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Understanding FCPA Enforcement Trends in the Aerospace and Defense Industry: A Launch Pad to Effective Management of Anticorruption Risks

April 2013 Contents

I. Introduction...... 1

II. A Brief Introduction to the FCPA...... 1

III. the International Compliance Landscape...... 4 A. The UK Bribery Act B. Enforcement in BRIC Countries

IV. recent Enforcement Actions Against Companies in the Aerospace and Defense Industry: Trends and Case Studies...... 5 A. The Use of Third-Party Agents May Be the Single Riskiest Practice B. US Authorities Are Aggressively Targeting Industry Executives C. The First Large-Scale Undercover Investigation in FCPA History Targeted Defense Industry Executives D. FCPA Enforcement in the Aerospace and Defense Industry Could Have National Security Implications E. The United States and the United Kingdom Worked Together to Obtain the Largest Criminal Penalty Ever Imposed on a Defense Company in the FCPA Arena F. Successor Liability Means That Comprehensive Due Diligence Is Critical G. Operating in Certain Countries Presents Heightened Risks H. Defense Offset Transactions Can Lead to FCPA Liability I. Dealings with Commercial Customers Must Also be Scrutinized: The Case of State-Owned Airlines J. Emerging Risks for Satellite Communications Companies K. Statutes Often Linked with FCPA Charges L. Derivative Civil Litigation Related to the FCPA

V. Best Practices for the Industry...... 14

VI. fcPA Reform Initiatives...... 15

VII. Latham & Watkins’ Industry Experience and Expertise...... 16

VIII. Chart of Industry Enforcement Actions...... 17

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense I. INTRODUCTION

All companies conducting business abroad should be concerned about compliance with the Foreign Corrupt Practices Act (FCPA or the Act). Companies in certain industries — like the aerospace and defense industry—due to the heavily regulated nature of the industry and the level of interaction with foreign governments, are even more vulnerable to FCPA liability than others. Legislative history from 1977 indicates that congressional concern over reports of questionable payments made by aerospace companies was one impetus for the Act’s passage. According to Trace International, aerospace and defense industry members have accounted for approximately twelve percent of the world’s anticorruption enforcement actions since 1977, second only to the extractive industries like oil and mining.

FCPA enforcement across all industries has sky-rocketed in recent years. In 2009, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) initiated a total of 40 FCPA enforcement proceedings. That figure nearly doubled in 2010 to 74 enforcement actions, fell slightly in 2011 to approximately 50, and decreased even more in 2012 to just over 20 actions. But, the 2012 downtick should not prompt companies to relax their compliance. All signs, including DOJ and SEC’s recent publication of the FCPA Resource Guide (Resource Guide), suggest that US authorities will continue to vigorously enforce the FCPA in the coming years.

US authorities are not alone in their efforts to crackdown on corruption. Other countries, most notably the United Kingdom, are also stepping up their anticorruption efforts and focusing on the aerospace and defense industry. The UK Bribery Act 2010 (UKBA) is potentially more burdensome for global companies to comply with than the FCPA. Unlike the FCPA, the UKBA reaches bribery in both the public and private sectors and punishes companies for failing to prevent bribery. This means that a company, UK or otherwise, could be held liable under the UKBA if a person associated with the company commits bribery, even if the person has no connection with the United Kingdom and the bribe activity occurred outside of the United Kingdom.

The potential exposure for multinational companies and their executives is significant. Companies in all industries must appreciate the compliance risks and take steps to minimize their vulnerabilities. Utilizing the enforcement agencies’ recent pronouncements in the Resource Guide as a launching mechanism, this article provides a background primer on key aspects of the FCPA and UKBA and highlights recent trends and case studies that have impacted companies in the aerospace and defense industry. Through our industry group platform, Latham & Watkins LLP is uniquely positioned to deploy resources around the world to assist our industry clients as they tackle the challenges of assessing and minimizing their anticorruption risks.

II. A BRIEF INTRODUCTION TO THE FCPA

The FCPA criminalizes corrupt payments to foreign government officials for the purpose of obtaining or retaining business. The Act’s anti-bribery provisions prohibit the use of the mail or any instrumentality of interstate commerce in furtherance of a corrupt offer, payment, promise to pay, or authorization to pay money to any foreign official for the purpose of influencing the official in his or her official capacity, inducing the official to violate his or her lawful duty, or securing an improper business advantage. The Act’s coverage is vast. It applies to improper payments made anywhere in the world and covers illegal payments made not only by company employees, but also by subsidiaries, joint venture partners, and third-party agents. Companies and senior executives can be held responsible for payments made by their employees and agents, even if they did not have actual knowledge of the corrupt nature of the payments. This means that executives cannot shield themselves from FCPA liability simply by ignoring or disregarding the suspicious actions of their employees and agents.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 1 DOJ’s concept of “foreign official” under the FCPA is equally expansive. It covers not only officers and employees of foreign governments, but also anyone acting in an official capacity for or on behalf of a government department, agency, or “instrumentality thereof,” which can include employees of state-owned and state-controlled companies. Courts that have examined this issue in recent years have held that whether a particular entity is an “instrumentality” under the FCPA requires a fact-specific analysis of the entity’s ownership, control, status, and function. Jury instructions often include a non-exhaustive list of factors that a jury should consider, including the foreign state’s extent of ownership and degree of control over the entity; the circumstances surrounding the entity’s creation; the purpose of the entity’s activities; and the level of financial support by the foreign state. Although no factor is dispositive, DOJ and SEC guidance suggests that an entity is unlikely to be considered an instrumentality if a government does not own or control a majority of its shares.

The FCPA also contains accounting provisions that work hand-in-hand with its anti-bribery provisions. The accounting rules, known as the books and records provisions, require companies to maintain books and records in reasonable detail to accurately account for and report all transactions and dispositions of their assets. This mandate is not limited to transactions within the United States or with foreign government officials. It applies to all financial dealings of all US and foreign companies that are required to file reports or register their securities with SEC. So broad is the reach of the FCPA’s books and records provisions that a US parent company can be held liable for its foreign subsidiary’s failure to keep accurate books and records where, for example, the subsidiary’s financials are ultimately consolidated with the parent’s financial statements.

DOJ and SEC jointly enforce the FCPA. Corporations are subject to criminal fines of up to $2 million per anti-bribery violation. Under the Alternative Fines Act, which authorizes fines up to twice the benefit the defendant sought to gain by making the corrupt payments, actual fines can be even higher. Individual executives are also subject to criminal penalties of up to $100,000 in fines and five years in prison. Violations of the accounting provisions can subject corporations to a fine of up to $25 million. On the civil side, companies and individuals face fines of $16,000 per anti-bribery violation. Under the civil forfeiture statute, which can also be used in the criminal context, defendants may be required to forfeit any assets derived from proceeds traceable to an FCPA violation or a conspiracy to violate the FCPA.

