Canada: SEC Pulls The Trigger On Smith & Wesson: Anti-Bribery Lessons For Canadian Companies

Last Updated: August 5 2014
Article by Graham Erion

Well-known American gun manufacturer, Smith & Wesson Holding Corporation ("Smith & Wesson"), became the latest high-profile target of the Securities & Exchange Commission's enforcement of the Foreign Corrupt Practices Act ("FCPA") on July 28, 2014 when the company agreed to a $2 million settlement for FCPA violations. As Canadian authorities step up enforcement of Canada's version of the FCPA, the Corruption of Foreign Public Officials Act ("CFPOA"), the Smith & Wesson example provides some invaluable lessons for Canadian companies on how to avoid violating anti-corruption laws and what to do if violations are discovered.

Guns as Gifts

According to the SEC, Smith & Wesson's problems began in 2007 when the company sought to break into new high-risk markets by retaining third-party agents, who made improper gifts and bribes to public officials to win contracts. For example, a Smith & Wesson agent in Pakistan was reportedly authorized to provide more than $11,000 worth of guns to Pakistani police officials as gifts, in addition to cash payments. Similarly, a third-party agent of the company tried to disguise bribes to an Indonesian police department as legitimate firearm lab testing costs, though this deal was never consummated. Smith & Wesson also misfired on finalizing sales contracts in Turkey, Nepal and Bangladesh, even after the company authorized third-party agents in those countries to make improper payments.

These failed attempts to benefit from bribes underscore how little authorities are concerned with whether an actual business advantage is realized by the company in question; the mere attempt to gain such an advantage through corrupt conduct is sufficient to violate these acts, as Canada's first CFPOA prison sentence to Nazir Karigar has recently established.

Gifts as Bribes

A key lesson from the Smith & Wesson affair is the importance of discerning the difference between a legitimate gift or promotion and an illicit bribe. Both the FCPA and CFPOA exempt gifts or expenditures directly related to "the promotion, demonstration or explanation of products and services" from any bribery violation. However, this exemption is tempered by the requirement that such gifts or expenditures be "reasonable" and "incurred in good faith." Clearly in this case, $11,000 worth of free firearms was not deemed reasonable.

A previous bulletin advised that "reasonableness" is achieved if gifts or promotional expenditures to public officials are of limited frequency and nominal value, fall within commonly accepted standards of courtesy where offered, and do not appear to compromise the integrity of the public official in question. If gifts or promotional expenses do need to be paid or offered, it is also best for the company to do so openly and directly with the public official as the use of agents for such purposes can add additional risks, as discussed below.

Third-party and Agent Risks

One anti-corruption lesson that seems to regularly bear repeating is the need to properly oversee and ensure compliance of third-parties and agents acting on the company's behalf in foreign markets. Well over half of the FCPA settlements to date, including the $384 million paid by Alcoa earlier this year, have resulted from bribes paid by agents on behalf of the company, rather than the company's own employees. Companies should protect themselves from this risk by instituting strict prohibitions on interacting with public officials in their subcontracting templates for all agents and third parties who, as part of the services to be provided to the company, should not require interacting with public officials. For those agents who will interact with public officials, companies must ensure they get:

1. an undertaking from such agents to fully comply with the company's anti-corruption policy (and should include the agents in appropriate compliance training);

2. an agreement to cooperate in any bribery investigation, including permitting access to the agent's books and records; and

3. a right to terminate the subcontract upon reasonable suspicion of a corruption incident involving the agent.

It is also prudent to ensure agents provide a full indemnity to the company for any costs or losses (including investigation costs and any fines or settlements) assessed against the company by virtue of the agent's breach of the anti-corruption policy.

Cooperation When in the Crosshairs

While Smith & Wesson failed to institute proper controls over gifts and promotions to public officials and oversight of third-party agents, the company can be praised for the pro-active steps it took as soon as the SEC began their investigation. Indeed, the SEC considered Smith & Wesson's cooperation with the investigation as well as the remedial acts taken after the conduct came to light in assessing the $2 million settlement, which would have presumably been much higher without such actions taken by the company. These actions included Smith & Wesson halting the impending sales transactions in question before they went through, which minimized the benefit to the company from the bribes that were paid. This was not sufficient to prevent a corruption violation, as discussed above, but any efforts to minimize the business advantage from the bribes can temper the penalty assessed for a corruption incident. The company also terminated its entire international sales staff and implemented a series of significant measures to improve its internal controls and compliance processes.

Canadian companies have already appeared to learn the benefit of cooperation in anti-corruption investigations. Despite paying a Canadian record $10.35 million fine in 2013, Griffiths Energy International Inc. ("GEI") likely escaped a much harsher penalty for violating the CFPOA as the Crown acknowledged in their settlement "the degree of cooperation provided by GEI through its voluntary disclosure of this matter was full and extensive" and the remedial steps the company took to reduce the likelihood of a subsequent related offense in the future. In the Nazir Karigar example, Mr. Karigar's employer, Cryptometrics, escaped any liability from the bribery scheme, despite being the ultimate beneficiary of the intended business advantage, by virtue of their cooperation with investigators and willingness to give evidence to the Crown, including testimony of a senior officer against Mr. Karigar.

As Canada's crackdown of foreign corruption continues, companies in this country will be well served to learn the lessons from the Smith & Wesson case to help avoid and contain any liability from a corruption incident.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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