Recently, United Technologies Corporation (“UTC”), an international aerospace and building systems company headquartered in Hartford, Connecticut, entered into a global settlement with the US Departments of Justice and State to resolve criminal and civil charges that the company and several affiliates violated US defense trade control requirements involving a wide array of activities that occurred over the previous twelve years. Combined fines totaled more than $75 million. In addition, UTC and its affiliates agreed to implement costly mandatory compliance improvements and to hire an independent compliance watchdog to monitor the company’s efforts. Finally, UTC’s Canadian subsidiary, Pratt & Whitney Canada (“PWC”), has been debarred from most US defense trade for at least one year.
Details about the precise charges and full consequences are available on the Firm’s website in an updated version of our ITAR Enforcement Digest. Meanwhile, this latest enforcement case demonstrates a number of important takeaways for companies to consider:
- People matter. The US government’s publicly released documents reflect that UTC—ranked 10th largest in the 2011 Defense News 100—had an existing formal compliance program with abundant, committed and competent resources and personnel. Yet, according to those same documents, certain individuals inside UTC’s Canadian subsidiary were able to thwart the company’s internal controls for several years, and allegedly did so to increase the bottom line in disregard of the company’s legal obligations. This settlement highlights the fact that compliance is as much about people as it is process, and reflects the maxim that a “few bad apples can spoil the bunch.” Companies must ensure that their programs are followed both in spirit and in practice, which can be especially challenging for large, diverse global enterprises.
- The perception of inertia and delay aggravates legal exposure. Publicly released documents reflect the US government’s view that the company did not react with adequate dispatch to internal signals that something was amiss, and suggest that it was only after the matter was raised by an investor watchdog group that the company initiated a formal internal review.
- Disclosures must be fulsome, accurate and not misleading. The US government alleged that UTC made inaccurate characterizations in its disclosures to investigators. Whatever mitigating reasons may have existed with respect to such shortcomings, the company’s disclosures exposed it to criminal liability for making false statements. This settlement highlights the critical need to ensure that all official communications with investigators reflect representations that have been verified.
- The US government continues to make enforcement of US trade controls a top priority. In its various press releases about the case, the US government reiterated its commitment to aggressive enforcement of US trade controls generally, and highlighted the fact that the diversion of sensitive technology to China and other destinations continues to constitute a grave threat to national security. In addition, the case highlights the ever-increasing cooperation among the various US government agencies that play a role in protecting national security, inasmuch as the official press releases noted the coordination among several regulatory and enforcement arms of the US government.
- The case could have a negative impact on US export reform efforts. Efforts to streamline US export controls currently are in a delicate phase, and face increasing scrutiny from certain legislators who believe that national security may require tightening—not loosening—requirements. Having a major US aerospace firm plead guilty to diverting sensitive technology to China is not helpful to the case for export reform.
- Watchful eyes are everywhere, not just in the US government. A seemingly unique aspect of this case is the fact that a shareholder inquiry preceded the decision to launch a formal internal inquiry. The US government implied a causal connection between the two events in the publicly released settlement documents. Whatever the circumstances, companies should acknowledge that investors, whistleblowers and other interested parties play an important and increasingly prominent role in assuring responsible corporate governance.
- Inadequate compliance is costly, burdensome and intrusive. According to publicly disclosed information, UTC has invested approximately $30 million thus far toward improving its compliance program in the wake of the matters it settled with the US government. In addition to the steep fines and mandatory compliance costs allocated on a going-forward basis, it is reasonable to assume that the company has paid significantly more to fix its problems than it would have invested upfront to prevent them in the first place. Perhaps more importantly, the company has abdicated a significant degree of autonomy over its business processes, as it now labors under the intense scrutiny of US government regulators, independent monitors, and other interested parties.
- “Judge not that ye be not judged.” While the UTC settlement tells a cautionary tale for multinational enterprises subject to US trade controls, it should not be construed as a morality tale. In fact, this case highlights the very acute risks that any multinational enterprise, large or small, faces in the global marketplace. Any system of internal controls can be thwarted, which says less about the bona fides of any particular company than it does about the compelling need for vigilance.