US Agency Enforcement of Industry Actions

8 7 6 5 4 3 Number of Industry Actions 2 1 0 Just DOJ Just SEC Both SEC and DOJ

The collateral consequences of FCPA enforcement actions can be more burdensome than the massive fines. The enforcement agencies have utilized the appointment of outside monitors more frequently in recent years. According to the Resource Guide, DOJ and SEC consider the following factors when determining whether a monitor is appropriate:

2 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense (1) seriousness of the offense; (2) duration of the misconduct; (3) pervasiveness of the misconduct (including whether it cuts across geographic or product lines); (4) nature and size of the company; (5) quality of the company’s compliance program at the time of the misconduct; and (6) subsequent remediation efforts.

Generally, the monitor agreements require companies to grant their monitors very broad access to their employees, policies, systems, and documents, and the monitors may be required to provide periodic reports to the government. Under its February 2010 plea agreement with DOJ stemming from charges that it made illegal bribe payments to obtain government contracts, BAE Systems (BAES) agreed to engage an outside corporate monitor for three years. DOJ permitted BAES to choose its own monitor, but DOJ retained complete discretion to accept or reject BAES’s proposed candidates. For many companies, the loss of autonomy over their compliance systems is one of the most troubling consequences of settling FCPA charges.

The government can impose other non-monetary sanctions, including prohibiting transactions with the government and barring companies from obtaining export licenses. For defense contractors, debarment from government contracting or the loss of export privileges could effectively put them out of business.

FCPA enforcement has been at an all-time high in recent years. From 2004 to 2010, the number of FCPA enforcement actions initiated by DOJ and SEC increased almost fifteen fold — from five to 74. The penalties have increased dramatically as well. In 2010, US and foreign companies paid a record $1.8 billion in FCPA-related financial penalties. The ten costliest FCPA-related settlements have all occurred since 2008, and eight of the ten have occurred since 2010. Although enforcement fell slightly in 2011 and 2012, it will undoubtedly pick up again due in part to a recent move by Congress to increase the incentives for whistleblowers to report FCPA violations to SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, includes a “whistleblower bounty” provision that provides monetary benefits for whistleblowers who report securities law violations to SEC. Whistleblowers who provide information that leads SEC to a successful enforcement action or settlement can receive between 10 and 30 percent of the amount of the settlement that exceeds $1 million. The whistleblower bounty provision, coupled with the aggressive enforcement appetite of US law enforcement, will undoubtedly lead to more FCPA investigations and enforcement actions in the coming years.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 3 III. THE INTERNATIONAL COMPLIANCE LANDSCAPE

A. the UK Bribery Act The UKBA, which entered into force on July 1, 2011, is even broader, in terms of scope and territorial reach, than the FCPA. The UKBA contains two general offenses: active bribery, meaning offering, promising, or giving a bribe; and passive bribery, or requesting, agreeing to receive, or accepting a bribe. Thus, unlike the FCPA, which only targets bribe-givers, the UKBA punishes both sides of the bribe transaction. Under the UKBA, a bribery offense occurs when a person offers, promises, or gives a financial or other advantage to another person with the intent to induce that person or another to improperly perform a relevant function or activity. A “relevant function or activity” is defined to include anything connected with a business, trade, or profession, with minor exceptions. This expansive definition highlights the second major distinction between the UKBA and the FCPA — unlike the FCPA, which prohibits bribery of foreign government officials, the UKBA targets all bribery, including bribery that is entirely within the private sector.

Arguably, Section 7 of the UKBA is its most expansive provision. Section 7 creates a new form of corporate liability for failing to prevent bribery. There is only one defense to the charge of failure to prevent bribery — that an organization had “adequate procedures” in place to prevent bribery. The UK Ministry of Justice issued guidance that lays out six factors the UK authorities will consider when deciding whether a commercial organization has implemented adequate procedures to prevent bribery: whether (1) proportionate procedures are in place to prevent bribery; (2) top-level management is committed to preventing bribery; (3) risk assessments are performed and documented on a periodic basis; (4) due diligence is conducted prior to entering into business relationships with third parties; (5) anti-bribery policies are embedded and understood through communication and training; and (6) anti-bribery procedures are monitored and reviewed as needed.

The UKBA’s territorial coverage is extensive. The UKBA governs all acts that take place within the United Kingdom, regardless of where the organization or individual who committed the act is based. In addition, the UKBA’s anti-bribery provisions apply to acts committed outside the United Kingdom if the actor had a “close connection” to the United Kingdom. For individuals, this means a person who is a British national or resident; for companies, this means a body incorporated in the United Kingdom or a Scottish partnership. Section 7, the failure to prevent bribery offense, applies even more generally to all companies “carrying on business, or part of a business” in the United Kingdom. This means that a non-UK company that bribes a private non-UK citizen to retain business that is entirely unconnected with the United Kingdom could theoretically fall under the jurisdiction of the UKBA if it carries on business in the United Kingdom. Because the threshold for “carrying on business” is low, all global companies with some presence in the United Kingdom must take steps to implement adequate procedures to prevent bribery in order to minimize their UKBA exposure.

B. enforcement in BRIC Countries Other countries have become increasingly active in their anticorruption efforts. To date, 40 countries have ratified the Organization for Economic Cooperation and Development’s (OECD) Anti-Bribery Convention, which entered into force in 1999. By signing onto the Convention, countries pledge to enact national legislation to criminalize the bribery of foreign government officials. In addition, in the span of just a few months, some of the world’s most powerful emerging nations passed laws criminalizing foreign bribery. Effective May 2011, China amended its criminal code to make paying bribes to foreign government officials a crime. China amended Article 164 of the Chinese Criminal Law, which previously prohibited commercial bribery, to add a prohibition against giving property to any foreign public official or official of an international public organization “for the purpose of seeking illegitimate commercial benefits.”The amended law does not contain any affirmative defense or exceptions, and applies to all Chinese citizens, wherever located, and to all companies organized under Chinese law.

4 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense Also in May 2011, the Russian President signed into law a measure that imposes criminal sanctions on companies and individuals who make corrupt payments to foreign public officials. The Russian law, like the UKBA, also criminalizes the receipt of corrupt payments. Under Russia’s law, wrongdoers can be fined up to 100 times the amount of the bribe (not to exceed 500 million rubles, or about $18 million), and can be jailed for up to 12 years. Also in 2011, Indian lawmakers introduced anticorruption legislation. However, India’s Parliament has thus far failed to pass the legislation. Finally, in 2012 the Brazilian Congress considered proposed legislation that would prohibit bribery of foreign public officials and substantially strengthen Brazil’s anticorruption efforts. However, the bill’s progress stalled in late 2012, in part due to a lobbying campaign against the bill by the business community.

IV. RECENT ENFORCEMENT ACTIONS AGAINST COMPANIES IN THE AEROSPACE AND DEFENSE INDUSTRY: TRENDS AND CASE STUDIES

Aerospace and defense companies are particularly vulnerable to FCPA exposure for a number of reasons. For instance, companies in the industry often serve government end-customers, and are therefore in constant contact with foreign government officials. Additionally, aerospace and defense companies regularly hire agents and foreign consultants to handle their on-the-ground transactions with host country officials.The industry is also heavily regulated, resulting in greater scrutiny by numerous government agencies. It is imperative that companies and individuals working in the aerospace and defense industry are aware of recent enforcement actions brought against industry players and understand how they fit into broader FCPA trends. In addition to the case studies discussed below, other industry companies have disclosed in public filings that they are currently under investigation for potential FCPA violations.

