On March 1, 2010 UK-based defense contractor BAE Systems plc (BAES) pleaded guilty in the US District Court for the District of Columbia to conspiring to defraud the United States, making false statements about BAES’ Foreign Corrupt Practices Act (FCPA) compliance program and violating the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR). For its violation, BAES will pay a US$400 million criminal fine – one of the largest ever levied by the United States against a business for business-related violations. Despite the seriousness of the allegations against BAES and the magnitude of its criminal penalty, BAES has avoided the potentially more damaging effects of suspension or debarment from trade involving US defense articles or participation in US public procurement contracts. The US government’s decision not to impose these measures raises questions about whether BAES is simply too big to penalize with suspension or debarment.
BAES’ violations stem from representations the company made to the US government between 2000 and 2002 that it would develop and implement policies and procedures to ensure compliance with the antibribery provisions of the FCPA and similar provisions of non-US laws established at the Organisation for Economic Co-operation and Development’s (OECD) Anti-Bribery Convention. In brief, the FCPA prohibits certain businesses and individuals from making corrupt payments to foreign officials for the purpose of obtaining or retaining business. It further prohibits such payments to third parties when it is known that a portion of the payments will go to a foreign official for the purpose of obtaining or retaining business.
According to court documents, BAES knowingly and willfully failed to implement antibribery compliance measures and, in fact, reaped significant financial gains from prohibited activities which might have been detected and prevented had compliance measures been adopted as was represented. As part of its plea, BAES admitted to making a variety of payments prohibited by the FCPA, including a series of payments to offshore shell companies and third-party intermediaries. BAES did not screen these companies and intermediaries to the degree that BAES had represented to the US government that it would. In addition, the company made various payments to so-called “marketing advisors” that were retained by BAES to secure sales of defense items. In some cases, BAES encouraged these advisors to establish offshore shell companies to help hide their relationships with BAES, circumvent the laws of countries that prohibit such relationships and disguise prohibited payments.
BAES’ violations of the AECA and ITAR derive from the same payments as those discussed above. In its plea, BAES admitted to making false, inaccurate and incomplete statements to the US government in its requests for authorization to export defense-related items by failing to disclose commissions paid to third parties to secure sales of those items. The company further admitted that it knowingly and willfully failed to disclose these payments in order to shield its relationships with outside advisors from public scrutiny.
Remedial measures against BAES
Under the terms of the plea agreement, BAES will pay a US$400 million criminal fine and maintain a comprehensive compliance program to detect and prevent future violations of the FCPA, non-US antibribery laws, the AECA and the ITAR. In addition, BAES must retain an independent compliance monitor for a period of three years who will periodically report to the US Department of Justice on the company’s compliance performance.
Despite the magnitude of penalties levied against BAES, the company has not been suspended or debarred either from federal procurement contracts or from export activities controlled under the ITAR. Federal procurement regulations provide that a party that has violated the FCPA may face possible suspension or debarment from federal contracts.
These penalties were not imposed on BAES, however, as it was not specifically charged with (and did not admit to) violating or conspiring to violate the FCPA. Rather, BAES was charged with a single count of conspiring to defraud the United States and making false statements about its FCPA compliance program, charges presumably chosen specifically to avoid federal procurement suspension or debarment remedies.
For its violations of AECA and the ITAR, BAES continues to face possible suspension or debarment from export privileges. To date the Department of State has not issued a definitive statement about what, if any, action will be taken against BAES, leaving many US defense companies unsure about how to react. Immediately following the announcement of the BAES plea, the Department of State posted on its website a statement indicating that it would place a “temporary administrative hold” on all license applications where BAES “or any of its subsidiaries is an applicant, consignee, end user, manufacturer or source” (which was removed from the site less than 24 hours after it was posted). It was shortly thereafter replaced by similar statement, which was also taken down with 24 hours of its posting. On March 10, 2010 Department of State spokesman P.J. Crowley stated during a press conference that the Department of State was still “assessing the implication the [BAES] plea will have on the statutory debarment and resulting policy of denial.” He added that “applications for export will be delayed if those applications involve BAE Systems plc or any of its subsidiaries.”
Application of the ITAR
The AECA prohibits issuance of licenses for defense-related exports to persons who have been convicted of violating the Act, unless or until such persons are granted relief. The Act further provides that relief from this “statutory debarment” can occur only after a thorough review of the circumstances surrounding conviction and a finding that appropriate measures have been adopted to mitigate any related law enforcement concerns. In implementing the enforcement provisions of the AECA, the ITAR explains that it is the policy of the Department of State to deny authorization for exports involving persons convicted of violating or conspiring to violate the AECA for a three-year period following conviction. Department of State policy permits debarred persons to request reinstatement of export privileges after one year of debarment; however, reinstatement is generally granted only after three years of debarment. To be reinstated, debarred persons must submit a request for reinstatement which is granted only after interagency consultations, upon a showing that export control concerns have been mitigated. In some cases, exceptions are granted for specific transactions involving debarred persons where consistent with foreign policy and national security concerns.
Having pleaded guilty to charges of conspiring to violate the AECA, BAES is subject to statutory debarment. The Department of State’s current list of debarred persons includes scores of individuals and companies smaller than BAES that were convicted of smaller-scale violations in terms of sophistication and dollar value. The list includes, for example, Rigel Optics, Inc., which was debarred in 2009 and fined US$90,000 for certain prohibited exports, while its owner was fined US$5,000 for related false statements in licensing documents. Does BAES warrant special treatment due to its size and importance to the US government and US defense industry? Is the Department of State taking the position that the violations of the parent should not be attributed to the subsidiaries, or will it articulate some other justification for its position?
The US government’s decision not to charge BAES for specific violations of the FCPA that could trigger suspension or debarment from federal contracts and the Department of State’s reluctance to enforce its debarment policy strongly suggest that the US government views debarment remedies differently for different companies. Notably, BAES is one of the Department of Defense’s largest arms suppliers. Debarment or suspension from federal contracts or defense-related exports would severely disrupt BAES’ activities in the United States. For companies as large as BAES, these remedies could also severely disrupt government procurement activities and export licensing for countless US-based firms involved with BAES and BAES products. The government’s reluctance to impose these remedies in this case could indicate an implied exception for circumstances where enforcement of suspension or debarment would be impractical or imprudent.