This article was reprinted with permission from FCPA Professor
This post highlights various issues to consider from this week’s Smith & Wesson Foreign Corrupt Practices Act enforcement action.
Should There Be a Difference?
If the U.S. government uses public taxpayer money to offer or pay a foreign government to induce the government to purchase military and law enforcement products, we construct programs around it and call it “Foreign Military Financing,” “Foreign Military Sales,” etc.
Yet, if a company offers or pays private shareholder money to a representative of a foreign government to induce the government to purchase military and law enforcement programs, the U.S. government calls it bribery.
Should there be a difference?
Either Enforce the FCPA or Don’t
The Department of Justice should either enforce the FCPA or not enforce the FCPA. Period. End of story.
The current system in which the DOJ makes opaque, arbitrary, non-reviewable discretionary decisions behind closed doors is contrary to the rule of law.
In the Smith & Wesson action, the SEC alleged that FCPA “violations took place from 2007 through early 2010, when a senior employee and other employees and representatives of Smith & Wesson made, authorized, and offered to make improper payments and/or to provide gifts to foreign officials in an attempt to win contracts to sell firearm products to foreign military and law enforcement departments.” The culpable individuals were identified as Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales and the improper conduct concerned business practices in several countries (Pakistan, Indonesia, Turkey, Nepal and Bangladesh).
It’s not every SEC FCPA enforcement action that alleges a multi-year scheme in a number of countries involving a V.P. of International Sales and a Regional Director of International Sales under circumstances in which the company did not voluntarily disclose.
Nevertheless, as previously reported in June, Smith & Wesson disclosed that “the DOJ declined to pursue any FCPA charges against us and closed its investigation.”
Why did the DOJ “decline” to pursue FCPA charges against Smith & Wesson, yet Ralph Lauren (voluntary disclosure of conduct in one country involving one employee of an indirect subsidiary in which the company cooperated) receive a NPA?
Why did the DOJ “decline” to pursue FCPA charges against Smith & Wesson, yet Data Systems & Solutions (conduct in one country involving one employee in which the company cooperated) receive a DPA?
Numerous other examples could be cited as well, but let’s call a spade a spade. The DOJ’s FCPA enforcement program is not always based on the rule of law, but often opaque, arbitrary, non-reviewable discretionary decisions made behind closed doors.
For instance, as highlighted in this prior post, last September the-then Chief of the DOJ’s FCPA Unit stated at an ABA conference that a large company (he did not provide the company’s name – other than it would be recognizable to the audience) was a “serial reporter” of FCPA issues to the DOJ’s FCPA Unit. The FCPA Unit Chief said that this company has a “good compliance program and system” in place and does “robust” internal investigations when issues arise. The FCPA Unit Chief further stated that he and his unit have a “relationship of trust” with this company and its counsel and that “frankly, most of the time” the issue is “not a particularly large issue.” According to FCPA Unit Chief, this company remediates the issue and then it “goes on its way.”
The following quote (albeit from a different era) is most appropriate:
“We [practitioners] must be able to advise our clients as to whether their conduct violates the law, not whether this year’s crop of administrators is likely to enforce a particular alleged violation. That would produce, in effect, a government of men and women rather than a government of law.”
There are reasons why the DOJ’s FCPA enforcement program is not as credible as it could and should be and is viewed by many as arbitrary. The circumstances surrounding Smith & Wesson contribute to these reasons.
In my recent article, “Foreign Corrupt Practices Act Ripples,” I highlight how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.
Smith & Wesson is another instructive example of this dynamic (a dynamic that escapes many who write about the FCPA and try to argue that “bribery pays” by measuring settlements amounts vs. bribe payments or business allegedly obtained or retained).
The “Ripples” article talks about the “three buckets of FCPA financial exposure” as follows.
In the Smith & Wesson action we know bucket #2 (approximately $2 million).
To my knowledge, Smith & Wesson (like many companies) has not disclosed bucket #1, but it is safe to assume that bucket #1 far exceeded bucket #2, likely by a ratio of at least 2-3 to 1.
As indicated in the earlier post summarizing the SEC’s enforcement action, per the SEC’s order Smith & Wesson has review and reporting obligations to the SEC for a two-year period. Again, it is safe to assume that bucket #3 will exceed bucket #2.
And then of course there are a variety of negative business consequences that often flow from FCPA scrutiny or enforcement as highlighted in the “Ripples” article. For instance, in the Smith & Wesson action, the SEC stated, among other things, as follows regarding the company’s “remedial measures” – the company terminated its entire international sales staff; terminated pending international sales transactions; and re-evaluated the markets in which it sought international sales. Again, it is safe to assume that the financial costs and consequences of these measures far exceeded bucket #2.
Read more articles on the FCPA by Mike Koehler at FCPA Professor.
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