[Editor's Note: This article was contributed by previous CCI featured author Wendy Wysong, a partner at Clifford Chance, along with her co-authors Adam Klauder and Megan Gordon, both associates at Clifford Chance.]
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A Bribe Is a Bribe Is a Bribe…Unless It’s an ITAR Violation
On March 1, 2010, British defense contractor BAE Systems plc (“BAE”) pleaded guilty to knowingly and willfully making false statements to U.S. government agencies and agreed to pay a $400 million criminal fine. BAE’s guilty plea to a single count of conspiracy to make false statements resolved bribery allegations dating back more than two decades, in a case fraught with foreign policy concerns and multijurisdictional enforcement challenges. This case is the latest in a line of recent criminal enforcement actions demonstrating the convergence of anti-corruption and export controls. This is a trend that requires compliance officers to be conversant with both regulatory regimes and counsel to understand the collateral consequences flowing from conviction under either.
This increased convergence of crimes often arises from a corporate culture at odds with compliance: if a company does not have strong anti-bribery controls, it probably also lacks strong systems and procedures to address export compliance. As the BAE case illustrates, U.S. prosecutors are ready and willing to use the arsenal of enforcement tools at their disposal to prosecute illegal activities.
Legal/Regulatory Overview
Although the Foreign Corrupt Practices Act (“FCPA”), the main anti-bribery statute in the United States, would seem the obvious choice under which to charge BAE for the millions of dollars in bribes the company allegedly paid to foreign governmental officials, BAE settled with the U.S. Department of Justice (“DOJ”) by pleading guilty to making false statements on arms export licenses and to misrepresentations in letters to the U.S. Department of Defense. As such, the Arms Export Control Act (“AECA”), not the FCPA, provided the substantive basis for the guilty plea.
The Foreign Corrupt Practices Act (“FCPA”) contains two separate sets of provisions: (i) those prohibiting the payment of anything of value to officials of foreign governments (the “anti-bribery” provisions) and (ii) those requiring accurate accounts and effective internal accounting controls (the “books and records” provisions). DOJ and the U.S. Securities and Exchange Commission (“SEC”) each have jurisdiction to enforce the FCPA, and companies often face independent actions by both.
The AECA is administered primarily by the State Department’s Directorate of Defense Trade Controls (“DDTC”), which regulates the export and re-export of defense-related goods and services pursuant to the AECA and the International Traffic in Arms Regulations (“ITAR”). Another set of U.S. export controls, the Export Administration Regulations (“EAR”) is administered by the Commerce Department’s Bureau of Industry and Security (“BIS”), which regulates “dual-use” exports and re-exports (i.e., civilian exports with potential military or strategic applications), as well as purely civilian and non-strategic commodities to prohibited and controlled destinations, such as Cuba, Iran, North Korea, Sudan and Syria.
Penalties for violations of both anti-corruption and export control laws have increased dramatically over the past three years, as have the number of investigations and convictions. Many attract worldwide attention because they reach beyond traditional U.S. targets to high-profile foreign companies and individuals.
BAE
Both the ITAR and FCPA came into play in BAE’s guilty plea, the culmination of a six-year investigation by both United States and British authorities. The United Kingdom’s Serious Fraud Office (“SFO”) had opened an investigation into newspaper allegations that BAE made secret payments totaling $2 billion to Saudi Arabia’s former ambassador to Washington for assistance in selling Typhoon jet fighters to the Saudi government. The SFO dropped its investigation in December 2006 when Saudi Arabia threatened to stop providing anti-terrorism assistance if the investigation continued to move forward. The United States opened its own investigation in 2007, and in May 2008 detained BAE’s CEO and a director as they passed through U.S. airports.
