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Fcpa enforcement-aerospace-defense-industry

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All companies conducting business abroad should be concerned about compliance with …

All companies conducting business abroad should be concerned about compliance with
the Foreign Corrupt Practices Act (FCPA or the Act). Companies in certain industries
— like the aerospace and defense industry—due to the heavily regulated nature of the
industry and the level of interaction with foreign governments, are even more vulnerable
to FCPA liability than others.

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  • 1. Understanding FCPA EnforcementTrends in the Aerospace and DefenseIndustry: A Launch Pad to EffectiveManagement of Anticorruption RisksApril 2013LW.com
  • 2. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseContentsI. Introduction....................................................................................1II. A Brief Introduction to the FCPA............................................1III. The International Compliance Landscape..........................4A. The UK Bribery ActB. Enforcement in BRIC CountriesIV. Recent Enforcement Actions Against Companiesin the Aerospace and Defense Industry: Trends andCase Studies.....................................................................................5A. The Use of Third-Party Agents May Be the Single Riskiest PracticeB. US Authorities Are Aggressively Targeting Industry ExecutivesC. The First Large-Scale Undercover Investigation in FCPA History TargetedDefense Industry ExecutivesD. FCPA Enforcement in the Aerospace and Defense Industry Could Have NationalSecurity ImplicationsE. The United States and the United Kingdom Worked Together to Obtain theLargest Criminal Penalty Ever Imposed on a Defense Company in the FCPAArenaF. Successor Liability Means That Comprehensive Due Diligence Is CriticalG. Operating in Certain Countries Presents Heightened RisksH. Defense Offset Transactions Can Lead to FCPA LiabilityI. Dealings with Commercial Customers Must Also be Scrutinized: The Case ofState-Owned AirlinesJ. Emerging Risks for Satellite Communications CompaniesK. Statutes Often Linked with FCPA ChargesL. Derivative Civil Litigation Related to the FCPAV. Best Practices for the Industry..........................................14VI. FCPA Reform Initiatives..............................................................15VII. Latham & Watkins’ Industry Experience andExpertise.........................................................................................16VIII. Chart of Industry Enforcement Actions..........................17
  • 3. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 1I. INTRODUCTIONAll companies conducting business abroad should be concerned about compliance withthe Foreign Corrupt Practices Act (FCPA or the Act). Companies in certain industries— like the aerospace and defense industry—due to the heavily regulated nature of theindustry and the level of interaction with foreign governments, are even more vulnerableto FCPA liability than others. Legislative history from 1977 indicates that congressionalconcern over reports of questionable payments made by aerospace companies was oneimpetus for the Act’s passage. According to Trace International, aerospace and defenseindustry members have accounted for approximately twelve percent of the world’santicorruption enforcement actions since 1977, second only to the extractive industrieslike oil and mining.FCPA enforcement across all industries has sky-rocketed in recent years. In 2009, theDepartment of Justice (DOJ) and Securities and Exchange Commission (SEC) initiateda total of 40 FCPA enforcement proceedings. That figure nearly doubled in 2010 to 74enforcement actions, fell slightly in 2011 to approximately 50, and decreased even morein 2012 to just over 20 actions. But, the 2012 downtick should not prompt companiesto relax their compliance. All signs, including DOJ and SEC’s recent publication of theFCPA Resource Guide (Resource Guide), suggest that US authorities will continue tovigorously enforce the FCPA in the coming years.US authorities are not alone in their efforts to crackdown on corruption. Other countries,most notably the United Kingdom, are also stepping up their anticorruption efforts andfocusing on the aerospace and defense industry. The UK Bribery Act 2010 (UKBA) ispotentially more burdensome for global companies to comply with than the FCPA. Unlikethe FCPA, the UKBA reaches bribery in both the public and private sectors and punishescompanies for failing to prevent bribery. This means that a company, UK or otherwise,could be held liable under the UKBA if a person associated with the company commitsbribery, even if the person has no connection with the United Kingdom and the bribeactivity occurred outside of the United Kingdom.The potential exposure for multinational companies and their executives is significant.Companies in all industries must appreciate the compliance risks and take steps tominimize their vulnerabilities. Utilizing the enforcement agencies’ recent pronouncementsin the Resource Guide as a launching mechanism, this article provides a backgroundprimer on key aspects of the FCPA and UKBA and highlights recent trends and casestudies that have impacted companies in the aerospace and defense industry. Throughour industry group platform, Latham & Watkins LLP is uniquely positioned to deployresources around the world to assist our industry clients as they tackle the challenges ofassessing and minimizing their anticorruption risks.II. A BRIEF INTRODUCTION TO THE FCPAThe FCPA criminalizes corrupt payments to foreign government officials for the purposeof obtaining or retaining business. The Act’s anti-bribery provisions prohibit the use ofthe mail or any instrumentality of interstate commerce in furtherance of a corrupt offer,payment, promise to pay, or authorization to pay money to any foreign official for thepurpose of influencing the official in his or her official capacity, inducing the official toviolate his or her lawful duty, or securing an improper business advantage. The Act’scoverage is vast. It applies to improper payments made anywhere in the world andcovers illegal payments made not only by company employees, but also by subsidiaries,joint venture partners, and third-party agents. Companies and senior executives canbe held responsible for payments made by their employees and agents, even if theydid not have actual knowledge of the corrupt nature of the payments. This meansthat executives cannot shield themselves from FCPA liability simply by ignoring ordisregarding the suspicious actions of their employees and agents.