A. the Use of Third-Party Agents May Be the Single Riskiest Practice Recent enforcement actions and numerous FCPA advisory opinions underscore the risks associated with the use of third-party sales agents, a common practice in the aerospace and defense industry. More than half of the industry enforcement actions discussed in this article involve bribes paid by third-party agents. Similarly, at least three of the 58 FCPA advisory opinions issued by DOJ since DOJ instituted the opinion procedure release process in 1980 relate to the use of third parties by aerospace and defense companies. According to the 2012 FCPA Resource Guide, Congress anticipated the use of third-party agents in bribery schemes, and thereby defined the term “knowing” to prevent the “head-in-the- sand” problem. This means that companies and their employees cannot avoid liability by purposefully inserting agents between themselves and foreign officials and then arguing that they did not know that their agents paid bribes.

In Opinion Procedure Release 82-03, a US company seeking to do business with the Yugoslav government department charged with obtaining property and services for the Yugoslav military requested an advisory opinion seeking guidance on whether it could retain a subunit of the government department to perform duties on its behalf that would typically be handled by a commercial sales agent. A Yugoslav law obligating the requesting company to pay a certain percentage of the total contract price to the government department necessitated this unique third-party arrangement. The requesting company assured DOJ that there was no expectation that any individual government official would personally benefit from the proposed agency agreement. DOJ concluded that, based on the facts presented, it did not intend to bring an enforcement action against the requestor. Opinion Procedure Releases 93-02 involved a similar situation in which a US company sought to pay a commission to a government-owned business that had the exclusive right to buy and sell all defense equipment for a foreign country’s armed forces. DOJ again issued no action comfort.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 5 A US company engaged in the manufacture and sale of commercial and military aircraft equipment requested Opinion Procedure Release 96-02. The US company wished to renew an existing exclusive sales representative agreement with a foreign state-owned enterprise. The requestor emphasized that the sales representative was in no position to influence the procurement decisions of the requestor’s potential customers, and the representative itself warranted that it was in full compliance with the FCPA. Based on these and other factors, DOJ issued no action comfort.

In July 2011, Armor Holdings Inc., a manufacturer of vehicle armor systems, security products, and protective equipment used primarily by military and law enforcement personnel, agreed to pay $10.29 million to DOJ and $5.69 million in civil penalties and disgorgement to SEC to settle charges related to illegal payments made by a subsidiary of the company through a third-party sales agent. Between 2001 and 2006, the subsidiary made more than $200,000 in commission payments to the agent with knowledge that the agent was passing on a portion of the payments to a United Nations (UN) official to induce the official to provide confidential, non-public bid information to Armor Holdings. Under the FCPA, payments to public international organizations like the UN are treated in the same manner as payments to foreign government officials.As a result of the illegal scheme, Armor Holdings received $6 million in UN body armor contracts. Armor Holdings also admitted that it had falsely recorded its commission payments to the agent in its financial records in violation of the FCPA’s books and records provisions.

In addition to pursuing Armor Holdings, DOJ also prosecuted a senior company executive for his role in several illicit payment schemes involving the company’s assets. DOJ alleged that Richard Bistrong, Vice President for International Sales for a subsidiary of Armor Holdings, conspired to make and conceal $4.4 million in illegal payments to third-party agents in order to obtain contracts in the Netherlands, Nigeria, and Iraq. Bistrong pleaded guilty to the charges against him and agreed to assist DOJ as a critical informant in the “shot show” investigation, which would become the largest FCPA investigation in history. In 2012, Bistrong was sentenced to 18 months in prison followed by 36 months of probation. These actions demonstrate the critical importance of vetting and continuously monitoring the acts of third-party agents to ensure that they are complying with the FCPA and other applicable anticorruption laws.

B. us Authorities Are Aggressively Targeting Industry Executives Richard Bistrong was not the only industry executive targeted by US (and international) enforcement authorities in recent years. Indeed, last month, the CEO of a major Italian defense company was arrested on Italian anti-corruption charges. As the actions discussed below make clear, investigating and prosecuting individual corporate executives and punishing them

US Prison Sentences for Industry Executives

Shu Quan- Sheng, AMAC Richard Bistrong, Armor Holdings Nam Nguyen, Sentence (in Nexus months)

An Nguyen, Nexus

Leo Winston Smith, PCI

0 20 40 60

6 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense with lengthy prison sentences have become cornerstones of DOJ’s FCPA enforcement strategy. Notwithstanding the former Italian Prime Minister’s recent statement following the arrest of a defense company CEO for bribing foreign officials that “Bribery exists. It’s pointless to ignore reality. Paying a briber abroad is a matter of necessity,” companies should not view fines imposed for violating the FCPA as just another cost of doing business.

In 2007 and 2008, DOJ and SEC brought FCPA cases against more than 30 individuals. In 2009 alone, DOJ and SEC charged more than 40 individuals with FCPA violations. The number fell by more than half in 2010, increased slightly in 2011 to 24, and fell again in 2012 to less than ten individuals. The threat of substantial jail time has been realized in several recent high-profile cases. In 2008, Albert “Jack” Stanley of Kellogg, Brown & Root, Inc. was sentenced to seven years in jail for his role in overseeing and participating in a scheme to bribe Nigerian government officials to obtain lucrative government contracts. In 2011, a Florida judge sentenced Joel Esquenazi, the former President of a telecommunications company, to 15 years in prison for his role in bribing officials of a state-owned telecommunications company in Haiti.

Aerospace and defense industry executives are not immune to imprisonment. In November 2008, a physicist from Virginia pleaded guilty to a three-count criminal indictment alleging violations of the FCPA and the Arms Export Control Act. Shu Quan- Sheng, a US citizen and native of China, was the President, Secretary, and Treasurer of AMAC International, a high-tech company based in Virginia that performed research under government grants. According to the criminal information, Shu made illegal payments to three Chinese government officials on behalf of AMAC and a French company for whom he was acting as an agent in order to induce the officials to award a contract for the development of a liquid hydrogen tank system to the French company. Throughout 2006, Shu offered payments to the officials totaling approximately $189,000. In 2007, the China Academy of Launch Vehicle Technology awarded the $4 million contract for the hydrogen liquefier project to the French company that Shu represented. In April 2009, Shu was sentenced to 51 months in prison.

SEC has also targeted industry executives. In May 2009, SEC filed a settled enforcement action against Thomas Wurzel, the former President of ACL Technologies Inc., a former subsidiary of Maryland-based aerospace and defense company United Industrial Corporation (UIC). The SEC complaint alleged that Wurzel authorized illegal payments to a third-party agent in Egypt, knowing or consciously disregarding the high probability that the agent would pass on the payments to Egyptian Air Force officials in order to obtain business for the company. As a result of these illicit payments, UIC received a $5.3 million contract. Wurzel consented to the charges without admitting or denying the allegations and paid a $35,000 civil penalty. SEC also pursued UIC, alleging that UIC’s legal department approved the retention of the Egyptian agent without any documented due diligence and did not require the agent to sign a written agreement warranting that he would comply with the FCPA. More generally, SEC concluded that the company lacked meaningful controls to prevent or detect illicit payments to its agents. UIC agreed to pay approximately $340,000 in disgorgement and prejudgment interest to settle the charges.