This cross-border investigation ultimately uncovered a variety of bribery schemes. According to the BAE Plea Agreement, beginning in May 2001, BAE made payments totaling over $281 million to “marketing advisors” through offshore shell companies in an effort to evade FCPA due diligence and compliance measures. BAE had represented that such measures were in place in a November 2000 letter to the U.S. Secretary of Defense, which detailed a BAE Board of Directors’ vote to extend FCPA compliance programs to its newly acquired defense businesses in the United States as well as to its non-U.S. businesses.
BAE also pleaded guilty to making false statements to the State Department in connection with the payments it made in the late 1990s to secure leases from the Swedish government for fighter jets for the Czech Republic and Hungary. The fighter jets contained U.S.-controlled defense materials that required an arms export license from DDTC, and BAE’s failure to disclose these payments pursuant to Part 130 of the ITAR caused the Swedish government to file false export applications with the U.S. government.
The BAE Plea Agreement also detailed BAE’s involvement in the payment scheme described in the UK newspaper allegations (the “al-Yamamah” arms deal). BAE provided substantial benefits to an unnamed Saudi Arabian official who was in “a position of influence” regarding sales to the Kingdom of Saudi Arabia of Tornado and Hawk aircraft along with other military hardware training and services. BAE failed to verify over $5 million on invoices submitted by a BAE employee for benefits provided to the official from May 2001 to early 2002 and agreed to transfer over $24 million to a Swiss bank account controlled by an intermediary knowing there was a high probability that the funds would be transferred to the official. As a result, BAE was in violation of its ITAR disclosure obligations.
Ultimately, BAE agreed to pay a criminal fine of $400 million to the U.S. government. Simultaneously the SFO announced that BAE would plead guilty to failing to keep accurate accounting records regarding commission payments made in connection with the sale of a radar system to the Tanzanian government. The British plea, pursuant to which BAE agreed to pay a penalty of £30 million (approximately $47 million), was delayed by a British court so it could consider whether to conduct a judicial review in response to a legal challenge by two UK social justice groups.
While not explicit in the U.S. plea documents, the careful wording of the charges and their nature may preserve BAE’s ability to continue to export products with U.S. content. A bribery conviction under the FCPA could have led to an automatic suspension of BAE’s export licensing privileges. Indeed, immediately after the plea, DDTC issued on its website a temporary administrative hold on BAE-related weapons export licenses so it could consider whether to take additional action against the company, but that statement and another that modified the hold were withdrawn within 24 hours. State Department officials have since indicated that BAE’s export license applications will likely continue to be processed and that they are working to come to a final decision as quickly as possible due to the “importance of BAE to the US-UK defence trade relationship.”[1]
Although bribery was not charged in either the United States or the United Kingdom, it clearly overlapped with the export control charges that were brought. In addition, this case highlights the increased anti-corruption risk that arises when using brokers and third parties in deals involving defense articles subject to the ITAR. For example, fee and commission payments not only create bribery risk under the FCPA, but the failure to disclose these payments on export licenses could also give rise to export control violations, particularly Part 130 of the ITAR. Moreover, the ITAR impose additional obligations on third parties, such as the requirement that brokers of U.S.-controlled goods and services register with DDTC, even if such brokers are domiciled outside the United States.
Predecessors to the BAE Case
L-3 Communications
The 2006 DDTC enforcement action against L-3 Communications was a trend-setting predecessor to the BAE case in that L-3 also faced charges of violating ITAR Part 130 for failing to report commissions, following a conviction under the FCPA for paying those commissions deemed to be bribes. DDTC fined L-3 $1.5 million because its subsidiary, Titan Corp., failed to report over $2.2 million in commissions paid in connection with the export of defense articles to Japan, France, and Sri Lanka on its pre-acquisition ITAR license applications. Although unrelated in substance to the underlying ITAR violations, DDTC referenced Titan’s 2005 conviction for three FCPA violations in the ITAR charging document. DDTC also referenced the SEC’s conclusion from the 2005 case that Titan never had a formal company-wide FCPA policy, disregarded the limited FCPA policies that were in place, and failed to maintain sufficient due diligence files on its foreign agents or have meaningful oversight of its foreign agents. These facts are arguably irrelevant to the DDTC enforcement action, but perhaps lend support to the fees and commissions charges.
