Armor Holdings, Inc., recently resolved allegations that it violated both the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act. Because of Armor’s extensive cooperation with the government, it was able to obtain a non-prosecution agreement from the Department of Justice and a settlement from the Securities and Exchange Commission. Armor’s experience is a timely reminder of the potential value of self-reporting, and provides a model to companies looking to avoid – or cope with – FCPA prosecution.

Haynes and Boone, LLP has extensive experience designing and implementing FCPA compliance programs, investigating FCPA allegations, and liaising with the Department of Justice and the Securities and Exchange Commission on behalf of clients.

Allegations of Bribery and Books-and-Records Violations

Armor Holdings, Inc. (“Armor”), is a manufacturer of military and law enforcement equipment. From 2001-2006, the time period relevant to the SEC and DOJ allegations, Armor Holdings Products, LLC (“AHP”), was a wholly-owned subsidiary of Armor located in the United States. Armor Products International, Ltd. (“Armor UK”), was a related company based in the United Kingdom. Armor and its subsidiaries conducted business in several countries around the world. In 2007, Armor was acquired by another company.

The SEC and DOJ alleged that, beginning in 2001, Armor UK entered into a sham consulting agreement with an independent third-party sales intermediary. The intermediary used his contacts – and a number of well-placed bribes – to help Armor secure body armor contracts with the United Nations. Armor UK allegedly paid inflated commissions to the intermediary from 2001-2006, knowing or deliberately disregarding the fact that at least part of the commissions would be used to bribe a U.N. procurement official for confidential competitor bid information. For example, in connection with the U.N.’s 2001 request for proposal on body armor, Armor UK allegedly submitted a signed, but blank, pricing sheet to the intermediary. The intermediary bribed a U.N. procurement official to learn about the competitors’ bids and then completed and submitted the blank pricing sheet on Armor UK’s behalf. The U.N. awarded Armor UK the contract. This same process was allegedly used in 2003 so that Armor UK could secure a renewal of the body armor contract. As a result of this scheme, Armor UK made 92 payments totaling more than $220,000 to the intermediary while collecting more than $1 million in profits.

Additionally, the DOJ and the SEC alleged that AHP, Armor’s United States subsidiary, engaged in improper “distributor net” accounting practices. AHP allegedly sent customers invoices that included the price of the armor and the commissions paid to third-party sales intermediaries. But internally AHP created fictitious invoices that omitted the price of the commissions to include in its books and records. When the customers paid the invoices, overpayments resulted, and these overpayments were transferred through a series of non-commission accounts and ultimately distributed to sales intermediaries. Using this practice, AHP avoided recording more than $4.3 million in commission payments to intermediaries. Armor allegedly received notice that AHP’s distributor net accounting practices violated generally accepted accounting principles from both an outside auditor and the comptroller of another Armor subsidiary, but failed to address the issue.

The DOJ Non-Prosecution Agreement

On July 13, 2011, the DOJ announced a non-prosecution agreement with Armor. According to the DOJ, a non-prosecution agreement was appropriate because Armor had conducted its own investigation of the misconduct, self-reported the results of that investigation to the DOJ, fully cooperated with the DOJ’s investigation, and engaged in extraordinary remedial measures. Among other things, Armor terminated the employees engaged in the misconduct and most of the third-party intermediary relationships, conducted FCPA compliance training for its employees, and adopted new compliance policies and internal controls to prevent future FCPA violations. The DOJ also recognized that the alleged misconduct had taken place before Armor was acquired by another company. Still, the DOJ extracted $10.3 million in penalties from Armor, prohibited Armor from committing any crimes for two years, and demanded several undertakings with regard to FCPA compliance.

The DOJ-mandated compliance program, which warranted its own appendix to the non-prosecution agreement, includes several measures related to company policy and at least annual review of the company’s FCPA compliance and training efforts. One key provision requires Armor to appoint an independent senior corporate executive to implement and oversee Armor’s anti-corruption policies, standards, and procedures. Armor must also adopt confidential reporting mechanisms and disciplinary procedures.

Importantly, Armor is also required to adopt measures aimed at ensuring that third parties comply with the FCPA. Specifically, Armor must undertake and properly document risk-based due diligence of its business partners and agents. Armor must also inform partners and agents of its commitment to complying with the anti-bribery laws, its ethics policies, and its compliance standards for detecting and preventing bribery. Before entering new business arrangements, Armor must seek reciprocal agreements from partners and agents regarding FCPA compliance and, in appropriate circumstances, include FCPA compliance clauses in its contracts with third parties.

The non-prosecution agreement requires Armor to file periodic reports with the DOJ confirming its compliance with the agreement and detailing any misconduct related to the agreement for two years.

The SEC Settlement Agreement

The SEC also noted Armor’s extensive cooperation with the government investigation, and it appears that Armor’s efforts resulted in a somewhat lenient settlement. To resolve the SEC’s bribery and accounting allegations, Armor agreed to pay $5.7 million in disgorgement, prejudgment interest, and civil penalties, and agreed to an injunction and other undertakings regarding FCPA compliance.1

Critical Lessons for Other Companies

The Armor allegations and the settlement highlight several important lessons for any company that does any business abroad. First, the DOJ has prosecuted FCPA cases for years, but as demonstrated here, the SEC has recently taken a strong interest in bringing FCPA cases under the anti-bribery and accounting statutes. In its press release, the SEC touted the fact that it has filed more than 32 FCPA cases since 2010. Second, FCPA compliance programs often focus on bribery of foreign officials, but the FCPA also covers officials of public international organizations such as the United Nations, the International Monetary Fund, and the Red Cross. Finally, this case emphasizes that companies cannot insulate themselves from FCPA liability by using agents or intermediaries. Indeed, the non-prosecution agreement and the settlement make it clear that companies may benefit from screening third parties for FCPA compliance before doing business with them and writing FCPA compliance clauses into their contracts.

The government agreements also highlight a number of other best practices for FCPA compliance, which include conducting regular compliance training, undertaking periodic reviews of anti-bribery policies, establishing an independent body to oversee FCPA compliance and training efforts, and developing mechanisms for confidential reporting. If any FCPA violations are reported, it is advisable that companies promptly and thoroughly investigate the allegations and, if there is merit to them, consider self-reporting to the DOJ and the SEC.