Bribery Scars UN Body Armor Contract with Safety Products Manufacturer

Jack Humphrey, Regulatory journalist
July 14, 2011 /

The Securities and Exchange Commission has charged a safety products company with violating the Foreign Corrupt Practices Act (FCPA) by participating in a bribery scheme from 2001 through 2006 to obtain contracts to supply body armor for use in United Nations peacekeeping missions.

The SEC claimed that Armor Holdings, a Florida-based manufacturer of military and law enforcement safety equipment, failed to account for more than $4 million in commissions from 2001 through 2007 in violation of the books and records and internal controls provisions of the federal securities laws.

The SEC’s complaint charged Armor Holdings with violating Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

Robert Khuzami, Director of the SEC’s Division of Enforcement, said: “Illicit payments to U.N. officials are no less reprehensible than bribes to foreign government officials. The important process of selecting body armor for peace keepers should not be affected by which company pays the best bribes.”

Without admitting or denying the allegations, Armor Holdings agreed to pay $1,552,306 in disgorgement, $458,438 in prejudgment interest, and a civil money penalty of $3,680,000. Armor Holdings also agreed to pay a $10.29 million fine to settle a parallel criminal investigation announced by the U.S. Department of Justice.

The safety products company also agreed to comply with certain undertakings regarding its FCPA compliance program in a settlement that is still subject to court approval. Armor Holdings conducted a thorough investigation to determine the scope of the improper payments and cooperated with the SEC’s inquiry.

Since 2010, the SEC has filed 32 FCPA cases, including the case against Armor Holdings, and obtained more than $600 million in penalties, disgorgement and interest.

Gerald W. Hodgkins, Associate Director of the SEC’s Division of Enforcement, said: “Armor failed to maintain adequate internal controls to prevent its subsidiary from making illegal payments to win U.N. supply contracts. Just as troubling, Armor improperly accounted for sales commissions for several years even after being warned that the accounting treatment was wrong.”

The SEC claimed that certain agents of Armor Holdings caused its U.K. subsidiary to wire at least 92 payments, totaling approximately $222,750 to a third-party intermediary, though they know that part of these payments would be offered to a U.N. official who could help steer business to the U.K. subsidiary of the safety products company.

According to the complaint, agents of Armor Holdings caused its U.K. subsidiary to enter into a sham consulting agreement with the intermediary for purportedly providing legitimate services in connection with the sale of goods to the U.N.

Through this bribery scheme, Armor Holdings derived gross revenues of $7,121,237, and net profits of $1,552,306, the complaint added.

The SEC alleges that another Armor Holdings subsidiary disguised in its books and records commissions paid to intermediaries who brokered the sale of goods to foreign governments.

Despite warnings by internal and external accountants that this practice violated U.S. Generally Accepted Accounting Principles, Armor Holdings’ subsidiary continued the improper accounting practice resulting in approximately $4 million in commissions that was not properly disclosed in the books and records of the company.

On July 31, 2007, after the conduct alleged in the SEC’s complaint had occurred, Armor Holdings was acquired by BAE Systems, Inc., an indirect wholly owned U.S. subsidiary of Britain’s BAE Systems PLC. Accordingly, Armor Holdings is no longer an issuer of securities.

Richard Kutchey and Gregory Faragasso conducted the SEC’s investigation.

 

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