  • 4. 2 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseDOJ’s concept of “foreign official” under the FCPA is equally expansive. It covers notonly officers and employees of foreign governments, but also anyone acting in an officialcapacity for or on behalf of a government department, agency, or “instrumentality thereof,”which can include employees of state-owned and state-controlled companies. Courts thathave examined this issue in recent years have held that whether a particular entity is an“instrumentality” under the FCPA requires a fact-specific analysis of the entity’s ownership,control, status, and function. Jury instructions often include a non-exhaustive list of factorsthat a jury should consider, including the foreign state’s extent of ownership and degreeof control over the entity; the circumstances surrounding the entity’s creation; the purposeof the entity’s activities; and the level of financial support by the foreign state. Althoughno factor is dispositive, DOJ and SEC guidance suggests that an entity is unlikely to beconsidered an instrumentality if a government does not own or control a majority of itsshares.The FCPA also contains accounting provisions that work hand-in-hand with its anti-briberyprovisions. The accounting rules, known as the books and records provisions, requirecompanies to maintain books and records in reasonable detail to accurately account forand report all transactions and dispositions of their assets. This mandate is not limitedto transactions within the United States or with foreign government officials. It applies toall financial dealings of all US and foreign companies that are required to file reports orregister their securities with SEC. So broad is the reach of the FCPA’s books and recordsprovisions that a US parent company can be held liable for its foreign subsidiary’s failureto keep accurate books and records where, for example, the subsidiary’s financials areultimately consolidated with the parent’s financial statements.DOJ and SEC jointly enforce the FCPA. Corporations are subject to criminal fines of upto $2 million per anti-bribery violation. Under the Alternative Fines Act, which authorizesfines up to twice the benefit the defendant sought to gain by making the corrupt payments,actual fines can be even higher. Individual executives are also subject to criminal penaltiesof up to $100,000 in fines and five years in prison. Violations of the accounting provisionscan subject corporations to a fine of up to $25 million. On the civil side, companies andindividuals face fines of $16,000 per anti-bribery violation. Under the civil forfeiture statute,which can also be used in the criminal context, defendants may be required to forfeit anyassets derived from proceeds traceable to an FCPA violation or a conspiracy to violate theFCPA.The collateral consequences of FCPA enforcement actions can be more burdensome thanthe massive fines. The enforcement agencies have utilized the appointment of outsidemonitors more frequently in recent years. According to the Resource Guide, DOJ andSEC consider the following factors when determining whether a monitor is appropriate:012345678Just DOJ Just SEC Both SECand DOJUS Agency Enforcement of Industry ActionsNumber of IndustryActions
  • 5. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 3(1) seriousness of the offense; (2) duration of the misconduct; (3) pervasiveness of themisconduct (including whether it cuts across geographic or product lines); (4) nature andsize of the company; (5) quality of the company’s compliance program at the time of themisconduct; and (6) subsequent remediation efforts.Generally, the monitor agreements require companies to grant their monitors very broadaccess to their employees, policies, systems, and documents, and the monitors maybe required to provide periodic reports to the government. Under its February 2010plea agreement with DOJ stemming from charges that it made illegal bribe paymentsto obtain government contracts, BAE Systems (BAES) agreed to engage an outsidecorporate monitor for three years. DOJ permitted BAES to choose its own monitor, butDOJ retained complete discretion to accept or reject BAES’s proposed candidates. Formany companies, the loss of autonomy over their compliance systems is one of the mosttroubling consequences of settling FCPA charges.The government can impose other non-monetary sanctions, including prohibitingtransactions with the government and barring companies from obtaining export licenses.For defense contractors, debarment from government contracting or the loss of exportprivileges could effectively put them out of business.FCPA enforcement has been at an all-time high in recent years. From 2004 to 2010, thenumber of FCPA enforcement actions initiated by DOJ and SEC increased almost fifteenfold — from five to 74. The penalties have increased dramatically as well. In 2010, USand foreign companies paid a record $1.8 billion in FCPA-related financial penalties.The ten costliest FCPA-related settlements have all occurred since 2008, and eight ofthe ten have occurred since 2010. Although enforcement fell slightly in 2011 and 2012,it will undoubtedly pick up again due in part to a recent move by Congress to increasethe incentives for whistleblowers to report FCPA violations to SEC. The Dodd-FrankWall Street Reform and Consumer Protection Act, signed into law by President Obamaon July 21, 2010, includes a “whistleblower bounty” provision that provides monetarybenefits for whistleblowers who report securities law violations to SEC. Whistleblowerswho provide information that leads SEC to a successful enforcement action or settlementcan receive between 10 and 30 percent of the amount of the settlement that exceeds $1million. The whistleblower bounty provision, coupled with the aggressive enforcementappetite of US law enforcement, will undoubtedly lead to more FCPA investigations andenforcement actions in the coming years.
  • 6. 4 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseIII. THE INTERNATIONAL COMPLIANCE LANDSCAPEA. The UK Bribery ActThe UKBA, which entered into force on July 1, 2011, is even broader, in terms of scope andterritorial reach, than the FCPA. The UKBA contains two general offenses: active bribery,meaning offering, promising, or giving a bribe; and passive bribery, or requesting, agreeing toreceive, or accepting a bribe. Thus, unlike the FCPA, which only targets bribe-givers, the UKBApunishes both sides of the bribe transaction. Under the UKBA, a bribery offense occurs whena person offers, promises, or gives a financial or other advantage to another person with theintent to induce that person or another to improperly perform a relevant function or activity. A“relevant function or activity” is defined to include anything connected with a business, trade,or profession, with minor exceptions. This expansive definition highlights the second majordistinction between the UKBA and the FCPA — unlike the FCPA, which prohibits bribery offoreign government officials, the UKBA targets all bribery, including bribery that is entirely withinthe private sector.Arguably, Section 7 of the UKBA is its most expansive provision. Section 7 creates a new formof corporate liability for failing to prevent bribery. There is only one defense to the charge offailure to prevent bribery — that an organization had “adequate procedures” in place to preventbribery. The UK Ministry of Justice issued guidance that lays out six factors the UK authoritieswill consider when deciding whether a commercial organization has implemented adequateprocedures to prevent bribery: whether (1) proportionate procedures are in place to preventbribery; (2) top-level management is committed to preventing bribery; (3) risk assessmentsare performed and documented on a periodic basis; (4) due diligence is conducted prior toentering into business relationships with third parties; (5) anti-bribery policies are embedded andunderstood through communication and training; and (6) anti-bribery procedures are monitoredand reviewed as needed.The UKBA’s territorial coverage is extensive. The UKBA governs all acts that take place withinthe United Kingdom, regardless of where the organization or individual who committed the actis based. In addition, the UKBA’s anti-bribery provisions apply to acts committed outside theUnited Kingdom if the actor had a “close connection” to the United Kingdom. For individuals,this means a person who is a British national or resident; for companies, this means a bodyincorporated in the United Kingdom or a Scottish partnership. Section 7, the failure to preventbribery offense, applies even more generally to all companies “carrying on business, or partof a business” in the United Kingdom. This means that a non-UK company that bribes aprivate non-UK citizen to retain business that is entirely unconnected with the United Kingdomcould theoretically fall under the jurisdiction of the UKBA if it carries on business in the UnitedKingdom. Because the threshold for “carrying on business” is low, all global companies withsome presence in the United Kingdom must take steps to implement adequate procedures toprevent bribery in order to minimize their UKBA exposure.B. Enforcement in BRIC CountriesOther countries have become increasingly active in their anticorruption efforts. To date, 40countries have ratified the Organization for Economic Cooperation and Development’s (OECD)Anti-Bribery Convention, which entered into force in 1999. By signing onto the Convention,countries pledge to enact national legislation to criminalize the bribery of foreign governmentofficials. In addition, in the span of just a few months, some of the world’s most powerfulemerging nations passed laws criminalizing foreign bribery. Effective May 2011, China amendedits criminal code to make paying bribes to foreign government officials a crime. China amendedArticle 164 of the Chinese Criminal Law, which previously prohibited commercial bribery, to adda prohibition against giving property to any foreign public official or official of an internationalpublic organization “for the purpose of seeking illegitimate commercial benefits.” The amendedlaw does not contain any affirmative defense or exceptions, and applies to all Chinese citizens,wherever located, and to all companies organized under Chinese law.