C. the First Large-Scale Undercover Investigation in FCPA History Targeted Defense Industry Executives DOJ targeted 22 defense industry executives in the first major use of undercover law enforcement tactics in the history of the FCPA. The two-year investigation, known as the “shot show” investigation, involved the use of undercover agents and informants and culminated in a coordinated sting operation. On January 18, 2010, DOJ arrested 22 executives of military and police equipment firms for violating the FCPA — the largest-ever FCPA indictment. 21 of the arrests took place in Las Vegas during the annual SHOT Show Convention, a trade show for professionals in the hunting and law enforcement industries.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 7 FBI agents posing as representatives of the Gabonese Ministry of Defense approached the various defendants and offered them a $15 million contract to outfit Gabon’s national guard. According to the charging documents, the defendants agreed to pay a 20 percent commission to a sales agent who they believed represented the Minister of Defense of Gabon and would funnel the payments to the Minister. Richard Bistrong, the previously discussed Armor Holdings Vice President, assisted the FBI in its investigation. Dubbed as “Individual 1” in the shot show indictment, Bistrong agreed to work as an informant for the government and used his industry connections to act as the primary intermediary between the undercover government agents and the shot show defendants. Bistrong and the undercover agents met with each of the indicted executives under either audio or video surveillance to arrange the deals.

Despite the groundbreaking investigative tactics, the ultimate results of the shot show case were not as DOJ had hoped. Originally, three of the shot show defendants pleaded guilty to the charges against them. The remaining defendants were scheduled to be tried in four separate trials. A federal judge dealt the government its first major setback in July 2011 when the judge declared a mistrial after a jury could not reach a verdict following six days of deliberations and a three-week trial against the first group of defendants. The government received another blow in January 2012 when the second trial involving six of the defendants resulted in the acquittal of two of the defendants and a mistrial for the remaining four following a hung jury. Finally, on February 21, 2012, Judge Richard Leon granted DOJ’s motion to dismiss all the charges against the remaining sixteen defendants. The court would later grant DOJ’s motion to dismiss the indictments against the three defendants who had earlier pleaded guilty. DOJ cited the outcome of the first two trials, the impact of evidentiary and legal rulings on future trials, and the enormous resources required to try future cases, as the reasons for the dismissal.

D. fcPA Enforcement in the Aerospace and Defense Industry Could Have National Security Implications Unlike the UKBA, the FCPA’s anti-bribery provisions do not expressly exempt bribes paid for national security reasons. However, the Act provides some indications that the so- called “public authority defense” may be successfully used to mount a defense against FCPA charges. Although the FCPA’s anti-bribery provisions do not contain a national security exemption, the FCPA’s books and records provisions do. Under the Act, the duty to maintain accurate books and records does not apply to acts with regard to “matters concerning the national security of the United States,” provided that the acts are based on a “specific, written directive” of a head of a federal department or agency that has the Presidential authority to issue such a directive.

Notably, the UKBA provides an express exemption for corrupt payments that are “necessary” for the “proper exercise of any function” of an intelligence service or armed forces. This defense may be applicable to aerospace and defense companies, particularly those providing civilian assistance to foreign militaries operating in countries like Iraq and Afghanistan.

In 2003, DOJ charged James Giffen, the then-head of the Mercator Corporation, with violating the FCPA. DOJ indicted Giffen on 65 counts, alleging that he made approximately $80 million in corrupt payments to senior government officials of Kazakhstan related to oil transactions. In his defense, Giffen argued that he made the payments under the control and with the knowledge of several US government agencies, including the CIA. Giffen’s assertion of the public authority defense resulted in years of sealed pre-trial proceedings in accordance with the Classified Information Procedures Act (CIPA).

Congress enacted CIPA in 1980 to prevent the use of “graymail,” meaning a threat to release classified information in open court in order to pressure the government not to prosecute. CIPA’s goal is to balance a criminal defendant’s right to present a

8 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense robust defense with the government’s duty to protect classified information. Under CIPA, a trial judge can conduct in camera reviews of classified information and rule on its admissibility before it is introduced in court. Giffen battled with the government for years about whether he could request the production of classified information from the CIA and other government agencies that he alleged would support his public authority defense. Although many of the details of the Giffen proceedings remain under seal, it is now evident that Giffen’s assertion of the public authority defense was largely successful. In 2010, following seven years of litigation, Giffen pleaded guilty to one count of a misdemeanor tax violation and received no punishment. In fact, the trial judge thanked him for being an important source of information for the United States during the Cold War.

E. the United States and the United Kingdom Worked Together to Obtain the Largest Criminal Penalty Ever Imposed on a Defense Company in the FCPA Arena The multi-jurisdictional investigation and prosecution of BAES, Europe’s largest defense contractor, led to one of the largest fines ever imposed against a company related to anticorruption violations. In February 2010, BAES agreed to pay $400 million to DOJ related to charges that the company knowingly made false statements to various US government agencies regarding payments made by third-party agents to secure government contacts in multiple countries. BAES admitted that it regularly retained third- party marketing advisors to assist with sales to foreign government customers without conducting adequate due diligence or implementing the proper controls to monitor their activities, and that it later took steps to conceal these payments from the US government.

The United Kingdom’s six-year investigation into BAES also culminated in February 2010. BAES agreed to pay £30 million in response to allegations that it engaged in corruption in connection with contracts in several countries, including Tanzania, the Czech Republic, and South Africa. Joint investigations by US law enforcement and the Serious Fraud Office (SFO), which is responsible for enforcing the UKBA, will no doubt increase as UK authorities begin to investigate and bring cases under the UKBA. It is important to be aware of this trend because increased multi-jurisdictional cooperation could impact the calculus of companies that are considering whether to disclose FCPA violations to US law enforcement. The consideration of whether to voluntarily disclose is already a difficult one; but, companies will now have to consider whether disclosing wrongful conduct to the US authorities may also lead to a related investigation by the United Kingdom or another jurisdiction.

