Small Aerospace and Defense Companies Face Big FCPA Penalties in Dealing with State-Owned Airlines
November 5, 2012 9:00 am

By Bill Henderson and Katie Kyle

Bill Henderson

U.S. regulators’ heavy enforcement of the Foreign Corrupt Practices Act is affecting small companies in the aerospace and defense industry, as shown by the recent fine levied on a small aircraft maintenance company, NORDAM Group. The Tulsa-based manufacturer in July agreed to pay $2 million for charges that it paid direct and indirect bribes to employees of airlines controlled and owned by the People’s Republic of China.

According to the Department of Justice, three employees of a NORDAM affiliate entered into sales representative agreements with fictitious entities then used the money from NORDAM to bribe airline employees. Using third parties for bribe payments is not original. In fact, most reported FCPA cases involve the use of third-party intermediaries such as agents or consultants.

In March, another Tulsa aircraft maintenance company, BizJet International Sales and Support Inc., agreed to pay $11.8 million to settle China-related FCPA charges.

Companies doing business with state-affiliated airlines clearly have elevated corruption risk. These companies include aircraft equipment and technology providers and those serving the aftermarket with installation, maintenance, repair and overhaul services. By our count, there are more than 80 majority or wholly state-owned airlines worldwide, and many of those airlines are located in countries that rate high on Transparency International’s Corruption Perceptions Index, including China, India, Russia, Argentina, South Africa, Vietnam, Egypt and Venezuela.

To address potential risk with state-affiliated airlines, companies should first review its contracts, including those in negotiation; identify possible government-affiliated customers; and assess its use of agents, subcontracts or other intermediaries helping to serve those customers. Red flags to consider during this process include:

  • Did customer personnel request the use of specific third parties during the negotiation process, or are certain third parties mandated by the contract?
  • Were any large, one-time payments made to local third parties during the negotiation process?
  • Did vetting procedures confirm that a third party is registered in the local market, is certified (if applicable) and has a valid business address?
  • Did due diligence procedures search for family relationships and past connections between the customer’s key officers/decision-makers and the third parties serving those customers?
  • Does the third party interact with the customer outside the presence of our employees?
  • Does the third party provide us with services of real value and complete, transparent documentation of their activities, fees and requested expense reimbursements?

Small companies need to set a clear tone at the top, communicate zero tolerance of bribery, and train employees in a position to be solicited for questionable or illicit payments. As the NORDAM case shows, anti-corruption compliance is not an area where companies, regardless of size, can be passive. In the battle against corruption, a company’s best defense is an aggressive offense.

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The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP. This material has been prepared for general information only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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