Current Top Ten

1.      Siemens (Germany): $800 million in 2008

2.      KBR/Halliburton (USA): $579 million in 2009

3.      BAE (UK): $400 million in 2010

4.      Snamprogetti Netherlands B.V./ENI S.p.A (Holland/Italy): $365 million in 2010

5.      Technip S.A. (France): $338 million in 2010

6.      Daimler AG (Germany): $185 million in 2010

7.      Alcatel-Lucent (France): $137 million in 2010

8.      Panalpina (Switzerland): $81.8 million in 2010

9.      ABB Ltd. (Switzerland): $58.3 million in 2010

10.  Pride (USA): $56.1 million in 2010

Information available at: http://fcpablog.squarespace.com

Lukas admitted that from 1999 to 2005, he and other Nexus employees agreed to, and paid, bribes to Vietnamese government officials in order to obtain contracts. These bribes were covered up as “commissions” in Nexus’s accounting records. Court records indicate that Nexus paid over $150,000 to Vietnamese officials over the 6 year period.

Lucas has been indicted for one count of conspiracy to bribe Vietnamese public officials, in violations of the Foreign Corrupt Practices Act (FCPA) along with Nexus and co-conspirators Nam Nguyen, Kim Nguyen and An Nguyen. Cases are still pending against the other defendants and Nexus. Lukas is scheduled for sentencing on April 6, 2010 and faces a maximum sentence of 10 years in prison and $350,000 fine.

More information:

• DOJ news release

During 2000 to 2003 the company spent millions of dollars on 315 trips for Chinese government officials that included sightseeing, entertainment and leisure. On all occasions the trips were approved by senior officials and even by corporate headquarters. Some trips were characterized as “factory inspections” or “training” in contracts, however by early 2001 Lucent Technologies Inc. had outsourced nearly all of its manufacturing and did not have any factories for customers to tour, yet many Chinese government officials were provided with trips for “factory inspections” around the world which involved little or no business content. These trips consisted of sightseeing to locations such as Disneyland, Universal Studios, the Grand Canyon and many other attractions. The trips lasted around 14 days and each costs between $25,000 and $55,000 per trip.

In the agreement with the Department of Justice Lucent admits all of this conduct and even other instances of providing travel and educational opportunities to Chinese government officials and admits to improperly recording them as expenses in its corporate books and records. The company has agreed to pay a penalty of $1 million to the United States Treasury and will adopt new internal controls, policies, and procedures. The new internal controls must ensure that the company makes and keeps fair and accurate books, records, and accounts as well as an anti-corruption compliance code, standards and procedures to ensure that any violations of the FCPA will be detected immediately.

The Justice Department has agreed not the prosecute Lucent Technologies Inc. as long as it complies will all requirements contained in the agreement over a two year term. The Securities and Exchange Commission (SEC) has filed a settled complaint against Lucent and the company has agreed to pay them $1.5 million in civil penalties in connection with similar conduct.

More information:

DOJ news release

Now, we’ve got an enforcement case that might encourage your company to put in place a reporting network to notify you if it has paid commissions, political contributions or fees related to an ITAR license/agreement application.

In March, 2005, Titan Corporation pled guilty to 3 violations of the Foreign Corrupt Practices Act of 1997. The violations resulted from bribes paid in the form of contributions to the election campaign of the then-incumbent President of the Republic of Benin. Over $2,000,000 in bribes were given in an attempt to maintain a business relationship with Benin , in which Titan would build and operate a wireless telephone network in their county. At Titan’s request, an agent of Benin submitted false invoices to Titan to facilitate the payment of these bribes. Payments were made under the false pretenses of the “betterment of the people of Benin.”

Following Titan’s guilty plea, it was required to pay over $15 million in disgorgement and prejudgment interest, and $13 million in criminal fines, in addition to 3 years of probation. (I’m not sure what a disgorgement is, but I surely wouldn’t want to be involved in one.)

Titan has now decided to settle additional charges that it neglected to report certain commissions in its ITAR export applications. On the applications in question, Titan allegedly made false statements that there were no reportable commissions paid to third parties. According to the DDTC charging letter, on three separate occasions between 2000 and 2003, Titan paid a combined $2,267,000 in commissions with respect to the sales or exports of defense articles to Access International Ltd., SurCom International BV , and AstroDesign, Inc.

If there is good news for L-3 and Titan in all this, it is that the DDTC did not impose the ITAR section 120.1(b) penalty making L-3 ineligible for export licenses due to its Foreign Corrupt Practices Act conviction. Debarment, as a penalty for the commissions charges, could also have been imposed, but was not. The settlement for the commissions charges was in the amount of $1.5 million. That breaks down to a $1 million cash payment and $500,000 to go toward the costs of a compliance program that L-3 will implement as a condition of the Consent Order.

The good news for you is that you now have an enforcement case that gives you a tangible basis for arguing your company needs to put in place communication channels.

