Corruption: BAe inherits bribery liability four years after purchase of US company.

It is no surprise to learn that a significant part of the behaviour by Armor Holdings related to the payment of so-called commissions to intermediaries, commissions that were passed onto officials by way of bribes. What is more surprising is that the recipients of the payments were not officials of a banana republic or one of the more usual suspects for corrupt payments but rather they were officials of the United Nations.

The goods in respect of which the bribery was made were body armour for UN peacekeepers.

The conduct complained of took place between 2001 and 2006 and ended a year before BAe bought the company in July 2007. There is something quite poetic about the fact that the case is wrapped up five years to the month after the purchase.

The case was brought by the USA's SEC and the Department of Justice in respect of contracts worth a little over USD7 million. "At least 92" separate payments totalling USD222,750 were made, says the SEC in its court papers. After making all the payments, the deal generated a profit of just USD1.5 million. A trail of false accounting obscured the payments.

But that was not the only case: dozens of payments were found to have been made to officials of foreign governments, says the SEC. And that covered the period from 2001 until June 2007. The payments appear to have abruptly stopped at the time of the takeover, perhaps as due diligence in the M&A process threatened to uncover it.

BAe has co-operated with the investigation, which is good, really, as the stink over the Saudi jet fighters which in part originated with complaints by the USA that the UK defence contractor had improperly beaten US suppliers is still hanging over the company.

But the US investigation into Armor Holdings is not over, as the official statement (below) makes plain.

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The Securities and Exchange Commission (“Commission”) today filed a settled civil enforcement action against Armor Holdings, Inc. (“Armor Holdings”), alleging violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Armor Holdings, a manufacturer of military and law enforcement safety equipment based in Jacksonville, Florida, agreed to pay a total of $5,690,744 in disgorgement, prejudgment interest, and civil penalties in order to resolve the Commission’s charges. In a related matter, Armor Holdings will pay a $10,290,000 fine to the U.S. Department of Justice (“DOJ”).

According to the Commission’s complaint:

From 2001 to 2006, certain agents of Armor Holdings participated in a bribery scheme to help a U.K. subsidiary of Armor Holdings, Armor Products International, Ltd. (“API”), obtain contracts for the supply of body armor to be used in United Nations (“U.N.”) peacekeeping missions. These agents of Armor Holdings caused API to enter into a sham consulting agreement with a third-party intermediary for purportedly legitimate services in connection with the sale of goods to the U.N.

In September 2001, the third-party intermediary instructed API to provide a signed, but otherwise blank, pricing sheet that the intermediary would complete after learning from a U.N. procurement official about non-public bids submitted by competitors for the contract. In October 2001, the U.N. awarded API a multi-year contract for the supply of body armor. In February 2003, an agent of Armor Holdings asked the third-party intermediary how API could win a renewal contract to sell body armor to the U.N. The intermediary responded that the same rules would apply to the 2003 tender as applied to the 2001 tender. In August 2003, API received another three-year contract from the U.N. In 2006, API received an additional one-year supply extension from the U.N. on the 2003 contract, without assistance from the third-party intermediary.

By late 2006, API had made at least ninety-two payments to the intermediary, totaling approximately $222,750. Agents of Armor Holdings caused API to wire payments to the intermediary with the understanding that part of these payments would be offered to a U.N. official who could help steer business to API. From the 2001 and 2003 U.N. contracts, together with the extension granted in 2006, Armor Holdings derived gross revenues of approximately $7,121,237, and net profits of approximately $1,552,306.

From 2001 through June 2007, a U.S. subsidiary of Armor Holdings, Armor Holdings Products, LLC (“AHP”), employed a separate accounting practice that disguised in the books and records of Armor Holdings approximately $4,371,278 in commissions paid to intermediaries who brokered the sale of goods to foreign governments. Despite internal and external admonitions that this practice violated U.S. Generally Accepted Accounting Principles, AHP failed to record commissions in at least 92 transactions through June 2007—resulting in approximately $4,371,278 of undisclosed commissions on the books and records of Armor Holdings.

On July 31, 2007, after the conduct in the Commission’s complaint had occurred, Armor Holdings was acquired by BAE Systems, Inc.—an indirect wholly-owned U.S. subsidiary of Britain’s BAE Systems PLC. Accordingly, Armor Holdings is no longer an issuer of securities.

Without admitting or denying the allegations in the Commission’s complaint, Armor Holdings has consented to a court order permanently enjoining it from violating Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; ordering it to pay disgorgement of $1,552,306, together with prejudgment interest of $458,438; imposing on it a civil penalty of $3,680,000; and ordering it to comply with certain undertakings regarding its FCPA compliance program. The proposed settlement is subject to court approval.

Armor Holdings conducted a thorough internal investigation to determine the scope of the improper payments and cooperated with the Commission’s inquiry.

The Commission acknowledges the assistance of the Fraud Section of DOJ’s Criminal Division and the Federal Bureau of Investigation. The Commission’s investigation is continuing.