The FCPA Blog

A report posted yesterday in Defense News said the U.S. State Department has placed a "temporary administrative hold" on weapons export licenses "by BAE Systems or companies using BAE Systems' products."

The story said the State Department's action "applies to BAE Systems, Inc. as well as BAE Systems PLC while the department studies the guilty plea and determines whether to take additional action against the company."

BAE pleaded guilty Monday to conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations. It was sentenced to pay a $400 million criminal fine.

U.S. law permits the federal government to ban exports by companies convicted of FCPA and related offenses.

The first debarment notice posted on the State Department's website Monday was withdrawn and a second notice was changed at least once and then also withdrawn. Defense News quoted a Washington trade lawyer as saying:

One notice Monday, another one Tuesday, and now they're both down. Which is it, guys? What State has done sends a terrible message. It makes it seem like State does not have a handle on what it wants to do - or that it's being manipulated by outside interests.

On Wednesday, the State Department said it was "still determining whether to debar BAE Systems, which would limit the company's ability to export products with U.S.-made content." But a BAE spokesperson told Defense News the company is "interpreting the current absence of a State Department notice about the hold to indicate that there is none in place."

The Justice Department on Monday described BAE's $400 million FCPA-related settlement as one of the biggest ever.

Here, by our reckoning, are the other big payouts:

Siemens' $800 million resolution with the DOJ and SEC in December 2008 is the most expensive so far.

Kellogg Brown & Root and Halliburton settled their case last year for $579 million.

Then comes BAE's $400 million payment.

Followed by Baker Hughes' 2007 price tag of $44.1 million.

Willbros paid $32.3 million last year.

Chevron's violations related to the U.N.'s oil-for-food program cost it $30 million, also last year.

Titan Corporation held the record after it paid $28.5 million in 2005 for its FCPA settlement.

Vetco's resolution cost it $26 million in 2007.

Lockheed paid $24.8 million in 1994, the biggest case of its time.

York International spent $22 million last year to end its enforcement action.

Statoil paid $21 million in 2006.

AGCO Corporation paid $19.9 million in 2009 to settle oil-for-food offenses.

AB Volvo's 2008 case settled for $19.6 million.

Novo Nordisk A/S paid $18 million in 2009 to settle oil-for-food offenses.

ABB's violations cost it $16.4 million in 2004.

Schnitzer Steel agreed to pay $15.2 million in 2006.

And Flowserve paid $10.5 million in 2009.

Several cases in the settlement pipeline, if they go as expected, will rank high on the list:

Technip said recently it has reserved €245 million (about $330 million) for a potential settlement of FCPA offenses with the DOJ and SEC for its role in the TSKJ Nigeria joint venture (see KRB / Halliburton above).

Daimler AG reportedly will pay around $200 million for its FCPA settlement.

Alcatel-Lucent said last month it will pay $137.4 million in a settlement that's agreed in principle with the DOJ and SEC.

Pride International, Inc. said it has set aside $56.2 million for an expected settlement with both U.S. agencies.

And Innospec Inc. disclosed last month that it hopes to settle bribery charges related to the U.N.'s oil-for-food program with the DOJ, SEC and the U.K.'s Serious Fraud Office for between $28.8 million and $40.2 million.

Comments about this list and corrections to it are welcome.

BAE Systems plc (BAE or BAES) pleaded guilty today in U.S. federal court in the District of Columbia to one count of conspiracy.

It admitted conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations. It was sentenced to pay a $400 million criminal fine.

BAE had announced the settlement with the DOJ and the U.K.'s Serious Fraud Office on February 5. The U.S. settlement was subject to today's court approval. See our post here.

In its release, the Justice Department said from 2000 to 2002, BAE "represented to various U.S. government agencies, including the Departments of Defense and Justice, that it would create and implement policies and procedures to ensure its compliance with the anti-bribery provisions of the FCPA, as well as similar, foreign laws implementing the Organization for Economic Cooperation and Development (OECD) Anti-bribery Convention. According to court documents, BAES knowingly and willfully failed to create mechanisms to ensure compliance with these legal prohibitions on foreign bribery. According to court documents, the gain to BAE from the various false statements and failures to make required disclosures to the U.S. government was more than $200 million."

See our post here for a copy of the criminal information against BAE. Exhibit A is a letter John Weston, BAE's chief executive, wrote on November 16, 2000 to U.S. Secretary of Defense William Cohen promising that BAE was not knowingly violating the  Foreign Corrupt Practices Act and other antibribery laws. 

Despite its assurances, BAE "made a series of substantial payments to shell companies and third party intermediaries" without due diligence or proper corporate controls. Some of the payments were to "marketing advisors" whose identity BAE actively concealed from the U.S. government. It also did not disclose some of the payments.

The DOJ said,

For example, after May 2001, BAES contracted with and paid certain advisors through various offshore shell companies beneficially owned by BAES. BAES also encouraged certain advisors to establish their own offshore shell companies to receive payments from BAES while disguising the origins and recipients of these payments. BAES admitted that it established one company in the British Virgin Islands (BVI) to conceal its marketing advisor relationships, including who the advisor was and how much it was paid; to create obstacles for investigating authorities to penetrate the arrangements; to circumvent laws in countries that did not allow such relationships; and to assist advisors in avoiding tax liability for payments from BAES.

