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BAE To Reform Its Compliance -- Later

In May this year, after the Department of Justice briefly held and searched BAE's ceo and a director in separate U.S. airports, we asked if stonewalling the U.S. government in a Foreign Corrupt Practices Act investigation ever makes sense.

We posed the question because BAE appeared to be doing just that -- thumbing its nose at the DOJ's investigation of alleged illegal payments to Prince Bandar bin-Sultan in return for the sale of jet fighters to the Saudi government. A former DOJ official responsible for FCPA prosecutions said after the airport incident that "the recent heavy-handed behavior of [U.S.] investigators indicated 'a severe lack of cooperation by BAE'."

Still, we thought BAE would come around. Why? As we've said, the FCPA doesn't work like a typical criminal statute. Companies facing FCPA charges don't go to trial. First, they can't withstand the withering publicity -- the front page stories around the world of their alleged corrupt culture and practices. Second, they usually can't risk being banned from U.S. government contracts, or losing their export licenses -- which can happen based on mere allegations of FCPA offenses. And third, their chances at trial are bleak. With the application of respondeat superior, once a company employee admits to violating the FCPA, the company is guilty as a matter of law.

But a regular FCPA Blog reader, CW -- who has no inside information about this case but is a top-notch compliance professional -- told us the DOJ's coercive approach to FCPA enforcement might not work on BAE. "I predicted that sooner or later," CW said, "one company would stand up and say enough is enough. That company may have been BAE Systems."

Is he right? Could be. Yesterday BAE announced that it's implementing the compliance reforms recommended in the Woolf Report -- the BAE-commissioned study of its future compliance needs. But the announcement said the roll-out of the Woolf reforms will take three years. Three years? That's practically forever to the DOJ when compliance problems need fixing. So what's going on? Was yesterday's announcement BAE's way of saying it feels no pressure from the U.S. investigation? That it will change its compliance practices, but only in its own time?

Both BAE and Prince Bandar have denied breaking any laws. And in November 2007, in our first post about them, we speculated on an appearance of the rarely-spotted local law defense. The FCPA allows otherwise prohibited payments if the "payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official?s" country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1).

Requiring the payment to be legal under the written laws of the country in question is a hurdle that has rendered the local law defense practically useless. But could it work for BAE? We said last year,

We doubt there are any laws or regulations now on the books in Saudi Arabia that would expressly permit members of the royal family to earn a commission on arms sales to the government. But would the King issue a decree -- the country is a true monarchy, after all -- that retroactively authorizes and approves the BAE payments? We don't know the answer. But the question is sure to raise issues for Saudi Arabia and its royal family that are well above our pay grade. Meanwhile, we imagine BAE is giving this some serious attention as it plots its potential defense strategy.

It's the DOJ's move.

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Full post as published by The FCPA Blog on July 22, 2008 (boomark / email).