It is my experience that most U.S. companies’ compliance to the FCPA is no more than “lip service.” The CEO issues a policy that instructs all employees to comply with the FCPA and that bribes of foreign government officials will not be tolerated. Then he/she and other members of the company’s senior management wrap themselves in this cozy “policy security blanket” and they are confident the company is in compliance. After all, everyone knows you can’t bribe government officials. Yeah, right!

On February 22, Titan Corporation (Titan) plead guilty to criminal charges of violating the FCPA, falsifying books and records of Titan, and willfully aiding and assisting in the preparation or presentation of a false or fraudulent tax return for Titan.

Does the case against Titan signal a heightened FCPA enforcement effort on the part of the Justice Department?

Background on the FCPA

The FCPA makes it unlawful to bribe foreign officials to obtain or retain business. There are five elements which must be met to constitute a violation of the Act (source).

1. Who
   The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provisions or if they conspire to violate those provisions.

   Amendments to the Act in 1998 expanded the FCPA to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to the FCPA if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the United States. U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves “domestic concerns,” who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

2. Corrupt intent
   The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his/her official position to direct business wrongfully to the payer or to any other person. It should be noted that the FCPA does not require that a corrupt act succeed. The offer or promise of a corrupt payment can constitute a violation
3. Payment
   The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value.
4. Recipient
   The prohibition extends only to corrupt payment to a foreign official, a foreign political party, or any candidate for foreign political office. This applies regardless of the official’s rank or position.
5. Business Purpose Test
   The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person.

The FCPA prohibits corrupt payments through third parties while knowing the payment will go directly or indirectly to a foreign official. The term “knowing” includes “conscious disregard and deliberate ignorance.” U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives. Firms should be aware of “red flags” when dealing with third party payments.

The Titan Case

In 1998, Titan embarked on a project to develop a telephone system in the African nation of the Republic of Benin and to generate revenue from operating the system for a number of years. In November of 1998, Titan personnel, including a corporate officer traveled to Benin and met with a Beninese national purported to have access to the President of Benin.

In July 1999, Titan acquired from an African company named Afronetwork, Ltd. All of their rights and obligations under various prior agreements with the Postal and Telecommunications Office (OPT) of the Republic of Benin to develop and operate a wireless telephone system in Benin. At this same time, Titan entered into a consulting agreement with the Beninese national. Prior to engaging this agent, Titan employees were aware this person was the “Head of State’s business advisor.”

Only six days after signing the consulting agreement, the agent submitted an invoice to Titan for $399,919. This invoice was paid a week later by wire transfer to a bank account in Benin in the name of a relative of the agent.

Certain of the agreements assumed by Titan required that “social payments” be made. In late December 2000, the Benin Agent and OPT demanded Titan to accelerate the payments and insisted they be made in full before the next election in March 2001.

In late January 2001, the Benin agent submitted two invoices to Titan totaling $2,381,551. Neither invoice reflected the true purpose of the payments: to provide funds for the benefit of the Benin President’s re-election campaign. Titan knew the “social payments” would be used to support the Benin President’s re-election effort. For example, these funds were used to purchase T-shirts bearing a picture of the President of Benin and instructing Beninese citizens to vote for him.

Department of Justice Investigation

In its investigation, DOJ found that Titan never had a FCPA compliance program or procedures. The company’s only related “policy: is a statement in their Code of Ethics stating “employees must be fully familiar with and strictly adhere to such provisions as the Foreign Corrupt Practices Act that prohibit payments or gifts to foreign government officials for the purpose of influencing official government acts or assistance in obtaining business.” Titan did not enforce that policy nor did it provide its employees with any information concerning the FCPA or its purposes. In addition, DOJ found that Titan had a bas debt expense write-off that included some portion of the Benin payments the company made in violation of the FCPA. Hence, the charge of preparing and presenting a false or fraudulent tax return.

Titan’s Penalties as a Result of Their Criminal Guilty Plea

Titan agreed to implement and maintain a compliance and ethics program that includes, at a minimum, the following:

• A clearly articulated corporate policy against violations of the FCPA and other applicable anti-bribery laws and the establishment of compliance standards and procedures to be followed.
• The assignment to one or more senior corporate officials of the responsibility for oversight of compliance with these policies, standards, and procedures. These officials shall have the authority to implement monitoring and auditing systems to detect criminal conduct and have the authority to retain outside counsel and independent auditors to conduct investigations and audits.
• The establishment and maintenance of a committee to review the retention of any agent, consultant, or representative for purposes of business development or lobbying in a foreign jurisdiction. This committee will also review the suitability of all prospective joint venture partners for purposes of compliance with the FCPA, as well as the adequacy of the due diligence.
• Clearly articulated corporate procedures to assure that substantial discretionary authority is not delegated to individuals that have a propensity to engage in illegal activities.
• Clearly articulated corporate procedures to assure that Titan has formed business relationships with reputable and qualified agents.
• The effective communication to all officers, employees, agents, consultants, and other representatives, and to sub-contractors, of corporate policies, standards, and procedures regarding the FCPA.
• The implementation of appropriate disciplinary mechanisms
• The establishment of a reporting system by which officers, employees, agents, consultants, and other representatives, as well as sub-contractors, may report suspected criminal conduct without fear of retribution
• The inclusion in all future contracts with agents, consultants and other representatives an agreement for Titan to have audit rights for purposes of ensuring adherence with the FCPA.
• Titan will conduct periodic reviews, no less than once every five years, of its corporate policies and compliance programs regarding the FCPA and the anti-bribery provisions of each foreign jurisdiction to which it may be subject.