  • 7. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 5Also in May 2011, the Russian President signed into law a measure that imposes criminalsanctions on companies and individuals who make corrupt payments to foreign publicofficials. The Russian law, like the UKBA, also criminalizes the receipt of corrupt payments.Under Russia’s law, wrongdoers can be fined up to 100 times the amount of the bribe (notto exceed 500 million rubles, or about $18 million), and can be jailed for up to 12 years. Alsoin 2011, Indian lawmakers introduced anticorruption legislation. However, India’s Parliamenthas thus far failed to pass the legislation. Finally, in 2012 the Brazilian Congress consideredproposed legislation that would prohibit bribery of foreign public officials and substantiallystrengthen Brazil’s anticorruption efforts. However, the bill’s progress stalled in late 2012, inpart due to a lobbying campaign against the bill by the business community.IV. RECENT ENFORCEMENT ACTIONS AGAINST COMPANIES IN THEAEROSPACE AND DEFENSE INDUSTRY: TRENDS AND CASESTUDIESAerospace and defense companies are particularly vulnerable to FCPA exposure fora number of reasons. For instance, companies in the industry often serve governmentend-customers, and are therefore in constant contact with foreign government officials.Additionally, aerospace and defense companies regularly hire agents and foreignconsultants to handle their on-the-ground transactions with host country officials. Theindustry is also heavily regulated, resulting in greater scrutiny by numerous governmentagencies. It is imperative that companies and individuals working in the aerospace anddefense industry are aware of recent enforcement actions brought against industry playersand understand how they fit into broader FCPA trends. In addition to the case studiesdiscussed below, other industry companies have disclosed in public filings that they arecurrently under investigation for potential FCPA violations.A. The Use of Third-Party Agents May Be the Single Riskiest PracticeRecent enforcement actions and numerous FCPA advisory opinions underscore the risksassociated with the use of third-party sales agents, a common practice in the aerospace anddefense industry. More than half of the industry enforcement actions discussed in this articleinvolve bribes paid by third-party agents. Similarly, at least three of the 58 FCPA advisoryopinions issued by DOJ since DOJ instituted the opinion procedure release process in1980 relate to the use of third parties by aerospace and defense companies. Accordingto the 2012 FCPA Resource Guide, Congress anticipated the use of third-party agentsin bribery schemes, and thereby defined the term “knowing” to prevent the “head-in-the-sand” problem. This means that companies and their employees cannot avoid liability bypurposefully inserting agents between themselves and foreign officials and then arguing thatthey did not know that their agents paid bribes.In Opinion Procedure Release 82-03, a US company seeking to do business with theYugoslav government department charged with obtaining property and services for theYugoslav military requested an advisory opinion seeking guidance on whether it could retaina subunit of the government department to perform duties on its behalf that would typicallybe handled by a commercial sales agent. A Yugoslav law obligating the requesting companyto pay a certain percentage of the total contract price to the government departmentnecessitated this unique third-party arrangement. The requesting company assured DOJthat there was no expectation that any individual government official would personallybenefit from the proposed agency agreement. DOJ concluded that, based on the factspresented, it did not intend to bring an enforcement action against the requestor. OpinionProcedure Releases 93-02 involved a similar situation in which a US company sought topay a commission to a government-owned business that had the exclusive right to buy andsell all defense equipment for a foreign country’s armed forces. DOJ again issued no actioncomfort.
  • 8. 6 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseA US company engaged in the manufacture and sale of commercial and military aircraftequipment requested Opinion Procedure Release 96-02. The US company wished to renewan existing exclusive sales representative agreement with a foreign state-owned enterprise.The requestor emphasized that the sales representative was in no position to influence theprocurement decisions of the requestor’s potential customers, and the representative itselfwarranted that it was in full compliance with the FCPA. Based on these and other factors, DOJissued no action comfort.In July 2011, Armor Holdings Inc., a manufacturer of vehicle armor systems, security products,and protective equipment used primarily by military and law enforcement personnel, agreed topay $10.29 million to DOJ and $5.69 million in civil penalties and disgorgement to SEC to settlecharges related to illegal payments made by a subsidiary of the company through a third-partysales agent. Between 2001 and 2006, the subsidiary made more than $200,000 in commissionpayments to the agent with knowledge that the agent was passing on a portion of the paymentsto a United Nations (UN) official to induce the official to provide confidential, non-public bidinformation to Armor Holdings. Under the FCPA, payments to public international organizationslike the UN are treated in the same manner as payments to foreign government officials. As aresult of the illegal scheme, Armor Holdings received $6 million in UN body armor contracts.Armor Holdings also admitted that it had falsely recorded its commission payments to the agentin its financial records in violation of the FCPA’s books and records provisions.In addition to pursuing Armor Holdings, DOJ also prosecuted a senior company executive for hisrole in several illicit payment schemes involving the company’s assets. DOJ alleged that RichardBistrong, Vice President for International Sales for a subsidiary of Armor Holdings, conspiredto make and conceal $4.4 million in illegal payments to third-party agents in order to obtaincontracts in the Netherlands, Nigeria, and Iraq. Bistrong pleaded guilty to the charges againsthim and agreed to assist DOJ as a critical informant in the “shot show” investigation, whichwould become the largest FCPA investigation in history. In 2012, Bistrong was sentenced to18 months in prison followed by 36 months of probation. These actions demonstrate the criticalimportance of vetting and continuously monitoring the acts of third-party agents to ensure thatthey are complying with the FCPA and other applicable anticorruption laws.B. US Authorities Are Aggressively Targeting Industry ExecutivesRichard Bistrong was not the only industry executive targeted by US (and international)enforcement authorities in recent years. Indeed, last month, the CEO of a major Italian defensecompany was arrested on Italian anti-corruption charges. As the actions discussed belowmake clear, investigating and prosecuting individual corporate executives and punishing them0 20 40 60Leo WinstonSmith, PCIAn Nguyen,NexusNam Nguyen,NexusRichardBistrong, ArmorHoldingsShu Quan-Sheng, AMACUS Prison Sentences for Industry ExecutivesSentence (inmonths)
  • 9. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 7with lengthy prison sentences have become cornerstones of DOJ’s FCPA enforcementstrategy. Notwithstanding the former Italian Prime Minister’s recent statement followingthe arrest of a defense company CEO for bribing foreign officials that “Bribery exists. It’spointless to ignore reality. Paying a briber abroad is a matter of necessity,” companiesshould not view fines imposed for violating the FCPA as just another cost of doingbusiness.In 2007 and 2008, DOJ and SEC brought FCPA cases against more than 30 individuals.In 2009 alone, DOJ and SEC charged more than 40 individuals with FCPA violations.The number fell by more than half in 2010, increased slightly in 2011 to 24, and fell againin 2012 to less than ten individuals. The threat of substantial jail time has been realizedin several recent high-profile cases. In 2008, Albert “Jack” Stanley of Kellogg, Brown &Root, Inc. was sentenced to seven years in jail for his role in overseeing and participatingin a scheme to bribe Nigerian government officials to obtain lucrative governmentcontracts. In 2011, a Florida judge sentenced Joel Esquenazi, the former President ofa telecommunications company, to 15 years in prison for his role in bribing officials of astate-owned telecommunications company in Haiti.Aerospace and defense industry executives are not immune to imprisonment. InNovember 2008, a physicist from Virginia pleaded guilty to a three-count criminalindictment alleging violations of the FCPA and the Arms Export Control Act. Shu Quan-Sheng, a US citizen and native of China, was the President, Secretary, and Treasurerof AMAC International, a high-tech company based in Virginia that performed researchunder government grants. According to the criminal information, Shu made illegalpayments to three Chinese government officials on behalf of AMAC and a Frenchcompany for whom he was acting as an agent in order to induce the officials to award acontract for the development of a liquid hydrogen tank system to the French company.Throughout 2006, Shu offered payments to the officials totaling approximately $189,000.In 2007, the China Academy of Launch Vehicle Technology awarded the $4 millioncontract for the hydrogen liquefier project to the French company that Shu represented. InApril 2009, Shu was sentenced to 51 months in prison.SEC has also targeted industry executives. In May 2009, SEC filed a settled enforcementaction against Thomas Wurzel, the former President of ACL Technologies Inc., a formersubsidiary of Maryland-based aerospace and defense company United IndustrialCorporation (UIC). The SEC complaint alleged that Wurzel authorized illegal paymentsto a third-party agent in Egypt, knowing or consciously disregarding the high probabilitythat the agent would pass on the payments to Egyptian Air Force officials in order toobtain business for the company. As a result of these illicit payments, UIC received a$5.3 million contract. Wurzel consented to the charges without admitting or denying theallegations and paid a $35,000 civil penalty. SEC also pursued UIC, alleging that UIC’slegal department approved the retention of the Egyptian agent without any documenteddue diligence and did not require the agent to sign a written agreement warranting that hewould comply with the FCPA. More generally, SEC concluded that the company lackedmeaningful controls to prevent or detect illicit payments to its agents. UIC agreed to payapproximately $340,000 in disgorgement and prejudgment interest to settle the charges.C. The First Large-Scale Undercover Investigation in FCPA HistoryTargeted Defense Industry ExecutivesDOJ targeted 22 defense industry executives in the first major use of undercover lawenforcement tactics in the history of the FCPA. The two-year investigation, known asthe “shot show” investigation, involved the use of undercover agents and informantsand culminated in a coordinated sting operation. On January 18, 2010, DOJ arrested 22executives of military and police equipment firms for violating the FCPA — the largest-everFCPA indictment. 21 of the arrests took place in Las Vegas during the annual SHOT ShowConvention, a trade show for professionals in the hunting and law enforcement industries.
