Armor Holdings: A Blank Price Sheet and Commissions That Disappeared

In the Armor Holdings FCPA case, the company agreed to pay $5,690,744 to resolve Securities and Exchange Commission allegations of bribery in United Nations body-armor procurement and hidden sales commissions. The alleged scheme left records a sales or finance insider would recognize: a signed pricing sheet requested with the price left blank, confidential bidding information, and commissions routed through accounts that never called them commissions.

Armor Holdings made military, law-enforcement and personnel-safety equipment through its operating subsidiaries. The Jacksonville, Florida company owned Armor Holdings Products, which in turn owned the U.K. business Armor Products International. According to the commission’s complaint, filed under the Foreign Corrupt Practices Act, the U.K. subsidiary sought contracts to supply body armor for U.N. peacekeeping missions, while the U.S. subsidiary used a separate accounting practice to conceal commissions on foreign-government sales.

U.N. Body-Armor Contracts and the Blank Pricing Sheet

The Securities and Exchange Commission alleged that Armor agents arranged a sham consulting agreement to help the U.K. subsidiary win U.N. business. The agreement promised an intermediary a success fee based on the value of any contract obtained. Between 2001 and 2006, the intermediary submitted invoices for inflated or illegitimate consulting commissions, reaching as high as twenty percent of the amount to be earned on the original contract.

The intermediary’s alleged contribution to the bid was inside information. In September 2001, it instructed the subsidiary to provide a signed but otherwise blank pricing sheet. The intermediary would fill in the price after learning from a U.N. procurement official what competitors had bid. That is procurement bribery aimed at the bidding decision itself: one bidder allegedly got access to prices its competitors had submitted in confidence.

Later that month, the intermediary obtained a confidential internal U.N. memorandum recommending the contract award to Armor’s subsidiary. The complaint says it immediately emailed the document to an Armor agent with this instruction:

We find the instruction to destroy the recommendation rather revealing. This was the alleged consulting arrangement: access to confidential procurement information, billed through invoices for purported services. For an employee who knew the tender, the consultant’s communications could explain more than its invoice ever would.

In October 2001, the U.N. awarded the subsidiary a multi-year body-armor contract. The commission alleged that the intermediary’s access inside the procurement system helped secure it. When an Armor Holdings Products vice president asked about winning a renewal in February 2003, the intermediary replied that the same rules would apply.

The subsidiary received another three-year contract in August 2003. It then received a one-year supply extension in 2006, as contemplated by that contract, without further help from the intermediary.

What the Intermediary Payments Bought

By late 2006, the U.K. subsidiary had made at least 92 payments totaling approximately $222,750 to the intermediary, according to the commission’s announcement. The agency alleged that Armor’s agents caused those wire transfers with the understanding that part of the money would be offered to a U.N. official who could steer business to the subsidiary.

Those intermediary payments allegedly helped secure contracts and an extension worth approximately $7,121,237 in gross revenue, according to the complaint. The competitive advantage lay in access to the customer’s decision and rivals’ bids, while the payment paperwork described consulting services.

In aerospace and defense sales, an intermediary’s fee has to be understood alongside the contract and the service it supposedly bought. Armor’s complaint identifies an authorizing vice president, a senior officer at the U.K. subsidiary, a paid intermediary and a procurement official with access to confidential information. The payment trail connects those different roles to the same customer decision. That is the connection a bare commission total leaves out.

Distributor Net Accounting Made Commissions Disappear

The Securities and Exchange Commission separately alleged that Armor Holdings Products disguised approximately $4,371,278 in intermediary commissions from 2001 through June 2007. Its method, called distributor net accounting, concerned sales to foreign governments beyond the U.N. contracts. The allegation reached the way the company recorded ordinary sales revenue and customer payments.

The commercial distinction mattered. These intermediaries never took ownership of the goods, and Armor Holdings Products retained the risks and rewards of ownership until delivery. The complaint says the company therefore should have recorded the full sales price and shown the commission separately as an expense. Instead, it booked a smaller sale and made the commission vanish from that account.

