reported by the FCPA
Currents in the Wall
Street Journal and numerous
others, on July 13, 2011, Armor Holdings Inc., entered into a
Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) to pay a
$10.29 million penalty to resolve violations of the Foreign Corrupt Practices
Act (FCPA). Contemporaneously, Armor Holdings settled a civil enforcement
action brought against the company by the Securities and Exchange Commission
(SEC) and agreed to pay a total of $5,690,744 in disgorgement, prejudgment
interest and civil penalties in order to resolve the SEC action. These fines
and penalties were in conjunction with Armor Holdings series of contracts with
the United Nations (UN) for supply of body armor for use in Iraq.
interesting side note is that the British company BAE Systems, Inc., acquired
Armor Holdings but we note that it was in 2007, after the conduct in question
took place. Nevertheless, this case has significant implications for the
compliance practitioner. We will give some detail to the books and records
scheme used by the company to disguise its bribes and then detail some of the
factors listed by the DOJ in its Press Release (the NPA is not available as of
the posting of this blog). These factors listed by the DOJ clearly show that a
sustained, committed effort to cooperate with the DOJ and SEC in the
investigation, coupled with a robust remediation program going forward can
significantly help a company overcome what may appear to be clear facts which
would seem to warrant a criminal penalty, in addition to a civil action.
Distributor Net Accounting
Holdings made sales through certain unnamed third party intermediaries. The
contracts were awarded from 2001 through 2006. The accounting basis of the
scheme was an accounting system described as "Distributor Net" which was worked
by the company to disguise more than $4.3 MM in commissions paid to these third
party intermediaries. These third party intermediaries never received title to
the goods in question. Under such a sales system, according to US Generally
Accepted Accounting Principles (GAAP), Armor Holdings should have recorded the
sale to the UN at the full or "gross" sales price - with a separate display of
any commission expense for amounts paid to an intermediary.
Armor Holdings would send the customer a "gross" invoice, including the sales
price of goods sold, plus commission, while internally recording sales at a
"net" amount that did not include the commission due to the third party sales
intermediary. Thus, amounts received from the customer would be greater than
the amount booked internally for a sale, resulting in a credit balance in the
customer's account receivable. Armor Holdings would then transfer the
"overpayment" through a series of non-commission accounts before ultimately
disbursing it to the third party sales intermediary. These payments to sales
intermediaries under the scheme were never recorded as a commission expense on
the books and records of the company.
to the Company
early as March 2001, the company's outside auditor "emailed comments to certain
senior officers, indicating that the "distributor net" practice understated
accrued liabilities and accounts receivable; and that the company should record
a receivable for the gross amount due, together with an accrual for
commissions." In September, 2005, the comptroller of "another Armor
Holdings subsidiary who had refused to implement "distributor net" at his
division advised senior officials at AHP and Armor Holdings of his concern that
such accounting was "blown out of the water" by GAAP." The SEC Complaint noted
that even with the admonitions Armor Holdings engaged in "at least 92
transactions from 2001 through June 2007 - resulting in approximately
$4,371,278 of undisclosed commissions on the books and records of Armor
Holdings, and rendering those books and records inaccurate."
noted above, Armor Holdings was able to negotiate an NPA for these accounting
sins. Although the NPA is not currently available, the DOJ did list several
factors, in its Press Release announcing the settlement, which led to the NPA.
These factors included:
Holdings also agreed to "enhanced compliance undertakings" in the NPA but we
will have to wait until the NPA is released to see what those may be. While the
DOJ Press Release noted that Armor Holdings would not be required to retain a
corporate monitor, the company had agreed to report to the department on
implementation of its remediation and enhanced compliance efforts every six months
for the duration of the agreement. Lastly the NPA requires that Armor Holdings
continue to implement rigorous internal controls and that it cooperate fully
with the department.
clear import of this NPA is that a company can come back from the edge of the
abyss through thorough and sustained cooperation with the DOJ. Armor Holdings
had 92 separate instances of disguising bribes yet was able to obtain a NPA.
The lesson learned is clear: self-disclose, clean house, remediate and
implement a best practices compliance program and your company may well
be able to extricate itself without landing on the "Top Ten
of All Time FCPA Settlement List".
the DOJ's July 13, 2011 Press Release here.
the SEC's Litigation Press Release here.
the SEC's civil complaint against Armor Holdings here.
Visit the FCPA
Compliance and Ethics Blog, hosted by Thomas Fox, for more commentary on FCPA
compliance, indemnities and other forms of risk management for a worldwide
energy practice, tax issues faced by multi-national US companies, insurance
coverage issues and protection of trade secrets.
publication contains general information only and is based on the experiences
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Thomas R. Fox, 2011
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