are also prohibited. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. According to the Department of Justice, the term "knowing" includes conscious disregard and deliberate ignorance.

But some payments aren’t corrupt.  According to the Department of Justice’s FCPA Guide for Laypersons—

There is an exception to the antibribery prohibition for payments to facilitate or expedite performance of a ‘routine governmental action.’ The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country.

With respect to the books-and-records provision, a related statute requires that—

(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall--

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that--

(i) transactions are executed in accordance with management's general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management's general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Often improper payments under the FCPA anti-bribery provision are also violations of the books-and-records provision, given that the transactions are likely to be hidden in a company’s accounting system, and because enforcement agencies tend to believe that the corrupt payments would never have been made if the company had effective internal controls in the first place. 

The prominent law firm Gibson Dunn published a thorough review of FCPA activity in 2009.  According to that review, “In what is becoming nearly an annual event, 2009 once again saw record levels of FCPA enforcement actions brought by DOJ and the SEC. … It is clear that this trend of heightened enforcement activity will not soon subside. Mark Mendelsohn, the peripatetic Deputy Chief of the Fraud Section in DOJ's Criminal Division and the government's top criminal FCPA enforcer, recently confirmed that DOJ has least 130 open FCPA investigations.“  We encourage you to follow the link and read this excellent recap of recent enforcement activity and emerging trends.

Why is the FCPA of interest to aerospace/defense companies?  Well, the FCPA was originally enacted—at least in part—in reaction to the news that Lockheed (now called Lockheed Martin) had bribed foreign officials to the tune of roughly $22 million to help sell its planes.  According to this article, the company routinely engaged in bribery of foreign officials in countries such as West Germany, Italy, Japan, and Saudi Arabia.  News of the bribes led to the resignations of Lockheed’s Chairman of the Board of Directors as well as its Vice Chair and President.  In addition, of course, A&D companies sell their commercial and military goods and services globally, often through local agents and subcontractors, meaning they are vulnerable to the making of corrupt payments.

So it was not really surprising that on January 19, 2010, the Department of Justice announced that “Twenty-two executives and employees of companies in the military and law enforcement products industry have been indicted for engaging in schemes to bribe foreign government officials to obtain and retain business.”  21 of the alleged FCPA violators were arrested in Las Vegas; and one was arrested in Miami, as a result of 16 separate indictments—representing “the largest single investigation and prosecution against individuals in the history of DOJ’s enforcement of the Foreign Corrupt Practices Act (FCPA).” 

According to the DOJ announcement—

The indictments allege that the defendants engaged in a scheme to pay bribes to the minister of defense for a country in Africa. In fact, the scheme was part of the undercover operation, with no actual involvement from any minister of defense. As part of the undercover operation, the defendants allegedly agreed to pay a 20 percent ‘commission’ to a sales agent who the defendants believed represented the minister of defense for a country in Africa in order to win a portion of a $15 million deal to outfit the country’s presidential guard. In reality, the ‘sales agent’ was an undercover FBI agent. The defendants were told that half of that ‘commission’ would be paid directly to the minister of defense. The defendants allegedly agreed to create two price quotations in connection with the deals, with one quote representing the true cost of the goods and the second quote representing the true cost, plus the 20 percent ‘commission.’ The defendants also allegedly agreed to engage in a small ‘test’ deal to show the minister of defense that he would personally receive the 10 percent bribe.

The DOJ notes that “This ongoing investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations and the largest action ever undertaken by the Justice Department against individuals for FCPA violations.”  In addition, the announcement states that “Each of the indictments allege that the defendants conspired to violate the FCPA, conspired to engage in money laundering, and engaged in substantive violations of the FCPA. The indictments also seek criminal forfeiture of the defendants’ ill gotten gains.  The maximum prison sentence for the conspiracy count and for each FCPA count is five years. The maximum sentence for the money laundering conspiracy charge is 20 years in prison.”

The DOJ announcement continues an annoying trend we noticed, where individuals are named as alleged perpetrators, but the companies that employ them (or that they head) are not named.  It takes some sleuthing to match individuals to companies—sleuthing that the group Project on Government Oversight (POGO) was willing to undertake.  See the results of their efforts here.  POGO’s oft-maligned Federal Contractor Misconduct Database shows sixteen aerospace/defense contractors that have either been charged with, or pleaded guilty to, FCPA violations.  None of the 16—or indeed any other Federal Contractor listed in POGO’s database—was among the companies employing any of the 22 individuals nabbed in the recent undercover operation.  The only “name” company involved was the venerable Smith & Wesson of Springfield, Mass.  That company’s statement, which contained zero details, can be found here—for what it’s worth.  (Not much.)  It is not clear that any other company is an SEC-registrant, and hence none of the others may be subject to the books-and-records provision.  Of course, the anti-bribery provision is quite sufficient—especially when linked to allegations of money-laundering.  No need to pile-on.

We’ve noted before the difficulty in being a Government contractor, and all the controls and systems that must be established in order to assure compliance with a myriad of statutes, regulations, and rules.  For those companies doing business outside the U.S.—especially those that are SEC-registrants—the FCPA is an important compliance area that is worth spending some time and effort thinking through, in our view.