Paris Air Show

Titan case reveals lessons unlearned

 - December 13, 2006, 7:56 AM

For Titan Corp., the biggest fine imposed by the U.S. Justice Department since the passage of the Foreign Corrupt Practices Act (FCPA) in 1977 must seem like a pittance compared with the less obvious losses it suffered as a result of its malfeasance. A sullied reputation, stock devaluation and, in the case of the San Diego, California-based IT contractor, the end of a $1.7 billion takeover offer by Lockheed Martin amounted to more damages than any court can impose.

Titan admitted it funneled $2 million to the 2001 re-election campaign of the president Mathieu Kerekou of Benin, as well as $3.5 million to its agent in the West African country, who also happened to work for Kerekou as his “business advisor.”
Titan also admitted to instructing the agent to create false invoices to disguise the payments and to claiming the bribes as deductible business expenses on its federal income tax return.

Of course, nothing particularly shocking came out of the Titan case; aerospace companies must often consort with corrupt government officials, either willingly or out of necessity. The remarkable part centered on the fact that the company never set a corruption policy or limits on gifts and hospitality.

“I can say with confidence that almost every major aerospace company has really paid attention to FCPA anti-bribery problems, not necessarily because they’re all pure of heart, but because most of them have had a run-in with the law in one way or the other,” said Alexandra Wrage, president of TRACE, a nonprofit organization that specializes in anti-bribery due-diligence reviews and training for companies and their multinational intermediaries. “The smaller and medium-sized companies–you know, the Titans of the world–have paid much less attention to this issue because they never really believed they were in the crosshairs.”

EU Policy

The European Union has had its own framework policy (Council Framework Decision 2003/568/JHA) against corruption in the private sector since July 2003. It spells out definitions of active and passive forms of corruption, and criminalizes all forms of “instigation, aiding and abetting” corruption, as well as who the laws hold liable for companies’ actions. However, not all EU member states have managed to pass updated corruption legislation on their national statute books.

In the meantime, cases such as Boeing’s illegal hiring of U.S. Air Force official Darlene Druyan have brought the aerospace community under increasing scrutiny. In the UK, the Serious Fraud Office is still investigating suspected false accounting in contracts between BAE Systems and Saudi intermediaries Robert Lee International and Travellers World. It began the investigation in November 2004, at which time it made two arrests.

In March, the Organization for Economic Cooperation and Development criticized the British government for not taking effective action to prevent UK firms from using bribery overseas. It complained of a lack of prosecutions in such cases, and alleged potentially damaging political interference in investigations by government departments, such as defense, foreign affairs and trade.

That said, Titan got caught only because Lockheed Martin’s own due-diligence review uncovered the improprieties. But as industry consolidation forces other companies to open their books for due-diligence reviews, it begs the question of whether more cases like Titan’s might come to light.

Defining the Fine Line

Some 100 member companies and just under 1,000 member intermediaries now belong to TRACE, established by Wrage two-and-a-half years ago in Washington, D.C. The organization maintains due-diligence files on all its members and provides them to subscribing corporations. Members must complete annual anti-bribery compliance training provided by TRACE through its anticorruption workshops held around the world.

As every multinational company knows, a fine line exists between bribery and “reasonable and customary” gift giving and hospitality. Of course, laws vary from country to country, as do penalties. China, for example, executed 12 government officials last year for bribery. “It’s not going to be long before it’s the offerer and not the bribe taker, especially in the lead-up to the Olympics,” warned Wrage.

Here in Paris, as at any airshow, executives must be particularly mindful of the issue. “Reasonable and customary” may become quite different during show time, as the cost of doing business rises with airshow prices and the expectations of government procurement officials. The problem can extend to something as simple as a dinner invitation. For example, a company hosting a government official for dinner might not think anything of feeding the official’s wife as well. But in some jurisdictions extending such a seemingly common courtesy could break corruption laws.

Companies can only hope the UN convention on bribery will succeed in setting a more uniform standard, removing some of the ambiguity they face every day.