According to the commission, the company sent the government customer an invoice for the full amount, including the commission, but recorded a lower amount internally that excluded it. When the customer paid the invoice, the books showed a credit balance in the customer’s account. The company then moved that apparent overpayment through non-commission accounts before disbursing it to the intermediary.

We find the accounting label particularly rich. On the commission’s account, a customer paying exactly what it had been billed created an apparent overpayment because Armor had booked less than it charged. The cash still went out to the sales intermediary. The commission expense was what disappeared.

The Iraqi Body-Armor Sale

The complaint’s largest example involved a 2005 body-armor sale to the Iraqi government. An Armor subsidiary submitted invoices totaling $3,364,532 through a U.K. intermediary, while Armor Holdings Products booked a lower sale and receivable. It then recorded much of the apparent $1,144,532 overpayment in unrelated accounts before paying commissions to two sales intermediaries.

For someone in accounts receivable, that discrepancy was inside the normal sales records. The invoice, the booked sale, the customer payment and the subsequent transfers told different parts of the same transaction. The commission’s books-and-records and internal-controls allegations reached those entries and the company’s failure to account accurately for its payments.

Accountants Warned Armor, and the Entries Continued

The Securities and Exchange Commission alleged that Armor continued distributor net accounting after both an outside auditor and an internal accountant challenged it. In March 2001, the outside auditor emailed senior officers that the practice understated accrued liabilities and accounts receivable. The auditor said the company should record the full amount owed by the customer and separately account for commissions.

In September 2005, a comptroller at another Armor subsidiary raised the same underlying problem with senior officials. He had refused to use distributor net accounting in his own division and explained that Armor Holdings Products acted as a manufacturer, making net revenue treatment inappropriate. The complaint alleged that the practice nevertheless continued through June 2007.

The warning emails matter because they connect the accounting entries to decisions by people who had been told what was wrong. An invoice shows the sale. The warning and the later entries show what management did with the objection. That gives an audit or finance employee a different view of the case from a salesperson who saw the intermediary’s work on the tender.

A similar response to an inconvenient control appears in Embraer. In that company’s SEC complaint, the agency alleged that senior executives told subordinates to find a way to honor a promised bribe without involving the legal department. The connection is management’s response when a control gets in the way of the payment: Armor’s accountants allegedly identified the problem, yet the practice continued.

The SEC Settlement

The Securities and Exchange Commission announced Armor’s civil settlement on July 13, 2011. Its litigation release described an agreement to return $1,552,306 in profits from the U.N. business and pay $458,438 in prejudgment interest and a $3,680,000 civil penalty. The profit repayment matched the net profits the agency attributed to those contracts and their extension. The settlement also addressed the separate accounting allegations and included commitments concerning the company’s FCPA compliance program.

BAE Systems Inc., a U.S. subsidiary of BAE Systems PLC, had acquired Armor on July 31, 2007, after the conduct alleged in the SEC complaint. The commission credited Armor with conducting a thorough internal investigation into the improper payments and cooperating with its inquiry. It identified assistance from the Justice Department’s Fraud Section and the Federal Bureau of Investigation.

What Sales and Finance Insiders Can Connect

Armor’s case brings whistleblower evidence out of the general ledger and back into the business. A sales employee may recognize the intermediary agreement, tender correspondence and request for a blank price sheet. A finance employee may recognize the invoice booked at a lower value, the resulting customer credit and the transfer to another account. An auditor may know who received the warning and whether the entries continued afterward.

Those pieces answer different questions about the same conduct: what the intermediary supplied, how the customer decision changed, where the money went and who understood the accounting. We work with insiders to connect that knowledge to the transactions and the people making the decisions. Bring us the detail you know from doing the job so we can build the case with you.

Foreign-bribery information can support an SEC whistleblower award. Separately, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We assess the business, the government money and the available whistleblower claims with you.

You Know What the Commission Was For

If you saw a consultant trading on confidential bids or commissions disappearing into customer credits, tell our whistleblower experts what happened inside the business. We build the case with you, bring in FCPA whistleblower lawyers who understand procurement and accounting evidence, and stay beside you through the pursuit of a recovery.