BAE Systems PLC: Compliance Promises, Concealed Commissions

The BAE Systems plc FCPA case concerned false compliance statements and missing defense-export disclosures that brought the company more than $200 million in gain, according to the Justice Department’s guilty-plea announcement. BAE, a multinational defense contractor headquartered in the United Kingdom, pleaded guilty on March 1, 2010, in federal court in the District of Columbia.

In its guilty plea, the company admitted retaining advisors without scrutiny and building arrangements to hide who they were and what they received. For someone inside defense sales, the telling detail is the work behind the invoice: BAE often lacked adequate evidence that its advisors had performed any legitimate activity to justify their payments.

What BAE Systems Admitted

In its guilty plea, BAE admitted conspiring to defraud the United States, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations. Within FCPA cases, BAE shows why a company’s promises about payment controls matter alongside the payments themselves.

According to the Justice Department’s account of the criminal case, BAE told U.S. government agencies, including the Defense Department and the Justice Department, from approximately 2000 to 2002 that it would create and implement anti-bribery policies and procedures. It knowingly and willfully failed to create sufficient mechanisms to prevent and detect foreign-bribery violations.

The promise concerned how the business would operate, including scrutiny of payments. The admitted practices went the other way: concealed advisors, offshore companies and commissions left out of government disclosures. We see a promise backed by arrangements designed to defeat scrutiny. Some promise.

The FBI’s Washington Field Office FCPA squad and U.S. Immigration and Customs Enforcement’s Counter Proliferation Unit investigated the criminal case. The Defense Criminal Investigative Services and the General Services Administration, Office of Inspector General provided investigative assistance.

Marketing Advisors Whose Work Went Unchecked

In its guilty plea, BAE admitted regularly retaining what it called “marketing advisors” to help secure defense sales without scrutinizing those relationships. It also concealed relationships with some advisors and undisclosed payments to them. This is the practical question behind third-party due diligence: what did the advisor actually do for the money?

The Justice Department’s account describes how the concealment worked. After May 2001, BAE contracted with and paid certain advisors through offshore shell companies it beneficially owned. It also encouraged certain advisors to establish offshore shell companies of their own to receive payments while disguising the money’s origin and recipient.

BAE admitted establishing a company in the British Virgin Islands to hide advisor relationships, identities and compensation, and to obstruct investigators trying to understand the arrangements. The entity also helped circumvent countries’ restrictions on those relationships and helped advisors avoid tax liability on BAE payments. This was concealment built into the payment structure.

Through that entity, BAE made payments of more than £135 million and more than $14 million from May 2001 onward. The criminal case described situations in which BAE knew there was a high probability that part of the money would influence foreign governments’ defense-purchasing decisions. In many instances, it lacked adequate evidence of legitimate work supporting the payments.

An advisor agreement, an invoice and a bank transfer can each look complete while leaving the purpose of the payment unexplained. We connect those records to the services delivered, the people approving payment and the official decision the business wanted. That is where accounting records and payment controls become useful to an insider who can explain what an advisor actually did.

Saudi Defense Sales and Unverified Benefits

In its account of BAE’s guilty plea, the Justice Department connected benefits for a Saudi public official to fighter jets, other defense materials and support services over which the official had influence. BAE had become the U.K. government’s prime contractor following a formal understanding between the United Kingdom and Saudi Arabia in the mid-1980s. The Justice Department said the support services BAE provided under that arrangement resulted, in part, in substantial benefits for the official.

BAE admitted failing to adequately review or verify those benefits. That included more than $5 million in invoices submitted by a BAE employee from May 2001 to early 2002, which the company failed to adequately check against its earlier anti-corruption commitments to the U.S. government. The contrast was concrete: promises to government agencies on one side, expenses benefiting an influential customer official on the other.

The Justice Department also described BAE’s agreement to transfer more than £10 million and more than $9 million to a Swiss bank account controlled by an intermediary in connection with the same defense deals. BAE was aware of a high probability that the intermediary would transfer part of those payments to the same official. The payment trail therefore connected the intermediary controlling the account to the official expected to benefit.

Gripen Export Applications Left Out the Commission

In its guilty plea, BAE admitted causing false export-license applications for Gripen fighter jets destined for the Czech Republic and Hungary. It failed to tell the applicant or the State Department about £19 million paid to an intermediary, with a high probability that the money would influence the tender process in BAE’s favor.

In its explanation of the criminal plea, the Justice Department described the State Department’s role in approving or denying defense-export licenses. Applicants had to identify commissions paid to anyone helping secure the sales. BAE admitted knowingly failing to disclose third-party commissions, including payments through the British Virgin Islands entity, to keep its outside advisors and the scale of their involvement from public scrutiny.

For an employee working on aerospace and defense sales, the license application and the commission payment concern the same business. Someone handling export paperwork may know what the applicant was told, while someone in finance may know what the intermediary received. The BAE admission shows why those accounts belong together: the payment was missing from the information supplied to the people preparing or reviewing the license.

When the Advisor Contract Hides the Actual Sale

A separate aircraft-sales case shows how a contract can give an intermediary payment an apparently unrelated purpose. In its civil complaint, the Securities and Exchange Commission alleged that Embraer used a supposed Jordan sales commission to conceal a payment to a Dominican official even though the company never won the Jordan contract. The complaint described the response when the promised payment encountered legal review:

The alleged workaround matters to someone who knows which customer a commission really served. In BAE’s admitted arrangements, offshore entities concealed advisors. In the agency’s Embraer allegations, the stated sales assignment concealed the purpose of a payment. Both put the insider’s knowledge of the actual transaction beside the description in the file.

What an Insider Can See

The BAE case gives finance, sales, contracts and export-compliance staff concrete connections to recognize. An advisor’s engagement and work product show what the company bought. Invoices and payment approvals show what it authorized, and bank instructions show where the money went. Tender communications and commission disclosures connect those payments to the government business being pursued. We work with that inside knowledge of the decision, payment and record.

Our assessment matches what you saw to the whistleblower program that fits the conduct. An FCPA tip to the SEC can earn 10% to 30% of sanctions over $1 million; where a government contract is involved, a False Claims Act case can pay 15% to 30% of what the government recovers.

You Know What the Advisor Actually Did

If you saw a commission hidden from an export application or an advisor paid for work nobody could explain, talk to our whistleblower experts about the defense deal. We connect your knowledge of the sale to the payment decisions, bring in Foreign Corrupt Practices Act whistleblower lawyers who understand defense contracts and cross-border commissions, and stay beside you to build your strongest whistleblower case.