F. successor Liability Means That Comprehensive Due Diligence Is Critical Under the theory of successor liability, companies can be held liable for bribery activities committed by their joint venture and merger partners, even if the violations occurred before the joint venture or merger took place. It is therefore imperative that companies contemplating a merger or joint venture conduct thorough due diligence prior to entering into the relationship and post-acquisition auditing and monitoring as appropriate. In the Resource Guide, DOJ and SEC indicate that they have declined to take action against companies that voluntarily disclosed and remediated unlawful conduct in the merger and acquisition context in a significant number of instances. DOJ and SEC generally only take action against successor companies in cases of egregious and sustained violations or where the successor company directly participated in the violations or failed to stop them post-acquisition. The Resource Guide also makes clear that successor liability cannot create liability where none existed before. This means that if a US company merges with a foreign company that was not previously subject to the FCPA, the merger could not create retroactive FCPA liability for the US company.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 9 In the proposed merger between Titan Corporation and Lockheed Martin, FCPA violations uncovered during pre-acquisition due diligence derailed the deal entirely. In 2003, Titan and Lockheed Martin announced an agreement to complete a $1.83 billion merger by early 2004. However, Lockheed Martin discovered in pre-closing due diligence that Titan had made improper payments to consultants in Benin, East Asia, and Saudi Arabia. In Benin, for example, Titan Wireless paid more than $2 million to the reelection campaign of Benin’s then-President in exchange for receiving higher fees for its telecommunications contract. Titan recorded the payments in its books as “customs exonerations.” The risks were so great for Lockheed Martin that it initially dropped its offer price by $200 million and later abandoned the deal. In 2005, Titan settled the criminal and civil charges and agreed to pay a fine of $28.5 million.

In another industry action, FCPA violations discovered during a post-acquisition audit led to three individual prosecutions. In 2003, a group of private investors acquired Pacific Consolidated Industries (PCI), a California-based company that manufactures Air Separation Units and other military equipment. The buyers discovered several suspicious payments during a post-acquisition audit and referred the matter to DOJ for investigation. DOJ found that PCI executives had paid at least $300,000 in bribes to a UK Ministry of Defense official to obtain defense contracts. In May 2008, Martin Eric Self, the former President and co-owner of PCI, pleaded guilty to violating the FCPA for his role in the illegal scheme. The following year, Leo Winston Smith, PCI’s former Director of Sales and Marketing, entered a guilty plea based on the same activity. Smith was sentenced to six months in prison and six months of home confinement, while Self received two years’ probation. Across the Atlantic, the United Kingdom prosecuted Michael Hale, the UK Ministry of Defense official who admitted receiving nine bribe payments from PCI, and sentenced him to two years in prison.

G. Operating in Certain Countries Presents Heightened Risks Many aerospace and defense companies have expanded their global operations to reap the benefits of doing business in developing economies — most notably China, but also places such as Brazil, India, and Indonesia. Operating in China and other developing nations presents unique anticorruption compliance risks. Our review of recent enforcement actions against aerospace and defense industry members suggests that, in addition to China, FCPA actions have been based on alleged bribery in countries throughout Africa, Asia, the Middle East, Latin America, and Western Europe. In some developing nations, corruption is widespread and the legal infrastructure needed to combat corruption is lacking. In addition, the fact that many large companies in China and other developing nations are state-owned or state-controlled adds an additional layer of complexity. The need for industry companies to obtain government permits, licenses, or other approvals through processes that are often rife with corruption can also exacerbate the FCPA risks associated with doing business in developing economies.

Location of Illegal Conduct in Select US Aerospace & Defense Industry Enforcement Actions

Europe Africa Middle East Asia Latin America

10 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense An FCPA enforcement action against a public company that develops and sells computerized measurement devices and software for use in the aerospace industry demonstrates the particular risks associated with doing business in China. In June 2008, Faro Technologies Inc. agreed to pay $1.1 million in criminal penalties and $1.85 million in disgorgement for bribe payments made in China. Beginning in 2003, Faro engaged in direct sales in China through its Chinese subsidiary, Faro China. Between 2004 and 2005, Faro employees paid “referral fees” to employees of state-owned and controlled entities in order to secure $4.9 million worth of contracts. Internal company emails revealed that in 2005, Faro officials engaged in a scheme to route corrupt payments through a shell company via a third party to attempt to conceal the illicit payments. Faro also acknowledged violating the books and records provisions by falsely recording at least $238,000 in corrupt payments. In addition to the substantial fines, DOJ also required Faro to engage an independent corporate monitor for two years.

H. defense Offset Transactions Can Lead to FCPA Liability Almost all defense trading partners of the United States impose some sort of offset requirement. Generally stated, an offset is a trade of an investment obligation that is imposed on a defense contractor as a condition for entering into the main defense procurement agreement. The Commerce Department’s Bureau of Industry and Security reports that between 1993 and 2010, US companies entered into 763 offset agreements with 47 countries valued at $78.08 billion. In 1995, DOJ issued an FCPA Advisory Opinion in response to a joint request by two companies (Companies A and B) for guidance on potential FCPA liability arising from deals related to offset obligations.

Company A acquired offset obligations through contracts with a foreign government. In the country, offset obligations were handled by an Offset Office that was part of the Ministry of Defense. Company B, owned by a US citizen, entered into an oral agreement with the Offset Office to receive offset credits in exchange for establishing a new company (Newco) in the country. The majority of the investors in Newco were to be foreign government officials, though no Ministry of Defense officials would be included among the investors. Company B was to receive offset credits from Newco by meeting certain program milestones unrelated to Newco’s profitability or success. Under a management services agreement, Company A would provide management services to Newco and would be paid a fee based on Newco’s revenues and profit, and Company B would provide financing to Newco. Company A would then compensate Company B out of its management fee.

In the opinion request, Company B certified that it had not paid any funds received from Company A for the sale of offset credits to any investors in Newco or to any government officials. Additionally, the shareholders of Newco, who included government officials, made several certifications to DOJ, including that they would be passive investors only and that they would recuse themselves from any government decisions related to Newco. Based on these representations, DOJ assured the requestors that it would not bring an enforcement action against Company A’s purchase of offset credits from Company B or the proposed management services contract between Company A and Newco.

I. dealings with Commercial Customers Must Also be Scrutinized: The Case of State-Owned Airlines Aerospace and defense companies cannot afford to focus their FCPA compliance efforts only on government customers. According to media reports, in June 2011 the FBI briefed various US agencies on a corruption inquiry into sales and maintenance contracts between aerospace companies and state-owned airlines, whose employees qualify as foreign officials under the FCPA. To offset the recent decline in the domestic market, aerospace and defense companies have and will continue to pursue commercial opportunities in Asia, the Middle East, and Europe. Before doing so, companies must determine whether the airlines they are dealing with are state-owned or controlled entities.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 11 In 2008, SEC settled an enforcement action against Con-way, Inc., a California-based freight forwarder. Although not an aerospace or defense company, the case against Con- way demonstrates the potential pitfalls of transacting with commercial airlines. SEC alleged that between 2000 and 2003, Con-way made “hundreds of small payments” to employees of fourteen state-owned airlines throughout Europe, Asia, and the Middle East in order to induce airline officials to reserve space for and under-weigh its shipments to save on shipping costs. Under the terms of the settlement, Con-way agreed to pay $300,000 in civil penalties.

In 2012, the NORDAM Group, Inc., an aircraft maintenance, repair, and overhaul (MRO) provider based in Oklahoma, entered into a non-prosecution agreement with DOJ. DOJ alleged that NORDAM made $1.5 million in corrupt payments to employees of state-owned airlines in China in order to gain MRO contracts from the airlines. In an attempt to hide the bribe payments, employees of a NORDAM Singaporean affiliate entered into sales representation agreements with fictitious companies and then used the money paid by NORDAM under the supposed agreements to pay bribes. To resolve the charges, NORDAM agreed to pay a $2 million criminal fine.

