Smith Wesson FCPA Settlement Highlights Dangers of Entering High-Risk Markets
On July 28, 2014, the Smith Wesson Holding Corporation ("Smith Wesson") agreed to pay $2 million to settle civil Foreign Corrupt Practices Act ("FCPA") charges brought by the Securities and Exchange Commission (the "SEC"). In what was described by the SEC as a "systemic pattern of making, authorizing and offering bribes while seeking to expand the company's overseas business," the company undertook actions in Pakistan, Indonesia and other emerging markets that led to charges under each of the FCPA's anti-bribery, books and records, and internal controls provisions.
The SEC's charges described a senior Smith Wesson sales executive who authorized third-party agents to provide gifts and cash payments to local law enforcement officials in connection with the company's new market entry attempts. In 2008, Smith Wesson allegedly retained an agent in Pakistan who was allowed to provide in excess of $11,000 in firearms and cash payments to Pakistani police officers as an inducement to award a tender for the sale of handguns to the police department. Ultimately, Smith Wesson secured the contract and profited from the deal in the amount of $107,852. The SEC described similar payments made through third-party agents to police officers in Indonesia, Turkey, Nepal and Bangladesh, though none of those payments led to successful contracts.
Smith Wesson then mischaracterized these transactions in its books and records as legitimate commissions and business expenses, implicating the FCPA's accounting books and records provisions. The SEC also charged the company with maintaining inadequate internal financial controls and a substandard FCPA compliance program. Specifically, the SEC highlighted the company's failure to perform any anti-corruption risk assessment of these markets, or to conduct due diligence of its third-party agents who were interacting with foreign officials on the company's behalf. Smith Wesson also lacked compliance policies to address issues such as gifts and the use of product samples, and had empowered a single executive with no legal or compliance oversight to approve third-party agent commission payments.
The settlement with the SEC came just weeks after the Department of Justice (the "DOJ") declined to pursue criminal FCPA charges against Smith Wesson, having previously abandoned its attempted prosecution of nearly two dozen individuals from the military and law enforcement industries. The former Smith Wesson sales executive who authorized the transactions was among those who escaped prosecution, though he was terminated by the company along with the entire international sales staff.
See: SEC News Release; SEC Order.
Commentary
While Smith Wesson's $2 million settlement may pale in comparison to other high-profile FCPA prosecutions, the matter is instructive for several reasons. It illustrates the importance even for small companies of integrating compliance controls into a new and comprehensive country entry strategy, particularly in emerging markets known for high-corruption risk. The SEC emphasized that companies attempting to expand into high-risk markets similarly must expand their FCPA compliance programs and controls. It is also a good example of the importance of conducting due diligence on third-party agents, particularly in markets where those agents may be the company's only on-the-ground presence. While, in this case, the agents were authorized to make payments by a company executive, examples abound in which companies are held liable for their agents' actions even without direct approval from their principal. Finally, it is another example of how even relatively low-dollar-amount bribes can lead to a prosecution, including, in this case, disgorgement of the $107,852 profit plus a penalty of nearly twenty times that amount. Although Smith Wesson benefited from its cooperative stance and extensive remediation efforts, coupled with a fortuitous collapse of the DOJ's related criminal case, small and midsized companies should continue to ensure that their FCPA compliance programs meet appropriate standards before embarking on new business ventures in high-risk markets.