I recently co-authored an article with Professor Dru Stevenson (South Texas College of Law) entitled “FCPA Sanctions: Too Big to Debar?”, which will appear in the Fordham Law Review’s November 2011 volume 80. This article poses a “provocative” question: Does our nation’s dependency on a handful of private contractors insulate them from the risk of debarment (i.e., being blacklisted from receiving lucrative government contracts) despite flagrant violations of U.S. laws prohibiting foreign corruption? Anecdotal evidence suggests so.
As I recently summarized on the FCPA Blog (here), last year's FCPA-related prosecution of BAE Systems PLC illustrates this “too big to debar” problem. In March 2010 BAE paid a $400 million criminal fine for lying to the U.S. about bribing foreign officials across the globe in exchange for lucrative government contracts overseas. Rather than sever their partnership with the criminal offender, in the year that followed, U.S. agency heads awarded BAE billions of tax dollars in new government contracts. Federal officials have avoided sanctioning certain contractors with debarment because these companies are perceived as being "too big to debar"--that is, federal prosecutors and debarment officials prioritize their desire to avoid the potential “collateral consequences” of a government contractor's debarment (e.g., the resulting job loss and shareholder harm) over the need to deter these contractors from engaging in foreign corruption.
Fast-forward to May 16, 2011. Just months after Professor Stevenson and I released our article discussing the too-big-to-debar issue, BAE once again made headlines for allegedly violating the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR). As a result, earlier this month BAE agreed to pay a $79 million civil settlement to the State Department for its continued disregard of U.S. export laws. Having uncovered a staggering 2,591 violations of AECA and ITAR just one year after BAE's guilty plea to foreign corruption, the State Department “determined to impose statutory debarment” as a sanction (see page 20 here). And in yet another example of the too-big-to-debar problem, the State Department simultaneously rescinded BAE’s debarment so that it may continue doing business with federal agencies.
Check out the FCPA Professor's in-depth coverage of this story in a recent post entitled "The Final Act in the BAE Circus?" (here). The FCPA Blog summarized this peculiar, albeit unsurprising, development as follows:
In the proposed charging letter, the State Department explained why it imposed its biggest fine ever:
"The Department considered other aggravating factors, including the frequency and type of Respondent’s violations; the fact that certain violations were authorized by its former most senior management of Respondent; that violations were systemic, wide-spread, and sustained for more than ten (10) years; only three (3) of the violations by the Respondent were disclosed at the request of the Department, not voluntarily, after Respondent’s criminal plea with the U.S. Department of Justice; and all other remaining violations were never disclosed, but rather identified by the Department during its investigation."
Although the State Department declined to impose ongoing debarment, it said it is imposing "a policy of denial" on three BAE subsidiaries -- BAE Systems CS&S International, Red Diamond Trading Ltd., and Poseidon Trading Investments Ltd. That means "there will be an initial presumption of denial for all [export] applications involving these entities, unless upon case-by-case review the [State] Department determines that it is in the foreign policy or national security interests of the United States to provide an approval."
It's not clear what impact the policy of denial on the three subsidiaries will have on BAE's operations, if any.
Read the FCPA Blog’s full coverage of the story here. Although BAE’s debarment was taken off the table due to the perceived risk to national security and foreign policy that might result from BAE’s inability to continue supplying the U.S. with weapons, the government’s presumption of denial and enhanced oversight of BAE provide some insurance that the corrupt contractor will comply with U.S. laws moving forward. Whereas the billions of dollars in federal funding flowing to BAE will allow it to merely “write off” its most recent fine, the annoyance that its subsidiaries will experience due to enhanced oversight and case-by-case review will more effectively deter BAE—as well as other private contractors—from continuing to engage in foreign corruption.