  • 10. 8 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseFBI agents posing as representatives of the Gabonese Ministry of Defense approachedthe various defendants and offered them a $15 million contract to outfit Gabon’s nationalguard. According to the charging documents, the defendants agreed to pay a 20 percentcommission to a sales agent who they believed represented the Minister of Defense ofGabon and would funnel the payments to the Minister. Richard Bistrong, the previouslydiscussed Armor Holdings Vice President, assisted the FBI in its investigation. Dubbedas “Individual 1” in the shot show indictment, Bistrong agreed to work as an informantfor the government and used his industry connections to act as the primary intermediarybetween the undercover government agents and the shot show defendants. Bistrongand the undercover agents met with each of the indicted executives under either audio orvideo surveillance to arrange the deals.Despite the groundbreaking investigative tactics, the ultimate results of the shot showcase were not as DOJ had hoped. Originally, three of the shot show defendants pleadedguilty to the charges against them. The remaining defendants were scheduled to be triedin four separate trials. A federal judge dealt the government its first major setback in July2011 when the judge declared a mistrial after a jury could not reach a verdict followingsix days of deliberations and a three-week trial against the first group of defendants.The government received another blow in January 2012 when the second trial involvingsix of the defendants resulted in the acquittal of two of the defendants and a mistrial forthe remaining four following a hung jury. Finally, on February 21, 2012, Judge RichardLeon granted DOJ’s motion to dismiss all the charges against the remaining sixteendefendants. The court would later grant DOJ’s motion to dismiss the indictments againstthe three defendants who had earlier pleaded guilty. DOJ cited the outcome of the firsttwo trials, the impact of evidentiary and legal rulings on future trials, and the enormousresources required to try future cases, as the reasons for the dismissal.D. FCPA Enforcement in the Aerospace and Defense Industry Could HaveNational Security ImplicationsUnlike the UKBA, the FCPA’s anti-bribery provisions do not expressly exempt bribes paidfor national security reasons. However, the Act provides some indications that the so-called “public authority defense” may be successfully used to mount a defense againstFCPA charges. Although the FCPA’s anti-bribery provisions do not contain a nationalsecurity exemption, the FCPA’s books and records provisions do. Under the Act, the dutyto maintain accurate books and records does not apply to acts with regard to “mattersconcerning the national security of the United States,” provided that the acts are basedon a “specific, written directive” of a head of a federal department or agency that has thePresidential authority to issue such a directive.Notably, the UKBA provides an express exemption for corrupt payments that are“necessary” for the “proper exercise of any function” of an intelligence service orarmed forces. This defense may be applicable to aerospace and defense companies,particularly those providing civilian assistance to foreign militaries operating in countrieslike Iraq and Afghanistan.In 2003, DOJ charged James Giffen, the then-head of the Mercator Corporation,with violating the FCPA. DOJ indicted Giffen on 65 counts, alleging that he madeapproximately $80 million in corrupt payments to senior government officials ofKazakhstan related to oil transactions. In his defense, Giffen argued that he made thepayments under the control and with the knowledge of several US government agencies,including the CIA. Giffen’s assertion of the public authority defense resulted in years ofsealed pre-trial proceedings in accordance with the Classified Information ProceduresAct (CIPA).Congress enacted CIPA in 1980 to prevent the use of “graymail,” meaning a threatto release classified information in open court in order to pressure the governmentnot to prosecute. CIPA’s goal is to balance a criminal defendant’s right to present a
  • 11. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 9robust defense with the government’s duty to protect classified information. UnderCIPA, a trial judge can conduct in camera reviews of classified information and rule onits admissibility before it is introduced in court. Giffen battled with the government foryears about whether he could request the production of classified information from theCIA and other government agencies that he alleged would support his public authoritydefense. Although many of the details of the Giffen proceedings remain under seal,it is now evident that Giffen’s assertion of the public authority defense was largelysuccessful. In 2010, following seven years of litigation, Giffen pleaded guilty to onecount of a misdemeanor tax violation and received no punishment. In fact, the trial judgethanked him for being an important source of information for the United States during theCold War.E. The United States and the United Kingdom Worked Together to Obtainthe Largest Criminal Penalty Ever Imposed on a Defense Company inthe FCPA ArenaThe multi-jurisdictional investigation and prosecution of BAES, Europe’s largest defensecontractor, led to one of the largest fines ever imposed against a company related toanticorruption violations. In February 2010, BAES agreed to pay $400 million to DOJrelated to charges that the company knowingly made false statements to variousUS government agencies regarding payments made by third-party agents to securegovernment contacts in multiple countries. BAES admitted that it regularly retained third-party marketing advisors to assist with sales to foreign government customers withoutconducting adequate due diligence or implementing the proper controls to monitor theiractivities, and that it later took steps to conceal these payments from the US government.The United Kingdom’s six-year investigation into BAES also culminated in February2010. BAES agreed to pay £30 million in response to allegations that it engaged incorruption in connection with contracts in several countries, including Tanzania, theCzech Republic, and South Africa. Joint investigations by US law enforcement and theSerious Fraud Office (SFO), which is responsible for enforcing the UKBA, will no doubtincrease as UK authorities begin to investigate and bring cases under the UKBA. It isimportant to be aware of this trend because increased multi-jurisdictional cooperationcould impact the calculus of companies that are considering whether to disclose FCPAviolations to US law enforcement. The consideration of whether to voluntarily discloseis already a difficult one; but, companies will now have to consider whether disclosingwrongful conduct to the US authorities may also lead to a related investigation by theUnited Kingdom or another jurisdiction.F. Successor Liability Means That Comprehensive Due Diligence IsCriticalUnder the theory of successor liability, companies can be held liable for bribery activitiescommitted by their joint venture and merger partners, even if the violations occurredbefore the joint venture or merger took place. It is therefore imperative that companiescontemplating a merger or joint venture conduct thorough due diligence prior to enteringinto the relationship and post-acquisition auditing and monitoring as appropriate. In theResource Guide, DOJ and SEC indicate that they have declined to take action againstcompanies that voluntarily disclosed and remediated unlawful conduct in the merger andacquisition context in a significant number of instances. DOJ and SEC generally only takeaction against successor companies in cases of egregious and sustained violations orwhere the successor company directly participated in the violations or failed to stop thempost-acquisition. The Resource Guide also makes clear that successor liability cannotcreate liability where none existed before. This means that if a US company merges witha foreign company that was not previously subject to the FCPA, the merger could notcreate retroactive FCPA liability for the US company.
