Disclosing Compliance

Smith and Wesson, the most prominent company implicated in the Shot-Show prosecutions, disclosed last week that it’s being investigated by the DOJ and SEC for FCPA violations. The company said it has already spent $3.2 million in connection with the case.

The disclosure was fairly typical — some reasons for the government’s investigation, the uncertain outcome for the company, and no details about how Smith and Wesson tries to comply with the FCPA. That’s too bad.

We’d like to hear more about compliance. But for now, companies and their lawyers think that information doesn’t belong in SEC disclosure material. They’re partly right. Once an employee pleads guilty to an FCPA offense (the usual outcome of an indictment), the company becomes strictly liable under respondeat superior. It has no defense, so information about its compliance program becomes largely irrelevant.

There’s also an assumption that because a compliance program didn’t prevent an FCPA offense, the program is worthless. That’s wrong. Overseas bribery can happen in any company, even one with an “effective” compliance program.

Here’s an idea. Instead of holding companies strictly liable for their employees’ FCPA offenses, let them assert a good-faith defense. When accused of an FCPA violation, encourage companies to talk about the strengths of their compliance programs and how they tried to keep their employees on the right side of the law. Give them a chance to redeem their corporate citizenship without being pressured into a deal with the DOJ and SEC. That, in turn, will give them a powerful reason to have a robust compliance program and to disclose details about it, even before they’re in trouble.

Investors, customers, suppliers, NGOs, lawmakers, and the general public want to know what companies are doing to avoid overseas corruption. We think Smith and Wesson had good intentions. In its disclosure the company said: “We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad.” 

Still, we’d like to know more about what S&W and other companies do to comply with the FCPA. Fixing respondeat superior will encourage them to tell us.

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Here’s Smith and Wesson’s full FCPA disclosure from its latest annual report:

Foreign Corrupt Practices Act (FCPA)

On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the law enforcement and military equipment industries, one of whom was our Vice President−Sales, International & U.S. Law Enforcement. We were not charged in the indictment. We also were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter and have undertaken a comprehensive review of company policies and procedures, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, or if our employee is convicted of FCPA violations, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts, and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.

SEC Investigation

Subsequent to the end of fiscal 2010, we received a letter from the staff of the SEC giving notice that the SEC is conducting a non−public, fact−finding inquiry to determine whether there have been any violations of the federal securities laws. It appears this civil inquiry was triggered in part by the DOJ investigation into potential FCPA violations. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the SEC in this matter, the SEC may determine that we have violated federal securities laws. We cannot predict when this inquiry will be completed or its outcome. If the SEC determines that we have violated federal securities laws, we may face injunctive relief, disgorgement of ill−gotten gains, and sanctions, including fines and penalties, or may be forced to take corrective actions that could increase our costs or otherwise adversely affect our business,
results of operations, and liquidity. We also face increased legal expenses and could see an increase in the cost of doing business. We could also see private civil litigation arising as a result of the outcome of this inquiry. In addition, responding to the inquiry may divert the time and attention of our management from normal business operations. Regardless of the outcome of the inquiry, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by
investors, customers, and others.