Changing The Focus Of The Foreign Corrupt Practices Act

Last Updated Jan 29, 2010 6:11 AM EST

Last week the Justice Department announced that they were charging twenty-two individuals from thirteen different defense and security contractors with violations of the Foreign Corrupt Practices Act (FCPA). These persons representing the companies had been enticed by an African country offering to buy weapons and equipment for their security forces as long as the company paid a decent "commission" to the official negotiating the contract. The United States has made it clear through the FCPA that the paying of bribes or compensation to foreign officials as a way to get contracts is a serious crime and companies have received stiff punishment.

I discussed this case and its implications with Mr. Will Barry of the law firm Richards Kibbe & Orbe LLP is an expert on compliance for individuals and corporations with the FCPA and practices out of Washington DC. He makes it clear that their has been a shift in focus of the FCPA away from targeting corporations and to their employees. He believes this is being done "because it is a more effective deterrent and because it helps build the cases against the companies those individuals work or worked for."

In the recent case the employees were not necessarily senior managers or officers of the companies involved but the FCPA "incorporates the concept of "willful blindness." This concept leads to circumstances where officers might be charged even though they were not actually involved, if they were aware of a high probability that funds would be used for bribing foreign officials." Furthermore the corporation is also liable to the Securities and Exchange Commission (SEC) as they have pursued "control person" liability in the past. The arrest of these individuals will only allow further investigation and scrutiny of their employers and their potential participation in the FCPA violation.

This case represents a shift in enforcement as in the past the U.S. Government relied on self reporting or competitors raising issues this is a much more "proactive approach and employing more traditional law enforcement methods to develop cases against individuals with the hope that those individuals will cooperate and provide additional evidence against others or the companies for which they work or worked." Mr. Barry also said that the Justice Department has begun to focus more on individuals in these cases rather then just the companies.

Despite some major U.S. companies such as KBR (KBR) and Halliburton (HAL) being charged and settling with the U.S. Government the big Government contractors due to their size and capabilities have had time to build up a compliance infrastructure and training program. This case involved more smaller companies and they may not necessarily had the resources or time to build up a compliance system. Mr. Barry said that "Companies have to work diligently to put systems in place to make sure their employees understand what they can and cannot do."

If the U.S. defense budget does actually decline after 2011 there will be a greater focus on foriegn contracts to make up the lost business. Middle Eastern and Asian countries possess resources to buy new, modern Western equipment. As Mr. Barry says "The greater the competition for overseas business the more likely that corrupt foreign officials will demand payment for awarding bids or doing deals." There is always a chance that U.S. companies may not be competitive with those of other countries if they are willing to take a chance to violate a law like the FCPA that a U.S. corporation cannot. Mr. Barry believes that this issue will be resolved as "other jurisdictions are beginning to follow the lead of the U.S. and the OECD and implement foreign bribery prohibitions. This will help "level the playing field" over time."

The use of bribery and corruption in arms dealing has a long and infamous history. The FCPA and laws like it in other countries certainly go a long way to end the practice. As more nations adopt similar laws it will only help the competitiveness of defense contractors and make sure that tax dollars are being used appropriately and getting the best value in defense systems and capabilities. The recent change in focus by the U.S. Justice Department to charge individuals first seems to be an effective way to increase enforcement.

  • Matthew Potter

    Matthew Potter is a resident of Huntsville, Ala., where he works supporting U.S. Army aviation programs. After serving in the U.S. Navy, he began work as a defense contractor in Washington D.C. specializing in program management and budget development and execution. In the last 15 years Matthew has worked for several companies, large and small, involved in all aspects of government contracting and procurement. He holds two degrees in history as well as studying at the Defense Acquisition University. He has written for Seeking Alpha and at his own website, DefenseProcurementNews.com.