  • 12. 10 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseIn the proposed merger between Titan Corporation and Lockheed Martin, FCPA violationsuncovered during pre-acquisition due diligence derailed the deal entirely. In 2003, Titan andLockheed Martin announced an agreement to complete a $1.83 billion merger by early 2004.However, Lockheed Martin discovered in pre-closing due diligence that Titan had madeimproper payments to consultants in Benin, East Asia, and Saudi Arabia. In Benin, for example,Titan Wireless paid more than $2 million to the reelection campaign of Benin’s then-Presidentin exchange for receiving higher fees for its telecommunications contract. Titan recorded thepayments in its books as “customs exonerations.” The risks were so great for Lockheed Martinthat it initially dropped its offer price by $200 million and later abandoned the deal. In 2005,Titan settled the criminal and civil charges and agreed to pay a fine of $28.5 million.In another industry action, FCPA violations discovered during a post-acquisition audit ledto three individual prosecutions. In 2003, a group of private investors acquired PacificConsolidated Industries (PCI), a California-based company that manufactures Air SeparationUnits and other military equipment. The buyers discovered several suspicious payments duringa post-acquisition audit and referred the matter to DOJ for investigation. DOJ found that PCIexecutives had paid at least $300,000 in bribes to a UK Ministry of Defense official to obtaindefense contracts. In May 2008, Martin Eric Self, the former President and co-owner of PCI,pleaded guilty to violating the FCPA for his role in the illegal scheme. The following year, LeoWinston Smith, PCI’s former Director of Sales and Marketing, entered a guilty plea basedon the same activity. Smith was sentenced to six months in prison and six months of homeconfinement, while Self received two years’ probation. Across the Atlantic, the United Kingdomprosecuted Michael Hale, the UK Ministry of Defense official who admitted receiving nine bribepayments from PCI, and sentenced him to two years in prison.G. Operating in Certain Countries Presents Heightened RisksMany aerospace and defense companies have expanded their global operations to reap thebenefits of doing business in developing economies — most notably China, but also placessuch as Brazil, India, and Indonesia. Operating in China and other developing nations presentsunique anticorruption compliance risks. Our review of recent enforcement actions againstaerospace and defense industry members suggests that, in addition to China, FCPA actionshave been based on alleged bribery in countries throughout Africa, Asia, the Middle East, LatinAmerica, and Western Europe. In some developing nations, corruption is widespread and thelegal infrastructure needed to combat corruption is lacking. In addition, the fact that many largecompanies in China and other developing nations are state-owned or state-controlled adds anadditional layer of complexity. The need for industry companies to obtain government permits,licenses, or other approvals through processes that are often rife with corruption can alsoexacerbate the FCPA risks associated with doing business in developing economies.Location of Illegal Conduct inSelect US Aerospace & DefenseIndustry Enforcement ActionsEuropeAfricaMiddle EastAsiaLatin America
  • 13. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 11An FCPA enforcement action against a public company that develops and sellscomputerized measurement devices and software for use in the aerospace industrydemonstrates the particular risks associated with doing business in China. In June 2008,Faro Technologies Inc. agreed to pay $1.1 million in criminal penalties and $1.85 millionin disgorgement for bribe payments made in China. Beginning in 2003, Faro engagedin direct sales in China through its Chinese subsidiary, Faro China. Between 2004 and2005, Faro employees paid “referral fees” to employees of state-owned and controlledentities in order to secure $4.9 million worth of contracts. Internal company emailsrevealed that in 2005, Faro officials engaged in a scheme to route corrupt paymentsthrough a shell company via a third party to attempt to conceal the illicit payments. Faroalso acknowledged violating the books and records provisions by falsely recording at least$238,000 in corrupt payments. In addition to the substantial fines, DOJ also required Faroto engage an independent corporate monitor for two years.H. Defense Offset Transactions Can Lead to FCPA LiabilityAlmost all defense trading partners of the United States impose some sort of offsetrequirement. Generally stated, an offset is a trade of an investment obligation that isimposed on a defense contractor as a condition for entering into the main defenseprocurement agreement. The Commerce Department’s Bureau of Industry and Securityreports that between 1993 and 2010, US companies entered into 763 offset agreementswith 47 countries valued at $78.08 billion. In 1995, DOJ issued an FCPA Advisory Opinionin response to a joint request by two companies (Companies A and B) for guidance onpotential FCPA liability arising from deals related to offset obligations.Company A acquired offset obligations through contracts with a foreign government. In thecountry, offset obligations were handled by an Offset Office that was part of the Ministryof Defense. Company B, owned by a US citizen, entered into an oral agreement with theOffset Office to receive offset credits in exchange for establishing a new company (Newco)in the country. The majority of the investors in Newco were to be foreign governmentofficials, though no Ministry of Defense officials would be included among the investors.Company B was to receive offset credits from Newco by meeting certain programmilestones unrelated to Newco’s profitability or success. Under a management servicesagreement, Company A would provide management services to Newco and would be paida fee based on Newco’s revenues and profit, and Company B would provide financing toNewco. Company A would then compensate Company B out of its management fee.In the opinion request, Company B certified that it had not paid any funds received fromCompany A for the sale of offset credits to any investors in Newco or to any governmentofficials. Additionally, the shareholders of Newco, who included government officials, madeseveral certifications to DOJ, including that they would be passive investors only and thatthey would recuse themselves from any government decisions related to Newco. Based onthese representations, DOJ assured the requestors that it would not bring an enforcementaction against Company A’s purchase of offset credits from Company B or the proposedmanagement services contract between Company A and Newco.I. Dealings with Commercial Customers Must Also be Scrutinized: TheCase of State-Owned AirlinesAerospace and defense companies cannot afford to focus their FCPA compliance effortsonly on government customers. According to media reports, in June 2011 the FBI briefedvarious US agencies on a corruption inquiry into sales and maintenance contracts betweenaerospace companies and state-owned airlines, whose employees qualify as foreignofficials under the FCPA. To offset the recent decline in the domestic market, aerospaceand defense companies have and will continue to pursue commercial opportunities in Asia,the Middle East, and Europe. Before doing so, companies must determine whether theairlines they are dealing with are state-owned or controlled entities.