Unlike the SFO's early February release and charging documents, the DOJ referred to BAE's bribery of Saudi Arabian officials for the al-Yamamah contract -- an $80 billion deal signed in the mid-1980s for the sale of jet fighters.

In today's release, the DOJ thanked the SFO for "the significant assistance provided by the U.K.’s Serious Fraud Office, and further expresses its gratitude to that office for its ongoing partnership in the fight against overseas corruption."

A copy of the U.S. criminal information and the government's sentencing memorandum in U.S. v. BAE Systems plc can be downloaded here and here.

Like many people, we're tempted to bash the Serious Fraud Office. Its reluctance to pursue BAE -- despite the company's outrageous selling practices and offensive attitude -- generated strong emotions over the years. Andrew Feinstein, a former African National Congress MP who helped South Africa's parliament investigate BAE, told the Financial Times the SFO's settlement was a "travesty of justice."

The end wasn't pretty. The SFO -- which should have taken the lead -- barely laid a glove on BAE. It let the company plead guilty to an accounting lapse for payments to a former agent in small-market Tanzania. No other countries were mentioned. And it fined BAE £30 million (with some portion going to charity) -- a mere gesture considering the company's £18.5 billion in revenue last year.

Let's ask then: Why the tiny slap from the SFO? Why not something a lot more  . . . proportionate? The Justice Department, for example, followed a familiar script. In settling allegations that BAE paid and concealed bribes to government officials from Saudi Arabia, the Czech Republic, and Hungary, the DOJ hit the company with a small criminal charge -- one count of conspiracy to make false statements  -- and a huge financial penalty of $400 million. That's similar to the Siemens settlement in December 2008.

The SFO's main goal, it appeared, was to put the case behind it. On Friday it said "no further prosecutions will be brought against BAE Systems in relation to the matters that have been under investigation by the SFO." To prove the point, it dropped the prosecution of BAE's agent, Alfons Mensdorff-Pouilly. Just days earlier, he'd been charged with bribing government officials in the Czech Republic, Hungary, and Austria to sell jets for BAE. The end of his case probably sealed his lips -- and any evidence he might have offered -- forever.

We're not apologizing for the SFO. But could the BAE case have been too much enforcement too soon? The American Justice Department, after all, had 30 years to cut its teeth on FCPA prosecutions. When the big cases came along -- Siemens, KBR, then BAE -- the feds knew the drill. They had created politician-friendly templates that look like real punishment but let the corporate body survive unharmed and maybe even a lot wiser.

When the SFO launched its investigation into BAE six years ago, no British agency had prosecuted a case of overseas bribery. There wasn't any U.K. precedent to ensure punishment that wouldn't kill the company, à la Arthur Andersen. Beyond the mechanics, there was a cultural barrier. The British idea that laws broken overseas are no concern back home was around for a long time (see our post here). That idea didn't disappear on the day ten years ago when the U.K. signed the OECD's anti-corruption convention. Attitudes can change, as they did in the U.S., but that takes time.

Politics, too, may have helped overwhelm the case. The hawks who wanted BAE prosecuted were mainly from the press, NGOs, the judicial system, and the public. But the doves -- Britain's elected officials -- held the real power and they opposed putting BAE on trial. That's probably why the company's top brass never acted as though the SFO posed a serious threat.

There were also hints of something more cynical at work. As the Financial Times reported: "Norman Lamb, MP of the Liberal Democrats -- the only one of the three main parties not implicated in BAE's Saudi dealings of more than £40 billion over two decades -- said he was 'deeply concerned' that the settlement failed to deal with the company's suspected conduct in full." (Our italics.)

Going forward, the optimistic version is that the BAE case will help change British attitudes. And that the SFO, soon to be armed with a tough new antibribery law, will use the lessons learned to become a global leader in the fight against international public corruption.

John Weston: BAE's former chief executive lied to the U.S. government about the company's compliance with the FCPA.At the heart of the DOJ's one-count criminal information that BAE pleaded guilty to on Friday is the al-Yamamah contract -- an $80 billion deal signed in the mid-1980s for the sale of jet fighters to Saudi Arabia. BAE won the contract by agreeing to pay bribes and kickbacks.

The DOJ said:

BAE agreed to transfer sums totalling more than £10 million and more than $9 million to a bank account in Switzerland controlled by an intermediary. BAE was aware that there was a high probability that the intermediary would transfer part of these payments to the [Saudi] official.

And this:

BAE took steps to conceal its relationships with . . . advisers and its undisclosed payments to them. For example, BAE contracted with and paid certain of its advisers through various offshore shell entities beneficially owned by BAE. BAE also encouraged certain of its advisers to establish their own offshore shell entities to receive payments while disguising the origins and recipients of such payments.

Despite the bribes and the elaborate money-laundering operation to conceal them, John Weston, BAE's chief executive, wrote a letter on November 16, 2000 to William Cohen, the U.S. Secretary of Defense. Weston promised that BAE was not knowingly violating the  Foreign Corrupt Practices Act and other antibribery laws. The letter is Exhibit A to the DOJ's criminal information.

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If you haven't seen "Black Money," the PBS Frontline show examining al-Yamamah and the wider BAE scandal through the eyes and words of some of those involved, here it is. We think it's the best documentary about international corruption ever produced. There are great appearances by many, including David Leigh of the Guardian, who with colleague Rob Evans first reported the BAE scandal in 2003. Without their dogged work the story of BAE's corrupt practices may never have been told.