- Chuck Hough

But considering the wide net cast by Part 130, this may not be a safe practice.

Political contributions are broadly defined to include virtually any gift, loan, payment or other compensation made to virtually any kind of foreign political actor or group valued at $1,000 or more (see 130.6). Agreements to pay, even if a payment hasn’t been made yet, are also included in the definition. Fees and commissions are likewise broadly defined and, with few exceptions, include the same kinds of payments as with political contributions (see 130.5). Moreover, a fee or commission can include payments to virtually anybody, regardless of nationality. Included are payments not only by the license applicant, but anybody in the food chain under the license applicant, including their vendors. Any payment must be made for “solicitation or promotion or otherwise secure the conclusion of a sale of defense articles or services for armed forces” (see 130.3, 5 &6).

For example, paying an in country representative something other than normal salary is usually a fee or commission. If that representative makes a payment to a political party, that would likely be a political contribution by the applicant. If you have a subcontractor who also pays a success bonus to an in country agent, that frequently is considered a fee or commission by the applicant. Part 130 puts the obligation on the applicant to find out what vendors and their representatives are paying. As in country representatives are standard fare in many foreign defense transactions, along with multiple vendors with agents, the Part 130 requirements should be thoroughly understood by all munitions exporters.

• But there are always those who want quick guidelines and answers on how to get out of the Part 130 requirements. There are a few quick Part 130 “outs” that safely allow you to check the “no payments” box on your license application without much further thought:

  If the license application is for defense articles and services valued under $500,000 or,

• If the license application is for licensees/end users who are not “armed forces.”

All the PCF definitions and therefore subsequent obligations are tied to these two conditions. So if you can duck under them, the ITAR doesn’t require you to report any PCF’s no matter how many you made or how large the payment. Note, however, that the Foreign Corrupt Practices Act and/or other regulations may impose other obligations. If the application is valued at $500,000 or more and involves the sale to “armed forces,” you can still safely check the “no payments” box on your license application if:

· The aggregate political contributions (including those made by your agents, vendors or vendors agents, or anyone receiving your fee or commission) are valued under $5,000.
· The aggregate fee or commissions (including those made by your agents or vendors) are valued under $100,000.

For example, take the case where you are the license applicant for a sale of defense articles worth $1 million to overseas armed forces. Assume you paid your in country rep a $40,000 success fee to get the business, and your two major component vendors each paid a $40,000 success fee to their respective in country reps. You cannot check the “no payments” box, as your aggregate fees and commissions exceed $100,000. Instead you must provide the detailed report with the license application. If your in country rep also paid $10,000 of their success fee to a foreign political party in connection with the business, you must also report that political contribution with your license application, as the payment exceeded $5,000.

Ignorance of what your vendors or agents are doing is no excuse. In fact, Part 130 places an affirmative obligation on the applicant to find out what payments have been made. For example, 130.12 requires you to make a written request to your major component vendors to provide a statement on what they or their agents paid. If your vendor does not respond within 25 days, you must notify ODTC of their failure to respond (130.12(d)(1)).
Similarly, 130.13 requires applicants and their major component vendors to obtain information on any political contribution make by any recipient of a fee or commission.

If you are required to make a report, you must follow the report guidelines as per 130.10. The reports should include, among other things, the total contract price, names and addresses of all parties and recipients as well as payment amounts and types of payments. Note that 130.10(c) is a classically confusing ITAR mess. On the one hand it appears to state that you do not have to report details for individual payments under a di-minimis threshold. On the other hand it seems to open the door for reporting PCF’s below the clear 5,000/100,000 PCF threshold set in 130.9. Probably the best approach is to ignore the 130.10(c) confusion altogether and provide full report details for all individual payments of $1,000 or more that together exceed the 5,000/100,000 PCF threshold in 130.9.

Note that you have continued obligations to report political contributions after you submit the license application. If you agree to make payments exceeding the $5,000/$100,000 PCF thresholds after you submit the license application, you must report it to ODTC within 30 days of learning it. If you already filed a report, you must report again with if you make further PCFs exceeding a $2,500/$50,000 threshold.

A further word of caution on all PCF reporting: Part 130 requirements are essentially a method by which the Government can track potential Foreign Corrupt Practices Act (FCPA) violations. The FCPA essentially prohibits US companies from making bribes to foreign government officials. If you do find that you, your agents, your vendors, or your vendor’s agents are making political contributions, you should contact your Counsel or other FCPA specialist to ensure you don’t have even bigger problems before you submit your report.