Foreign Corrupt Practices Act Snares Security Company Employees

Last Updated Jan 21, 2010 5:54 AM EST

If you remember the Seventies one of the biggest corruption cases was the FBI's sting of sundry Senators, Congressman, state and local officials in Abscam. This was where a pretend Saudi Arabian businessman offered to pay the legislators a great deal of money if they did what he asked. Several of the participants were convicted and did jail time or left office. Now it seems the FBI ran a similar scan on security equipment companies across the U.S. just prior to their annual trade show, the Shot Show.

Twenty-two individuals from thirteen different companies were arrested and charged with violating the Foreign Corrupt Practices Act (FCPA). This law prohibits U.S. persons and companies as well as foreign companies in the U.S. from paying bribes to foreign government personnel in order to win contracts or get work. This is the largest case involving the act and normally the results are just fines to the companies and not the arrest and prosecution of employees. For example in the last few years Siemens (SI) and KBR (KBR) paid fines related to their attempts to win work in Africa and Iraq. The U.S. can also limit how the companies may bid on U.S. contracts as punishment.

In this case the FBI pretended to be an African government official seeking a $15 million buy of security equipment and weapons. As part of the contract the official would receive a twenty percent commission on the contract. In a demonstration of how diverse this business has become employees from one Israeli and two British companies were charged. The companies have not been named but Smith & Wesson (SWHC) released a press announcement yesterday acknowledging the arrest of one of their workers.

Bribery and "commissions" have long been part of international arms deals. The U.S. and European countries have made great strides over the last forty years to limit this practice. Currently BAE Systems (BAE:UK) is under investigation for possible payments to Saudi Arabian officials related to the recent buy of Eurofighter Typhoon aircraft. The company has been discussing the case with the British government with a goal of limiting the financial penalties if any.

The case involving the security companies has been ongoing for over two years and it seems that the FBI could have kept it going for several more creating a longer list of potential companies and persons to be charged. The decision to close it now may have been related to the fact that the majority of the persons arrested were at the show and it might have been one of the few times the foreign nationals were in the U.S.

The pressure is there on companies to make deals. In many places it has been accepted practice to pay the commissions or hire the relative of government agents to facilitate the sales for years. A big overseas contract can do a lot for a company and there are many who might look the other way if financial compensation was asked for. It is also fairly easy to hide these costs in the contracts so that procurement officials in the country involved are not aware of it.

These practices hurt the countries involved and their taxpayers and laws like the FCPA are completely appropriate. Money is wasted on possibly paying inflated prices for equipment that might not meet the requirements. Shareholders are hurt if the illegal act is found out and the company is punished as there may be a financial penalty or lost business. It seems though that some want to keep trying to do this.

  • 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.