  • 14. 12 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseIn 2008, SEC settled an enforcement action against Con-way, Inc., a California-basedfreight forwarder. Although not an aerospace or defense company, the case against Con-way demonstrates the potential pitfalls of transacting with commercial airlines. SEC allegedthat between 2000 and 2003, Con-way made “hundreds of small payments” to employeesof fourteen state-owned airlines throughout Europe, Asia, and the Middle East in orderto induce airline officials to reserve space for and under-weigh its shipments to save onshipping costs. Under the terms of the settlement, Con-way agreed to pay $300,000 in civilpenalties.In 2012, the NORDAM Group, Inc., an aircraft maintenance, repair, and overhaul (MRO)provider based in Oklahoma, entered into a non-prosecution agreement with DOJ. DOJalleged that NORDAM made $1.5 million in corrupt payments to employees of state-ownedairlines in China in order to gain MRO contracts from the airlines. In an attempt to hidethe bribe payments, employees of a NORDAM Singaporean affiliate entered into salesrepresentation agreements with fictitious companies and then used the money paid byNORDAM under the supposed agreements to pay bribes. To resolve the charges, NORDAMagreed to pay a $2 million criminal fine.J. Emerging Risks for Satellite Communications CompaniesThe telecommunications industry is a related field that US law enforcement hasaggressively targeted in recent years. Like the aerospace and defense industry,telecommunication companies are often forced to interact with foreign governmentsto obtain the necessary licenses and permits to do business and typically sell theirproducts and services to state-owned customers. One clear area of overlap betweenthe two industries relates to satellite companies. Just last year, the UK SFO announcedthat it was investigating a company owned by a European defense contractor, foralleged bribe payments to win a contract with a Middle Eastern country to upgrade itssatellite and intranet systems. The Resource Guide utilizes enforcement actions in thetelecommunications industry to illustrate the government’s expansive interpretation of whomis a “foreign official,” as well as to show how financing extravagant travel and entertainmentexpenses for clients can lead to FCPA liability. Given the continued growth and relianceupon satellite communications systems in the global economy, the potential anti-corruptionrisks should be carefully assessed and appropriate compliance programs and internalcontrols implemented.K. Statutes Often Linked with FCPA ChargesDOJ has other tools in its prosecution arsenal that it uses in conjunction with the FCPA.The overlapping enforcement of anticorruption and export controls is particularly relevantto aerospace and defense companies. The Arms Export Control Act (AECA) and itsimplementing regulations, the International Traffic in Arms Regulations (ITAR), regulate theexport of defense articles and services. The settlement that BAES entered into in early 2010was based in part on false statements by BAES in its arms export licenses in violation of theAECA and the ITAR. Likewise, Shu Quan-Sheng, the President, Secretary, and Treasurerof AMAC International, was sentenced to 51 months in prison after pleading guilty to bothFCPA (discussed above) and AECA violations. DOJ alleged that Shu willfully exportedcontrolled military technical data to China.In addition, DOJ has sporadically used the Travel Act, a 50-year-old statute passedto combat organized crime and racketeering, in conjunction with the FCPA to reachallegations of commercial bribery. In relevant part, the Travel Act makes it a crime to travelbetween states or international boundaries or use interstate facilities with the intent tocarry on an unlawful activity, including bribery in violation of the laws of the state in whichit is committed. Essentially, the Travel Act federalizes state bribery statutes and allowsprosecutors to use the FCPA to go after bribery that is entirely within the private sector.
  • 15. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 13In a string of recent FCPA actions, the government alleged violations of the Travel Act inconjunction with the FCPA based on violations of the state commercial bribery laws ofAlabama, New Jersey, and California.DOJ’s prosecution of Nexus Technologies Inc., a Pennsylvania-based export company,demonstrates the interaction between the Travel Act and the FCPA. From 1999 to2008, Nexus and several company executives engaged in a conspiracy to pay bribes togovernment officials from the Vietnamese Ministries of Transport, Industry, and PublicSafety. DOJ initially indicted the company and individual defendants in September 2008on one count of conspiracy to violate the FCPA and four counts of violating the FCPA. InOctober 2009, DOJ filed a superseding indictment to add numerous charges, includingconspiracy to violate the Travel Act and nine substantive counts of violating the TravelAct. The company and the four executives eventually pleaded guilty to the charges in thesuperseding indictment, and two of the executives were sentenced to significant prisontime. DOJ’s basis for Travel Act liability was that the defendants sent a series of wiretransfers from Philadelphia to Asia in violation of Pennsylvania’s state commercial briberystatute. Similarly aggressive uses of the Travel Act in the future could result in a substantialexpansion of the activities targeted by authorities in FCPA cases.DOJ has also charged industry members under 18 USC § 371 for conspiracy to commitan offense against the United States, instead of charging for substantive violations ofthe FCPA. In a 2012 criminal information against BizJet International, an MRO provider,DOJ alleged that BizJet conspired with several company executives and others to useinstrumentalities of interstate commerce in furtherance of an offer, payment, promise to pay,and authorization to give something of value to a foreign official for the purpose of securingan improper advantage. The alleged purpose of the conspiracy was to obtain and retainMRO service contracts with foreign government customers in Mexico and Panama. BizJetagreed to pay $11.8 million under a deferred prosecution agreement to resolve the charges.The FCPA Resource Guide suggests that law enforcement may charge defendants withconspiracy to violate the FCPA if they cannot independently charge them with substantiveFCPA violations. In conspiracy cases, the United States asserts that it has jurisdiction overall the conspirators, including foreign persons or companies, if at least one conspirator is anissuer, a domestic concern, or commits an overt act within the United States.The US government has also relied on money laundering, asset forfeiture, mail and wirefraud, and tax statutes in connection with anticorruption enforcement actions. The potentialcriminal penalties associated with money laundering statutes provide powerful incentives forindividuals to cooperate with the government.L. Derivative Civil Litigation Related to the FCPAIncreasingly, civil litigation has resulted attendant to, or in the wake of, governmentinvestigations of alleged FCPA violations. Although the FCPA does not create a private rightof action, shareholders have filed a substantial number of shareholder derivative suits andsecurities claims in relation to anticorruptiton charges, including against companies in theaerospace and defense industry. Because there is no private right of action under the FCPA,shareholders sue under other causes of action, including securities laws, common lawfraud, RICO, or breach of fiduciary duties.In 2010, a federal appeals court affirmed the dismissal of a 2007 shareholder derivativesuit against BAES related to bribery allegations. Shareholders of the City of HarperWoods Michigan Employee’s Retirement System, which owned 3,500 of BAES’s AmericanDepository Receipts, alleged that directors and executives of BAES breached their fiduciaryduties and wasted corporate assets based on BAES’s alleged bribe payment to a Saudiprince to secure contracts for the sale of jet fighters and trainer aircraft. The US courts,applying English law, held that shareholders of the pension fund lacked standing to sueBAES.
