On July 28, the SEC announced the settlement of an administrative action against Smith & Wesson, a firearms manufacturer. The gist of the case is that the company violated the anti-bribery provisions of the Foreign Corrupt Practices Act by making improper payments and providing gifts to foreign officials in an attempt to win contracts to sell firearms to foreign military and law enforcement departments. The Commission alleged that these payments were inaccurately recorded in the books and records as sales commissions or other business expenses.
The Commission’s order attributes the violations to a failure to establish an appropriate compliance program, or to devise and maintain an adequate system of internal accounting controls, in conjunction with the company’s efforts to make sales in new and high-risk overseas markets. Among other things, the order states that the company “did not perform any anti-corruption risk assessment and conducted virtually no due diligence of its third-party agents regardless of the perceived level of corruption” in the country in which it was seeking to do business; “failed to devise adequate policies and procedures for commission payments, the use of samples for test and evaluation, gifts, and commission advances”; gave “almost complete authority to conduct the company’s international business, including the sole ability to approve most commissions” to a single officer; and had inadequate FCPA policies and procedures and FCPA-related training and supervision.
Without admitting or denying the Commission’s allegations, the company agreed to the entry of a cease-and-desist order prohibiting future violations of the anti-bribery, books and records, and internal control provisions of the Securities Exchange Act. The company also agreed to undertakings relating to remediation and future compliance and to make a payment to the U.S. Treasury of slightly over $2 million as a penalty and disgorgement.
3 Update │ August 2014
Comment: This case is a more traditional example than is QSGI of the circumstances in which the Commission charges internal control violations. In this matter, the control inadequacies are alleged to have permitted the FCPA violations, which are the heart of the case. However, like QSGI, this case underscores the Commission’s focus on controls. In the press release announcing the settlement, Kara Brockmeyer, head of the SEC Enforcement Division’s FCPA Unit, describes the settlement as “a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. * * * When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”