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Did EU Rules Ruin BAE’s Settlement?

The British press in September reported (here) that BAE Systems — the U.K.’s biggest defense contractor — had been given until the end of the month by the Serious Fraud Office to settle bribery charges related to sales in Africa and Eastern Europe or face prosecution. When the deadline passed with no settlement, the BBC reported the two sides couldn’t agree, among other things, “on what BAE would admit.” We may now know why they couldn’t agree.

The Times said Friday BAE’s admissions could lead to an EU ban:

Insiders told the Times that one of the major obstacles to a settlement is a European Union law on bribery that states that European governments must not give work to companies found guilty of corruption. The EU directive means that a criminal conviction could ruin BAE, which employs more than 100,000 people and is the biggest supplier to the British Armed Forces. Most experts believe that a financial settlement will be reached that will mean BAE admitting lesser charges not covered by the EU rules.

When BAE’s settlement talks broke down in September and the SFO announced it would seek prosecution, British MP Sir Menzies Campbell hinted at the problem with the EU. He told Sky News: “The company is the principal contractor in the programs for the Eurofighter, the aircraft carriers and Joint Strike Fighter, and many other significant procurement projects. These developments have a considerable impact on all of these projects.”

The Times and others say BAE may yet settle with the SFO. Both sides want to reach a compromise that may include a large fine but avoid criminal prosecution, saving BAE’s business in Europe and elsewhere. 

A resolution like that would resemble settlements the U.S. Justice Department routinely reaches in Foreign Corrupt Practices Act enforcement actions. It uses plea arrangements and pre-trial agreements to avoid prosecuting corporations for antibribery offenses. That in turn allows them to continue doing business with the U.S. government and others.

Some commentators are critical of the American approach. But we’ve defended the practice:

[T]he DOJ is understandably reluctant to hit corporations head on. The Arthur Andersen prosecution in the aftermath of the Enron scandal demonstrated the catastrophic consequences that can result from a corporate felony charge. For Andersen it was an instant death sentence, even though the firm was later exonerated. That’s why the DOJ has since adopted a softer approach to FCPA and other white collar offenses. It offers companies that want to cooperate alternatives in the form of negotiated settlements.

The Justice Deparatment, meanwhile, is reportedly still investigating BAE’s payments of about $2 billion to Saudi Prince Bandar bin Sultan. The SFO dropped that investigation in 2006. But is the DOJ moving slowly because of the EU rules? Is there concern a typical Justice Department settlement might also lead to an EU ban on BAE? Is the DOJ having trouble harmonizing its practices with the SFO and the EU?

Lots more will be said and written about this in the coming weeks and months. Stay tuned.

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1 Comment

  1. The argument against imposing the "death penalty" on companies for FCPA violations seems to incorporate more than a bit of the "too big to fail" argument advanced with respect to certain financial institutions over the past eighteen months. One might argue, however, that although there will be disruption and inconvenience, eliminating a company from participating in its chosen market (e.g., defense) due to numerous and material breaches of the FCPA or analogous legislation does not mean that the company assets will wither and die. Instead, as in the bankruptcy context, the assets can be acquired and redeployed by others who have not engaged in criminal behavior. For example, Verizon’s acquisition of WorldCom assets (and employees) after the discovery of far-reaching fraud and other criminal behavior shows that while companies may die, businesses can continue. In the defense context, one might consider imposing a criminal sentence on the company that prevents that company from engaging in any further business, while at the same time putting some or all of the business assets in a trust – either to be acquired or re-incorporated by third parties. Otherwise, one might wonder whether there are two brands of justice – one for those who are large and/or operate in critical areas and another for small or mid-size companies who – though perhaps less culpable – are not as "important."

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