  • 16. 14 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseOther derivative suits against industry members have been more successful. In addition tothe criminal and administrative proceedings initiated against Faro that were discussed above,Faro faced a pair of shareholder lawsuits based on its alleged bribery conduct. In the firstcase, Faro’s shareholders filed a class action lawsuit alleging that Faro had failed to discloseinformation about its finances through alleged FCPA violations, and that it had benefitedfrom the inflated stock prices. Following an unsuccessful motion to dismiss, Faro agreed tosettle with the shareholders for approximately $7 million. In April 2009, Faro settled a secondshareholder derivative suit. The shareholders alleged that Faro’s officers and directorsbreached their fiduciary duties by failing to adequately oversee the company’s internalcontrols. Faro agreed to pay $400,000 in attorneys’ fees and implement certain corporategovernance procedures.Similarly, in 2005, Titan settled a class action suit for more than $61 million. The complaintalleged that Titan and certain of its officers violated Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934, as well as Rule 10b-5, based on material misrepresentations maderegarding Titan’s financial results during its merger negotiations with Lockheed Martin.V. BEST PRACTICES FOR THE INDUSTRYCompanies in the industry must be aware of these FCPA enforcement trends and takeeffective steps to minimize their exposure. Chapter 8 of the US Sentencing Guidelines,which governs the sentencing of organizations, takes into account whether an organizationhas an effective compliance and ethics program. According to the Resource Guide, theadequacy of a company’s compliance program may influence how FCPA charges areresolved (through a deferred prosecution agreement or non-prosecution agreement), thelength of the agreement, the penalty amount, and the need for a monitor. In order to assesstheir risks, companies should conduct periodic FCPA risk assessments and program audits,taking into account the countries where they do business, their internal controls weaknesses,the degree of government oversight and their interactions with government officials, theirrelationships with business partners and third-party representatives, and any other potentialred flags. DOJ and SEC have said that they would expect a financial services company toimplement different internal controls than a manufacturer because their risk profiles differ. Aspart of risk assessments, companies may consider transaction testing in high risk markets.Companies should carefully consider the results of risk assessments and audits, and reviseFCPA policies and procedures — as well as related policies on gifts, travel, entertainment,political contributions, and facilitation payments — as necessary to further minimizeexposure.In addition, companies should provide regular FCPA training to employees operating incountries with significant corruption, as well as employees in sales, marketing, finance,internal audit, and other relevant functions. Companies who regularly engage agents ordistributors may also consider providing FCPA training to their agents. Finally, as part ofa “red flag” review, companies should consider irregularities in their financial accountingsystems, including round dollar payments, duplicate payment amounts to the same vendor,payments to third parties with vague descriptions of the services provided, invoices that lacksupporting documentation, and requests for payment in cash or to offshore bank accounts.As recent industry enforcement actions demonstrate, the use of third-party representatives,including local sales consultants, customs brokers, and subcontractors, can create enormousFCPA compliance risks. To mitigate such risks, companies should conduct reasonabledue diligence on all potential third-party representatives before retaining them, requirerepresentatives to sign written agreements that include anticorruption provisions, requirethird parties to periodically certify their compliance with applicable anticorruption laws, andcontinuously monitor their representatives’ activities. Similarly, companies should fully vetproposed joint venture and merger partners early on in the life of the transaction. Companiesshould even more closely scrutinize a proposed joint venture with a state-owned entity or
  • 17. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 15in a high-risk country, and structure the transaction in a way that allows the company an outshould its joint venture partner subsequently engage in questionable conduct. Lastly, the buy-in and support of senior management and the board of directors is key. Senior managementmust show strong and visible support for a company’s code of conduct and anticorruptionpolicies and procedures in order for its anticorruption program to be effective.VI. FCPA REFORM INITIATIVESIn the past few years, numerous influential groups, from the American Bar Association (ABA)to the US Chamber of Commerce (Chamber) to the US Congress, have considered andadvocated for FCPA reforms.In an October 2010 report entitled “Restoring Balance: Proposed Amendments to theForeign Corrupt Practices Act,” the Chamber called on Congress to make several pro-business amendments to the FCPA. The Chamber asserted that the FCPA has madeAmerican businesses less competitive in relation to their foreign counterparts, citing a 1999Congressional Research Service estimate that the FCPA’s anti-bribery provisions cost theUnited States up to $1 billion per year in lost exports. The Chamber recommended thefollowing reforms to the Act: (1) clarify the definition of “foreign official;” (2) limit a company’sliability for acts of its foreign subsidiaries and the prior acts of companies it acquires; (3)allow for a compliance defense similar to the UKBA’s adequate procedures defense; and (4)require a showing of willfulness to impose corporate criminal liability.On October 29, 2011, the co-chair of the ABA’s Global Anti-Corruption Task Force presenteda resolution to members of the ABA’s Criminal Justice Section. The resolution called forCongress to clarify certain of the Act’s ambiguous terms, including the term “instrumentality”in the definition of foreign government official. Like the Chamber’s report, the resolution alsocalled on Congress to limit successor liability under the FCPA and to provide for some sort ofdefense for companies with robust compliance programs.In September 2011, George Soros’s Open Society Foundations published a stronglyworded report in favor of the FCPA, asserting that the Chamber’s proposed reforms “wouldsubstantially undermine the possibility for successful enforcement of America’s anti-briberycommitments” and “set back decades of progress in the global struggle against corruption.”In addition, the report characterized the Chamber’s assertion of prosecutorial overreaching inFCPA enforcement as a myth, noting that although the number of FCPA enforcement actionshas increased in recent years, the average fines obtained have remained stable and modest.In the end, Congress must bring on any reforms. On June 14, 2011, the House JudiciarySubcommittee on Crime, Terrorism and Homeland Security held a hearing to examineproposals to reform the FCPA. The hearing focused on two primary reform proposals:(1) adding a compliance defense; and (2) clarifying the definition of foreign official. TheSubcommittee did not come to any resolutions at the end of the hearing. In addition, theSenate Committee on the Judiciary Subcommittee on Crime and Drugs held a hearingon November 30, 2010 entitled “Examining Enforcement of the Foreign Corrupt PracticesAct.” Thus far, no legislation has been put forth to accomplish any of these FCPA reforms(although some bills have been proposed that, for example, would establish a private right ofaction).In response to calls for reform and clarity, DOJ and SEC issued the FCPA Resource Guidein November 2012. Although FCPA practitioners generally agree that the Guide did notbreak any new ground, most also agree that it provides useful guidance for the businesscommunity, compliance officers, and practitioners. The Resource Guide addresses a varietyof topics, including the definition of a foreign official, improper gifts, travel, and entertainmentexpenses, and the hallmarks of an effective compliance program. The Resource Guide isavailable online at http://www.justice.gov/criminal/fraud/fcpa/guidance/.
  • 18. 16 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseVII. LATHAM & WATKINS’ INDUSTRY EXPERIENCE AND EXPERTISELatham & Watkins has been advising major clients in the aerospace and defenseindustry for decades and brings a deep knowledge and understanding of the businessand legal challenges faced by clients in the industry. We represent private companiesand government entities on a wide range of bet-the-company regulatory, transactional,and litigation matters. Through our unique industry group platform, we are able toeffectively deploy the vast and diverse resources resident in our 31 offices across theglobe to address any legal needs our clients face.Latham & Watkins offers clients in the aerospace and defense industry a full rangeof legal services covering all aspects of a company’s needs, from structuring IPOs tohelping launch a business; to representing companies during mergers, acquisitions,and financing deals to help grow a business; to counseling clients on a vast array ofregulatory issues to help preserve a strong business. Latham & Watkins attorneys havecounseled hundreds of clients on compliance, enforcement, and disclosure issuesarising under the FCPA and have conducted numerous internal investigations for bothUS and foreign companies into potential violations of the FCPA. For more informationon the Aerospace, Defense & Government Services Industry Group, please e-mailaerospacedefensegov@lw.com.