J. emerging Risks for Satellite Communications Companies The telecommunications industry is a related field that US law enforcement has aggressively targeted in recent years. Like the aerospace and defense industry, telecommunication companies are often forced to interact with foreign governments to obtain the necessary licenses and permits to do business and typically sell their products and services to state-owned customers. One clear area of overlap between the two industries relates to satellite companies. Just last year, the UK SFO announced that it was investigating a company owned by a European defense contractor, for alleged bribe payments to win a contract with a Middle Eastern country to upgrade its satellite and intranet systems. The Resource Guide utilizes enforcement actions in the telecommunications industry to illustrate the government’s expansive interpretation of whom is a “foreign official,” as well as to show how financing extravagant travel and entertainment expenses for clients can lead to FCPA liability. Given the continued growth and reliance upon satellite communications systems in the global economy, the potential anti-corruption risks should be carefully assessed and appropriate compliance programs and internal controls implemented.

K. statutes Often Linked with FCPA Charges DOJ has other tools in its prosecution arsenal that it uses in conjunction with the FCPA. The overlapping enforcement of anticorruption and export controls is particularly relevant to aerospace and defense companies. The Arms Export Control Act (AECA) and its implementing regulations, the International Traffic in Arms Regulations (ITAR), regulate the export of defense articles and services. The settlement that BAES entered into in early 2010 was based in part on false statements by BAES in its arms export licenses in violation of the AECA and the ITAR. Likewise, Shu Quan-Sheng, the President, Secretary, and Treasurer of AMAC International, was sentenced to 51 months in prison after pleading guilty to both FCPA (discussed above) and AECA violations. DOJ alleged that Shu willfully exported controlled military technical data to China.

In addition, DOJ has sporadically used the Travel Act, a 50-year-old statute passed to combat organized crime and racketeering, in conjunction with the FCPA to reach allegations of commercial bribery. In relevant part, the Travel Act makes it a crime to travel between states or international boundaries or use interstate facilities with the intent to carry on an unlawful activity, including bribery in violation of the laws of the state in which it is committed. Essentially, the Travel Act federalizes state bribery statutes and allows prosecutors to use the FCPA to go after bribery that is entirely within the private sector.

12 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense In a string of recent FCPA actions, the government alleged violations of the Travel Act in conjunction with the FCPA based on violations of the state commercial bribery laws of Alabama, New Jersey, and California.

DOJ’s prosecution of Nexus Technologies Inc., a Pennsylvania-based export company, demonstrates the interaction between the Travel Act and the FCPA. From 1999 to 2008, Nexus and several company executives engaged in a conspiracy to pay bribes to government officials from the Vietnamese Ministries of Transport, Industry, and Public Safety. DOJ initially indicted the company and individual defendants in September 2008 on one count of conspiracy to violate the FCPA and four counts of violating the FCPA. In October 2009, DOJ filed a superseding indictment to add numerous charges, including conspiracy to violate the Travel Act and nine substantive counts of violating the Travel Act. The company and the four executives eventually pleaded guilty to the charges in the superseding indictment, and two of the executives were sentenced to significant prison time. DOJ’s basis for Travel Act liability was that the defendants sent a series of wire transfers from Philadelphia to Asia in violation of Pennsylvania’s state commercial bribery statute. Similarly aggressive uses of the Travel Act in the future could result in a substantial expansion of the activities targeted by authorities in FCPA cases.

DOJ has also charged industry members under 18 USC § 371 for conspiracy to commit an offense against the United States, instead of charging for substantive violations of the FCPA. In a 2012 criminal information against BizJet International, an MRO provider, DOJ alleged that BizJet conspired with several company executives and others to use instrumentalities of interstate commerce in furtherance of an offer, payment, promise to pay, and authorization to give something of value to a foreign official for the purpose of securing an improper advantage. The alleged purpose of the conspiracy was to obtain and retain MRO service contracts with foreign government customers in Mexico and Panama. BizJet agreed to pay $11.8 million under a deferred prosecution agreement to resolve the charges.

The FCPA Resource Guide suggests that law enforcement may charge defendants with conspiracy to violate the FCPA if they cannot independently charge them with substantive FCPA violations. In conspiracy cases, the United States asserts that it has jurisdiction over all the conspirators, including foreign persons or companies, if at least one conspirator is an issuer, a domestic concern, or commits an overt act within the United States.

The US government has also relied on money laundering, asset forfeiture, mail and wire fraud, and tax statutes in connection with anticorruption enforcement actions. The potential criminal penalties associated with money laundering statutes provide powerful incentives for individuals to cooperate with the government.

L. derivative Civil Litigation Related to the FCPA Increasingly, civil litigation has resulted attendant to, or in the wake of, government investigations of alleged FCPA violations. Although the FCPA does not create a private right of action, shareholders have filed a substantial number of shareholder derivative suits and securities claims in relation to anticorruptiton charges, including against companies in the aerospace and defense industry. Because there is no private right of action under the FCPA, shareholders sue under other causes of action, including securities laws, common law fraud, RICO, or breach of fiduciary duties.

In 2010, a federal appeals court affirmed the dismissal of a 2007 shareholder derivative suit against BAES related to bribery allegations. Shareholders of the City of Harper Woods Michigan Employee’s Retirement System, which owned 3,500 of BAES’s American Depository Receipts, alleged that directors and executives of BAES breached their fiduciary duties and wasted corporate assets based on BAES’s alleged bribe payment to a Saudi prince to secure contracts for the sale of jet fighters and trainer aircraft.The US courts, applying English law, held that shareholders of the pension fund lacked standing to sue BAES.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 13 Other derivative suits against industry members have been more successful. In addition to the criminal and administrative proceedings initiated against Faro that were discussed above, Faro faced a pair of shareholder lawsuits based on its alleged bribery conduct. In the first case, Faro’s shareholders filed a class action lawsuit alleging that Faro had failed to disclose information about its finances through alleged FCPA violations, and that it had benefited from the inflated stock prices. Following an unsuccessful motion to dismiss, Faro agreed to settle with the shareholders for approximately $7 million. In April 2009, Faro settled a second shareholder derivative suit. The shareholders alleged that Faro’s officers and directors breached their fiduciary duties by failing to adequately oversee the company’s internal controls. Faro agreed to pay $400,000 in attorneys’ fees and implement certain corporate governance procedures.

Similarly, in 2005, Titan settled a class action suit for more than $61 million. The complaint alleged that Titan and certain of its officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5, based on material misrepresentations made regarding Titan’s financial results during its merger negotiations with Lockheed Martin.