DDTC’s recitation of, and reliance on, the prior FCPA case should have raised awareness that an FCPA conviction involving the export of defense articles could give rise not only to denial of export privileges, but also to substantive ITAR reporting violations.
Baker Hughes and Dresser
A second line of cases, involving Baker Hughes, Inc. and Dresser Inc., demonstrates the spillover effect of non-compliance across regulatory regimes, as well as the increasing aggressiveness of enforcement in both the anti-corruption and export control areas. Baker Hughes was held responsible twice within six years for paying bribes and at the same time, was fined for violating Commerce Department license conditions. The first bribery case was resolved in 2001, prior to the recent aggressive enforcement climate. Accordingly, the SEC imposed only a cease and desist order on Baker Hughes for a books and records violation. In contrast, a second bribery case against Baker Hughes was resolved in 2007, when the DOJ and the SEC imposed the largest FCPA penalty ever imposed at that time, exceeding $44 million in fines, disgorgement, and prejudgment interest for bribes in excess of $19 million.
While the DOJ and SEC were investigating the second bribery scheme, the Commerce Department was investigating another Baker Hughes subsidiary for failure to comply with conditions of an export license for the export of seismic mapping equipment to China, violations which arose during the same time period as the bribe payments. In September 2006, Baker Hughes agreed to pay $2,890,600 in civil fines for this subsidiary (Western Geophysical) and a successor joint venture entity, Western Geco. The wide-ranging scope of the bribery and export control violations illustrates a broad failure of compliance across both regulatory areas.
Dresser and its subsidiaries were similarly involved in simultaneous compliance violations of U.S. export control laws and the FCPA. In July 2004, Dresser voluntarily disclosed that it had caused U.S.-origin oil industry-related items subject to the EAR to be exported to embargoed countries.
During this same time period, Dresser joined in a consortium that paid $180 million in bribes to obtain contracts for trains partially owned by the government of Nigeria. These bribes ultimately led to the conviction of KBR, the company that was formed when Halliburton acquired Dresser and is the successor in interest to Dresser’s contracts. KBR pleaded guilty in 2009 to one count of conspiring to violate the FCPA and four counts of violating the anti-bribery provisions of the FCPA, agreeing to a criminal fine of $402 million, disgorgement of $177 million, and appointment of an independent monitor for a term of three years. The substantive charges of bribery to which KBR pleaded guilty stand in stark contrast to the single false statements charge to which BAE pleaded guilty, although the criminal fines that were imposed in both cases are consistent.
Recent Cases That Illustrate the Anti-Corruption / Export Control Trend
Shu Quan-Sheng
Shu Quan-Sheng was the first person against whom DOJ charged violations of both the FCPA and ITAR in a single indictment. Shu, a naturalized U.S. citizen of Chinese descent and a Ph.D. physicist, was arrested on charges of unlawfully exporting a defense service to foreign persons without prior approval, unlawfully exporting technical data contained in a research papere, and offering bribes to a foreign government official.
The Commerce Department and the FBI investigated both the bribery and export controls case; a joint investigation being a key indicator of regulatory overlap. Shu pleaded guilty in November 2009 to one count of violating the FCPA and two counts of violating the AECA. He was sentenced in April 2009 to 51 months in prison after forfeiting $386,740 to the U.S. government.
Nexus Technologies
In September 2008, Nexus Technologies, a privately owned Philadelphia export company, and four of its executives were charged with conspiracy to violate the FCPA along with four substantive bribery charges. The Criminal Indictment alleges that from 1999-2008, Nexus Technologies paid $150,000 in bribes to the Vietnam Ministries of Transport, Industry and Public Safety to secure contracts for underwater mapping and bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems. No export violations were charged, but the investigation was run by Commerce Department enforcement agents, and given the nature of the company’s business, there is a clear nexus between the bribery charges and the export control laws.