  • 19. VIII. Chart of Industry Enforcement ActionsLatham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 17Case Country Allegations and Charges OutcomeUS v. Titan (S.D. Cal. 2005)SEC v. Titan Corporation(D.D.C. 2005)Date: 2005Agency: DOJ and SECBenin DOJ and SEC charged Titan with violatingthe FCPA’s anti-bribery and books andrecords provisions.These charges stemmed from allegationsthat Titan paid over $2 million to thereelection campaign of Benin’s Presidentin exchange for telecommunicationscontracts.Titan pleaded guilty and agreed topay $13 million in criminal penaltiesand undergo compliance monitoring.Titan settled with SEC and disgorged$15 million in profits and pre-judgment interest. SEC also imposeda $13 million penalty that wassatisfied by the criminal fine.US v. Martin Eric Self(C.D. Cal. 2008)US v. Leo Winston Smith(C.D. Cal. 2007)Date: 2007, 2008Agency: DOJUnited Kingdom DOJ charged Self, the former Presidentand co-owner of PCI, and Smith, PCI’sformer Director of Sales and Marketing,with violating the FCPA.The charges stemmed from allegationsthat the executives made bribe paymentsof at least $300,000 to a UK Ministryof Defense official to obtain defensecontracts.Self pleaded guilty and received twoyears probation.Smith pleaded guilty and wassentenced to six months in prisonand six months of home confinement.In re Faro Technologies, Inc.(Non-Prosecution Agreement,2008)In the Matter of FaroTechnologies, Inc.(SEC AdministrativeProceeding, 2008)Date: 2008Agency: DOJ and SECChina DOJ and SEC alleged that between 2004and 2005, Faro employees paid “referralfees” to employees of state-owned orcontrolled entities in order to secure$4.9 million worth of contracts. Faro alsoviolated the books and records provisionsby falsely recording at least $238,000 incorrupt payments.Faro entered into a non-prosecutionagreement and agreed to pay $1.1million in criminal penalties.Faro also settled with SEC, paying$1.85 million in disgorgement andagreeing to engage an independentcorporate monitor for two years.US v. Shu Quan-Sheng(E.D. Va. 2008)Date: 2008Agency: DOJChina DOJ charged Shu with violating the ArmsExport Control Act and the FCPA’s anti-bribery provisions.DOJ alleged that Shu, a Frenchcompany’s agent in China, bribed Chineseofficials in an effort to win a contract forthe French company to develop a liquidhydrogen tank system.Shu pleaded guilty on all chargesand was sentenced to 51 months inprison.US v. Nguyen, et al.(E.D. Pa. 2008)Date: 2008Agency: DOJVietnam DOJ charged Nexus Technologiesand four employees with violating andconspiracy to violate the FCPA’s anti-bribery provisions and the Travel Act.The charges stemmed from allegationsthat the company and several executivespaid bribes to government officials fromthe Vietnamese Ministries of Transport,Industry, and Public Safety from 1999to 2008. DOJ based the Travel Actcharges on a series of wire transfersfrom Philadelphia to Asia in violation ofPennsylvania’s state commercial briberystatute.All four executives pleaded guilty.Nam Nguyen, the President andowner, was sentenced to 16months in prison, while his sibling,An Nguyen, was sentenced tonine months. A third sibling, KimNguyen, was sentenced to twoyears’ probation and ordered to paya $20,000 fine. Joseph Lukas wassentenced to two years probation andagreed to pay a $1,000 fine.The company also pleaded guilty andagreed to dissolve.
  • 20. 18 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & DefenseCase Country Allegations and Charges OutcomeUS v. Alvirez et. al.,(D.D.C. 2009)Date: 2009Agency: DOJGabon DOJ charged the 22 shot-showdefendants with conspiracy to violatethe FCPA’s anti-bribery provisions andsubstantive counts of violating the anti-bribery provisions.The charges stemmed from allegationsthat industry executives attempted tobribe FBI agents posing as agents of theMinister of Defense of Gabon.Alvirez and two other defendantsentered into plea agreementswith DOJ in 2011. The remainingdefendants were scheduled to betried. The judge declared a mistrialafter the jury could not reach averdict in the trial against the firstgroup of defendants. Following thesecond trial of six defendants, thejudge declared a mistrial as to fourdefendants, while the remaining twodefendants were acquitted.In 2012, Judge Richard Leon grantedDOJ’s motions to dismiss all chargesagainst the defendants, includingthose who had previously pleadedguilty.In re United Industrial Corp.(2009)SEC v. Wurzel (D.D.C. 2009)Date: 2009Agency: SECEgypt SEC charged UIC with violating theanti-bribery and books and recordsprovisions of the FCPA. SEC chargedWurzel with aiding and abetting violationsof the FCPA’s anti-bribery, books andrecords, and internal controls provisionsand violating the books and recordsprovisions.SEC alleged that Wurzel, the presidentof one of UIC’s subsidiaries, authorizedpayments to an agent, and that he knewthose payments would be funneled asbribes to the Egyptian Air Force. SEC alsoalleged that UIC did not have adequateinternal controls in place to prevent illegalpayments.UIC settled and agreed to paydisgorgement and interest ofapproximately $340,000.Wurzel also settled, consenting toa final judgment enjoining him fromfuture FCPA violations and orderinghim to pay $35,000.US v. BAE Systems PLC(D.D.C. 2010)Date: 2010Agency: DOJCzech Republic,Hungary,Saudi ArabiaDOJ charged BAES with conspiring todefraud the United States by making falsestatements about its FCPA complianceand with violating the Arms Export ControlAct.DOJ alleged that BAES knowinglymade false statements to variousUS government agencies regardingpayments made by third-party agents tosecure government contracts for BAES.BAES admitted that it regularly retainedmarketing advisors without adequate duediligence or controls over its advisors’activities, and later took steps to concealpayments to these marketing advisorsfrom the government.BAES pleaded guilty to knowinglyand willfully making false statementsto the US government and agreed topay a $400 million fine and retain acompliance monitor for three years.BAES also reached an agreementwith the SFO and paid a £30 millionfine.
  • 21. Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 19Case Country Allegations and Charges OutcomeSEC v. Armor Holdings Inc.(D.D.C. 2011)In re Armor Holdings (2011)US v. Bistrong (D.D.C. 2010)Date: 2010, 2011Agency: DOJ and SECIraq,Netherlands,NigeriaDOJ and SEC charged the companywith violating the FCPA’s anti-bribery andbooks and records provisions.DOJ charged Bistrong, Vice Presidentfor International Sales, with conspiracy tomake corrupt payments to foreign officials,falsify books and records, and exportcontrolled goods without authorization.DOJ and SEC alleged that ArmorHoldings Inc. made corrupt paymentsto U.N. officials in order to obtain U.N.armor contracts. DOJ further alleged thatBistrong conspired to make and concealpayments to third-party agents in order tohelp the company obtain contracts in Iraq,the Netherlands, and Nigeria.Armor Holdings entered into adeferred prosecution agreementwith DOJ and agreed to pay $10.29million in criminal penalties.Armor Holdings also agreed to pay$5.69 million in civil penalties anddisgorgement to SEC.Bistrong pleaded guilty and wassentenced to an 18-month prisonterm and 36 months of probation.US v. BizJet International Salesand Support, Inc.(N.D. Okla. 2012)Date: 2012Agency: DOJMexico,PanamaDOJ alleged that between 2004 and 2010,BizJet authorized the payment of bribesto Mexican and Panamanian governmentofficials to secure aircraft maintenance,repair, and overhaul service contractsfrom government agencies.BizJet entered into a deferredprosecution agreement with DOJand agreed to pay $11.8 million incriminal fines and undertake remedialmeasures.BizJet’s indirect parent company,Lufthansa Technik AG of Germany,entered into a non-prosecutionagreement with DOJ that obliged it toimplement robust internal controls.US v. NORDAM Group, Inc.(N.D. Okla. 2012)Date: 2012Agency: DOJChina DOJ alleged that NORDAM made $1.5million in corrupt payments to employeesof Chinese state-owned airlines in order tosecure maintenance, repair, and overhaulcontracts.NORDAM entered into a non-prosecution agreement with DOJ andagreed to pay a $2 million criminalfine.
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