Since the start of the Ukraine crisis, NATO Secretary General Anders Fogh Rasmussen has called on NATO countries to increase defense spending. Poland has announced plans to accelerate a major military modernization program. And Latvia, Lithuania, Romania and the Czech Republic have all promised to increase their defense spending.
This means new opportunities for U.S. and European defense contractors, not only for military hardware sales to Eastern European governments, but also for training, maintenance, repair and overhaul (MRO) facilities, logistics services, and all the other forms of support that typically accompany weapons sales. But these opportunities also bring FCPA compliance risks.
Industry Risks. In selling to foreign governments, defense companies frequently rely on local agents, consultants, brokers, and other third parties such as local joint venture partners and teammates. They also often are required to enter into offset transactions with local companies selected or approved by the foreign government. These third parties and offset transactions often bring significant FCPA risks. Moreover, the national security, foreign policy, and export control implications of such transactions ensure the close attention of the U.S. government.
Regional Risks. In addition to these industry risks, there are also regional risks. Only one country in the region ranks higher than 30th place on the TI Corruption Perceptions Index (Estonia is currently ranked 26th ). Bulgaria and Romania are both ranked at 69, while Ukraine is ranked at 142. In addition, Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Poland, the Slovak Republic, and Slovenia are all parties to the OECD Anti-Bribery Convention, which also brings increased scrutiny and enforcement pressure.
Not surprisingly, defense competitions and contracts in the region have already resulted in significant enforcement actions and scrutiny. For example, BAE Systems pled guilty in the U.S. in March 2010 to charges relating to the sale of Gripen fighter jets to the Czech Republic and Hungary. Among other things, BAE admitted to failing to disclose that it had paid €19 million ($22 million) to an intermediary with the high probability that it would be used to influence the tender process in favor of BAE. In 2012, an aid to former Czech Prime Minister Mirek Topolanek was arrested and charged with attempting to obtain an €18 million ($21 million) kickback in exchange for the Czech government’s decision to buy 199 Pandur armored vehicles from Steyr, an Austrian unit of General Dynamics. The expected increase in defense spending in the region will likely bring more scrutiny and more prosecutions.
Managing the Risks. As always, ongoing risk assessments, anti-corruption training for sales forces, agents, consultants, JV partners and teammates, good local counsel and well-documented due diligence on local third party intermediaries and business partners are the keys to managing these risks. Failure to take these measures on an ongoing basis, could turn defense sales in Eastern Europe into a “target rich environment” for U.S. and foreign enforcement authorities.
Thomas Firestone is a partner in the Washington office of Baker & McKenzie. His practice focuses on international white collar criminal defense and compliance, with a special focus on Eastern Europe and the former Soviet Union. He previously spent 14 years at the U.S. Department of Justice, first as an Assistant U.S. Attorney in the Eastern District of New York and then as Resident Legal Adviser and Acting Chief of the Law Enforcement Section at the U.S. Embassy in Moscow.
Howard Weissman serves as counsel to Baker & McKenzie’s compliance practice. He was previously vice president & associate general counsel-international at Lockheed Martin Corporation. He advises on the FCPA, U.S. antiboycott laws, International Traffic in Arms Regulations, Export Administration Regulations, and foreign agency and anti-bribery laws.