V. BEST PRACTICES FOR THE INDUSTRY

Companies in the industry must be aware of these FCPA enforcement trends and take effective steps to minimize their exposure. Chapter 8 of the US Sentencing Guidelines, which governs the sentencing of organizations, takes into account whether an organization has an effective compliance and ethics program. According to the Resource Guide, the adequacy of a company’s compliance program may influence how FCPA charges are resolved (through a deferred prosecution agreement or non-prosecution agreement), the length of the agreement, the penalty amount, and the need for a monitor. In order to assess their risks, companies should conduct periodic FCPA risk assessments and program audits, taking into account the countries where they do business, their internal controls weaknesses, the degree of government oversight and their interactions with government officials, their relationships with business partners and third-party representatives, and any other potential red flags. DOJ and SEC have said that they would expect a financial services company to implement different internal controls than a manufacturer because their risk profiles differ. As part of risk assessments, companies may consider transaction testing in high risk markets. Companies should carefully consider the results of risk assessments and audits, and revise FCPA policies and procedures — as well as related policies on gifts, travel, entertainment, political contributions, and facilitation payments — as necessary to further minimize exposure.

In addition, companies should provide regular FCPA training to employees operating in countries with significant corruption, as well as employees in sales, marketing, finance, internal audit, and other relevant functions. Companies who regularly engage agents or distributors may also consider providing FCPA training to their agents. Finally, as part of a “red flag” review, companies should consider irregularities in their financial accounting systems, including round dollar payments, duplicate payment amounts to the same vendor, payments to third parties with vague descriptions of the services provided, invoices that lack supporting documentation, and requests for payment in cash or to offshore bank accounts.

As recent industry enforcement actions demonstrate, the use of third-party representatives, including local sales consultants, customs brokers, and subcontractors, can create enormous FCPA compliance risks. To mitigate such risks, companies should conduct reasonable due diligence on all potential third-party representatives before retaining them, require representatives to sign written agreements that include anticorruption provisions, require third parties to periodically certify their compliance with applicable anticorruption laws, and continuously monitor their representatives’ activities. Similarly, companies should fully vet proposed joint venture and merger partners early on in the life of the transaction. Companies should even more closely scrutinize a proposed joint venture with a state-owned entity or

14 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense in a high-risk country, and structure the transaction in a way that allows the company an out should its joint venture partner subsequently engage in questionable conduct. Lastly, the buy- in and support of senior management and the board of directors is key. Senior management must show strong and visible support for a company’s code of conduct and anticorruption policies and procedures in order for its anticorruption program to be effective.

VI. FCPA REFORM INITIATIVES

In the past few years, numerous influential groups, from the American Bar Association (ABA) to the US Chamber of Commerce (Chamber) to the US Congress, have considered and advocated for FCPA reforms.

In an October 2010 report entitled “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act,” the Chamber called on Congress to make several pro- business amendments to the FCPA. The Chamber asserted that the FCPA has made American businesses less competitive in relation to their foreign counterparts, citing a 1999 Congressional Research Service estimate that the FCPA’s anti-bribery provisions cost the United States up to $1 billion per year in lost exports. The Chamber recommended the following reforms to the Act: (1) clarify the definition of “foreign official;” (2) limit a company’s liability for acts of its foreign subsidiaries and the prior acts of companies it acquires; (3) allow for a compliance defense similar to the UKBA’s adequate procedures defense; and (4) require a showing of willfulness to impose corporate criminal liability.

On October 29, 2011, the co-chair of the ABA’s Global Anti-Corruption Task Force presented a resolution to members of the ABA’s Criminal Justice Section. The resolution called for Congress to clarify certain of the Act’s ambiguous terms, including the term “instrumentality” in the definition of foreign government official. Like the Chamber’s report, the resolution also called on Congress to limit successor liability under the FCPA and to provide for some sort of defense for companies with robust compliance programs.

In September 2011, George Soros’s Open Society Foundations published a strongly worded report in favor of the FCPA, asserting that the Chamber’s proposed reforms “would substantially undermine the possibility for successful enforcement of America’s anti-bribery commitments” and “set back decades of progress in the global struggle against corruption.” In addition, the report characterized the Chamber’s assertion of prosecutorial overreaching in FCPA enforcement as a myth, noting that although the number of FCPA enforcement actions has increased in recent years, the average fines obtained have remained stable and modest.

In the end, Congress must bring on any reforms. On June 14, 2011, the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security held a hearing to examine proposals to reform the FCPA. The hearing focused on two primary reform proposals: (1) adding a compliance defense; and (2) clarifying the definition of foreign official.The Subcommittee did not come to any resolutions at the end of the hearing. In addition, the Senate Committee on the Judiciary Subcommittee on Crime and Drugs held a hearing on November 30, 2010 entitled “Examining Enforcement of the Foreign Corrupt Practices Act.” Thus far, no legislation has been put forth to accomplish any of these FCPA reforms (although some bills have been proposed that, for example, would establish a private right of action).

In response to calls for reform and clarity, DOJ and SEC issued the FCPA Resource Guide in November 2012. Although FCPA practitioners generally agree that the Guide did not break any new ground, most also agree that it provides useful guidance for the business community, compliance officers, and practitioners. The Resource Guide addresses a variety of topics, including the definition of a foreign official, improper gifts, travel, and entertainment expenses, and the hallmarks of an effective compliance program. The Resource Guide is available online at http://www.justice.gov/criminal/fraud/fcpa/guidance/.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 15 VII. LATHAM & WATKINS’ INDUSTRY EXPERIENCE AND EXPERTISE

Latham & Watkins has been advising major clients in the aerospace and defense industry for decades and brings a deep knowledge and understanding of the business and legal challenges faced by clients in the industry. We represent private companies and government entities on a wide range of bet-the-company regulatory, transactional, and litigation matters. Through our unique industry group platform, we are able to effectively deploy the vast and diverse resources resident in our 31 offices across the globe to address any legal needs our clients face.

Latham & Watkins offers clients in the aerospace and defense industry a full range of legal services covering all aspects of a company’s needs, from structuring IPOs to helping launch a business; to representing companies during mergers, acquisitions, and financing deals to help grow a business; to counseling clients on a vast array of regulatory issues to help preserve a strong business. Latham & Watkins attorneys have counseled hundreds of clients on compliance, enforcement, and disclosure issues arising under the FCPA and have conducted numerous internal investigations for both US and foreign companies into potential violations of the FCPA. For more information on the Aerospace, Defense & Government Services Industry Group, please e-mail [email protected].

16 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense VIII. Chart of Industry Enforcement Actions

Case Country Allegations and Charges Outcome

US v. Titan (S.D. Cal. 2005) Benin DOJ and SEC charged Titan with violating Titan pleaded guilty and agreed to the FCPA’s anti-bribery and books and pay $13 million in criminal penalties SEC v. Titan Corporation records provisions. and undergo compliance monitoring. (D.D.C. 2005) These charges stemmed from allegations Titan settled with SEC and disgorged Date: 2005 that Titan paid over $2 million to the $15 million in profits and pre- reelection campaign of Benin’s President judgment interest. SEC also imposed Agency: DOJ and SEC in exchange for telecommunications a $13 million penalty that was contracts. satisfied by the criminal fine.

