U.S. cracking down on defense industry corruption overseas.

• Author: Kopp, Glen
• Position: LEGAL INSIDER

Defense spending across the Middle East and North Africa is on the rise and U.S. companies are pursuing business opportunities there. From small-cap to large-cap, defense firms are looking to capitalize on the big appetite of foreign governments for defense imports.

The race for international sales during the past few years has been followed by a wave of government investigations into defense companies for both major and relatively minor violations of the Foreign Corrupt Practices Act. By some measures, 2014 was a banner year for the government's FCPA enforcement regime, with it collecting more than $1.5 billion in fines, penalties and disgorgement--one of the highest totals the government has ever collected in FCPA cases in a single year.

The FCPA gives authorities the right to investigate alleged bribery all over the world and in any cases involving a domestic company or one that trades on a U.S. stock exchange. But prosecution trends reveal a pattern of investigations that focus on certain industries, at certain times and in certain countries.

Existing players and new entrants are faced with the need to weigh the challenge of capturing new business in a competitive market with assurances from locals that "this is how business is done here." Despite year-over-year reports of FCPA prosecutions, neither the assurance nor the balancing ever gets old.

Government investigators consider defense contractors to be among the companies most at risk of violating the act.

This view arises from the idiosyncratic business model required for direct commercial sales to foreign governments. Potential government decision makers are "foreign officials" within the meaning of the FCPA, to whom U.S. companies may not give "anything of value" to obtain or retain business, so foreign defense sales often draw close scrutiny by the U.S. Department of Justice and Securities and Exchange Commission.

Second, foreign procurement contracts are typically subject to significant offset requirements, which may call for the use of local subcontractors that present a minefield of corruption.

Recent government investigations bear out the close scrutiny that companies in the defense sector face. In late 2014, the SEC announced sanctions and a monetary settlement against two employees in the Dubai offices of FLIR Systems Inc., an Oregon-based defense contractor operating around the world. The case involved Stephen Timms and Yasser Ramahi, two sales employees with FLIR who were responsible for a $12.9 million contract the company secured to provide...