Richard Bistrong
The case against Richard Bistrong demonstrates that the U.S. government will continue to use the joint investigative and dual-charging model for the foreseeable future. Bistrong was charged in January 2010 with conspiracy to make corrupt payments to a United Nations agent, Dutch agents, and others to obtain contracts to supply body armor and crime control items, conspiracy to falsify books and records, and conspiracy to export ballistic armor vests and helmets to the Iraq through the UAE.
Bistrong’s case illustrates the overlap both because of the dual regimes charged in the same case, but also because of his link to an earlier export control case against Armor Holdings, Inc. In 2007, Armor Holdings settled a case with the Commerce Department for 167 violations of the EAR, which occurred when Bistrong was the vice president for international sales. The FBI, which is not usually a party to civil export violations, assisted the Commerce Department with the Armor Holdings investigation. Notably, Bistrong was not charged until January 20, 2010, for violations that could have been included in the Armor Holdings settlement agreement.
Second, and more interesting, this delay and omission may be explained by recent events. On January 19, 2010, 22 individuals in the arms industry were arrested for offering a 20% “commission” to the defense minister of an African country to obtain a part of a $15 million contract to outfit the presidential guard. However, the “sales agent” was an undercover FBI agent and the person who introduced the sales agent to the arms dealers was none other than Richard Bistrong. It appears that Bistrong may be cooperating with the undercover sting, perhaps in an attempt to reduce the charges and penalties that he would face for the illegal exports and bribes uncovered in 2007. This link demonstrates how a case that developed in one milieu can migrate into another, especially given how susceptible certain industry sectors can be to compliance failures.
Conclusion and Recommendations
As shown above, the overlap between export controls and anti-corruption laws is a solid enforcement trend and has proven useful to investigative agents and prosecutors. Indeed, in September 2009, Mark Mendelsohn, the Deputy Chief of the Fraud Section of the DOJ’s Criminal Division, noted:
The increasing overlap is being found between FCPA issues and other kinds of regulatory deficiencies, including sanctions violations, commercial bribery, procurement fraud, antitrust violations and accounting fraud (in addition to books and records violations, which are part of almost every FCPA case).[2]
This year, to his prediction that FCPA charges would overlap other violations, he added, “We are not myopically focused on the FCPA, we have a big fat criminal code at our disposal.”[3]
Companies also should not look myopically at their compliance programs. Companies need to examine and assess all of the risks that their business presents and integrate different areas of compliance. It is only by addressing enterprise-wide risk that a company will be able to safeguard itself against potential violations
- [1] Daniel Dombey, Stephanie Kirchgaessner & Sylvia Pfeifer, US suspended BAE licences, Financial Times, Mar. 11, 2010, at 13.
- [2] American Bar Association, The Second Annual FCPA Update, Washington, D.C. (Sept. 10, 2009).
- [3] Dow Jones & Ethisphere Global Ethics Summit, New York, New York (Feb. 24, 2010). See Christopher M. Matthews, Mendelsohn Ties Corruption Enforcement to Terrorism Battle, Main Justice, Feb. 24, 2010, http://www.mainjustice.com/2010/02/24/fraud-section-deputy-ties-corruption-enforcement-to-terrorism/.
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About the Author
Wendy L. Wysong is a partner at Clifford Chance US LLP in the White Collar & Regulatory group. Her concentration is compliance and enforcement under U.S. civil and criminal laws.
Her co-authors Adam Klauder and Megan Gordon are associates at Clifford Chance.
Ms. Wysong is the immediate past Deputy Assistant Secretary for Export Enforcement and Acting Assistant Secretary at the Bureau of Industry and Security, U.S. Department of Commerce.
She managed its enforcement program and was involved in the development and implementation of foreign policy through export control policies and programs throughout the administration, including the Departments of Justice, State, Treasury, and Homeland Security, as well as the intelligence community.
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