US v. Martin Eric Self United Kingdom DOJ charged Self, the former President Self pleaded guilty and received two (C.D. Cal. 2008) and co-owner of PCI, and Smith, PCI’s years probation. former Director of Sales and Marketing, US v. Leo Winston Smith with violating the FCPA. Smith pleaded guilty and was (C.D. Cal. 2007) sentenced to six months in prison The charges stemmed from allegations and six months of home confinement. Date: 2007, 2008 that the executives made bribe payments of at least $300,000 to a UK Ministry Agency: DOJ of Defense official to obtain defense contracts.

In re Faro Technologies, Inc. China DOJ and SEC alleged that between 2004 Faro entered into a non-prosecution (Non-Prosecution Agreement, and 2005, Faro employees paid “referral agreement and agreed to pay $1.1 2008) fees” to employees of state-owned or million in criminal penalties. controlled entities in order to secure In the Matter of Faro $4.9 million worth of contracts. Faro also Faro also settled with SEC, paying Technologies, Inc. violated the books and records provisions $1.85 million in disgorgement and (SEC Administrative by falsely recording at least $238,000 in agreeing to engage an independent Proceeding, 2008) corrupt payments. corporate monitor for two years.

Date: 2008

Agency: DOJ and SEC

US v. Shu Quan-Sheng China DOJ charged Shu with violating the Arms Shu pleaded guilty on all charges (E.D. Va. 2008) Export Control Act and the FCPA’s anti- and was sentenced to 51 months in Date: 2008 bribery provisions. prison.

Agency: DOJ DOJ alleged that Shu, a French company’s agent in China, bribed Chinese officials in an effort to win a contract for the French company to develop a liquid hydrogen tank system.

US v. Nguyen, et al. Vietnam DOJ charged Nexus Technologies All four executives pleaded guilty. (E.D. Pa. 2008) and four employees with violating and Nam Nguyen, the President and Date: 2008 conspiracy to violate the FCPA’s anti- owner, was sentenced to 16 bribery provisions and the Travel Act. months in prison, while his sibling, Agency: DOJ The charges stemmed from allegations An Nguyen, was sentenced to that the company and several executives nine months. A third sibling, Kim paid bribes to government officials from Nguyen, was sentenced to two the Vietnamese Ministries of Transport, years’ probation and ordered to pay Industry, and Public Safety from 1999 a $20,000 fine. Joseph Lukas was to 2008. DOJ based the Travel Act sentenced to two years probation and charges on a series of wire transfers agreed to pay a $1,000 fine. from Philadelphia to Asia in violation of Pennsylvania’s state commercial bribery The company also pleaded guilty and statute. agreed to dissolve.

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 17 Case Country Allegations and Charges Outcome

US v. Alvirez et. al., Gabon DOJ charged the 22 shot-show Alvirez and two other defendants (D.D.C. 2009) defendants with conspiracy to violate entered into plea agreements the FCPA’s anti-bribery provisions and with DOJ in 2011. The remaining Date: 2009 substantive counts of violating the anti- defendants were scheduled to be bribery provisions. tried. The judge declared a mistrial Agency: DOJ The charges stemmed from allegations after the jury could not reach a that industry executives attempted to verdict in the trial against the first bribe FBI agents posing as agents of the group of defendants. Following the Minister of Defense of Gabon. second trial of six defendants, the judge declared a mistrial as to four defendants, while the remaining two defendants were acquitted.

In 2012, Judge Richard Leon granted DOJ’s motions to dismiss all charges against the defendants, including those who had previously pleaded guilty.

In re United Industrial Corp. Egypt SEC charged UIC with violating the UIC settled and agreed to pay (2009) anti-bribery and books and records disgorgement and interest of provisions of the FCPA. SEC charged approximately $340,000. SEC v. Wurzel (D.D.C. 2009) Wurzel with aiding and abetting violations Date: 2009 of the FCPA’s anti-bribery, books and Wurzel also settled, consenting to records, and internal controls provisions a final judgment enjoining him from Agency: SEC and violating the books and records future FCPA violations and ordering provisions. him to pay $35,000.

SEC alleged that Wurzel, the president of one of UIC’s subsidiaries, authorized payments to an agent, and that he knew those payments would be funneled as bribes to the Egyptian Air Force. SEC also alleged that UIC did not have adequate internal controls in place to prevent illegal payments.

US v. BAE Systems PLC Czech Republic, DOJ charged BAES with conspiring to BAES pleaded guilty to knowingly (D.D.C. 2010) Hungary, defraud the United States by making false and willfully making false statements Date: 2010 Saudi Arabia statements about its FCPA compliance to the US government and agreed to and with violating the Arms Export Control pay a $400 million fine and retain a Agency: DOJ Act. compliance monitor for three years.

DOJ alleged that BAES knowingly BAES also reached an agreement made false statements to various with the SFO and paid a £30 million US government agencies regarding fine. payments made by third-party agents to secure government contracts for BAES. BAES admitted that it regularly retained marketing advisors without adequate due diligence or controls over its advisors’ activities, and later took steps to conceal payments to these marketing advisors from the government.

18 Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense Case Country Allegations and Charges Outcome

SEC v. Armor Holdings Inc. Iraq, DOJ and SEC charged the company Armor Holdings entered into a (D.D.C. 2011) Netherlands, with violating the FCPA’s anti-bribery and deferred prosecution agreement Nigeria books and records provisions. with DOJ and agreed to pay $10.29 In re Armor Holdings (2011) million in criminal penalties. DOJ charged Bistrong, Vice President US v. Bistrong (D.D.C. 2010) for International Sales, with conspiracy to Armor Holdings also agreed to pay make corrupt payments to foreign officials, $5.69 million in civil penalties and Date: 2010, 2011 falsify books and records, and export disgorgement to SEC. controlled goods without authorization. Agency: DOJ and SEC Bistrong pleaded guilty and was DOJ and SEC alleged that Armor sentenced to an 18-month prison Holdings Inc. made corrupt payments term and 36 months of probation. to U.N. officials in order to obtain U.N. armor contracts. DOJ further alleged that Bistrong conspired to make and conceal payments to third-party agents in order to help the company obtain contracts in Iraq, the Netherlands, and Nigeria.

US v. BizJet International Sales Mexico, DOJ alleged that between 2004 and 2010, BizJet entered into a deferred and Support, Inc. Panama BizJet authorized the payment of bribes prosecution agreement with DOJ (N.D. Okla. 2012) to Mexican and Panamanian government and agreed to pay $11.8 million in officials to secure aircraft maintenance, criminal fines and undertake remedial Date: 2012 repair, and overhaul service contracts measures. from government agencies. Agency: DOJ BizJet’s indirect parent company, Lufthansa Technik AG of Germany, entered into a non-prosecution agreement with DOJ that obliged it to implement robust internal controls.

US v. NORDAM Group, Inc. China DOJ alleged that NORDAM made $1.5 NORDAM entered into a non- (N.D. Okla. 2012) million in corrupt payments to employees prosecution agreement with DOJ and of Chinese state-owned airlines in order to agreed to pay a $2 million criminal Date: 2012 secure maintenance, repair, and overhaul fine. contracts. Agency: DOJ

Latham & Watkins | Understanding FCPA Enforcement Trends in Aerospace & Defense 19 LW.com

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