On April 8, 2015, the U.S. Securities and Exchange Commission (SEC) announced a settlement agreement with FLIR Systems Inc. regarding alleged violations of the Foreign Corrupt Practices Act (FCPA). The FCPA is a federal law prohibiting “subject persons” from bribing foreign officials and, if a subject person is a publicly-traded company, concealing the bribes in its books and records.

FLIR is a publicly-traded U.S. corporation that manufactures imaging systems and other sensing equipment. According to the SEC cease-and-desist order, as a result of business development efforts primarily undertaken out of FLIR’s Dubai office, the company landed a $12.9 million contract to sell binoculars to the Saudi Arabia Ministry of Interior (MOI). One of the contract’s provisions called for the binoculars to undergo a “Factory Acceptance Test” before final delivery. The test was to occur in Boston in the presence of MOI officials. The officials chosen for the trip included two responsible for awarding FLIR the contract.

Had FLIR flown the officials to Boston to witness the Factory Acceptance Test, provided them with moderately-priced accommodations and meals during their brief stay in Boston, and then sent them home with nothing more than FLIR paraphernalia, there is a good chance that this would not be a story. Even modest entertainment, such as an outing to a baseball game, would have probably been permissible. The FCPA, after all, provides an affirmative defense for reasonable and bona fide business expenditures incurred on behalf of foreign officials pursuant to demonstrating a product or complying with a contractual obligation. The Act also allows gifts of nominal value.

According to the SEC, however, FLIR did not limit its hospitality to airfare, rooms at Boston Park Plaza, a night at Fenway Park, and FLIR-branded baseball caps. Instead, the company’s Dubai office arranged for the MOI officials to go on what one FLIR employee characterized as a “world tour” that included stops in Casablanca, Paris, Dubai, Beirut, and New York. In total, the MOI officials traveled for almost a month, and spent less than a day at FLIR’s Boston facility. MOI officials were later treated to additional travel to Dubai and within Saudi Arabia, as well as expensive watches. Egyptian Ministry of Defense officials were wooed similarly with less extravagant travel opportunities. FLIR Dubai office personnel, with the help of a third-party agent, later obscured these expenses with fraudulent documents.

FLIR made approximately $7 million from its sales to the Saudi MOI, and ended up settling with the SEC for just over $9.5 million. This figure does not reflect FLIR’s total expenditures related to the charges, which presumably include significant legal fees and compliance program improvement costs. The company also has ongoing compliance-related reporting requirements with the SEC that will undoubtedly carry their own attendant expenses. In the final tabulations then, what appeared to be a lucrative contract with the Saudi MOI has become a net loss that will haunt FLIR for years to come.

This is a danger that all companies with overseas sales offices face – not knowing how much foreign agents are pushing the envelope in business development efforts. It’s a delicate balance; on the one hand, executives want to give employees in a sales territory the autonomy to exercise their discretion and best judgment in adapting to business realities. On the other, too much autonomy coupled with sales pressure insufficiently mitigated by other incentives can lead to lapses in judgment like the one involved here.

That is why it’s important for company compliance personnel to work with stakeholders throughout the business to develop internal anti-bribery controls that are both rigorous and workable. Strict guidelines on acceptable business development activities, firm expenditure thresholds and vendor compensation/reimbursement procedures, transparent authorization and accounting practices, regular audits – these are all critical compliance programs elements. When a question arises about whether giving a several-thousand dollar watch to a government official is acceptable under company policy, the last thing a company wants is for employees to be groping around in the dark for an answer.