Britain’s plan to prosecute BAE Systems for bribery is more bad news for the UK Company, which is already smarting after losing two major multibillion-dollar US truck deals earlier this year.
BAE and Britain could well resolve the issue through an out-of-court settlement; but for now, an ongoing investigation has cast a shadow over BAE’s US subsidiary just as defence contractors are fighting harder than ever for a shrinking number of Pentagon dollars, analysts said.
Britain’s Serious Fraud Office said it was prepared to prosecute BAE but did not formally request a criminal trial.
“The corruption charges will be a drag on BAE’s business at a time when it is facing a downturn in its considerable North American revenues,” said Loren Thompson, defence analyst with the Virginia-based Lexington Institute.
BAE had long been treated “almost like an honorary American company” because of its key role on classified intelligence programs, said Thompson, a long-time adviser to BAE’s US unit. “But the federal government does not go easy on companies that are under a cloud of suspicion. The fact that BAE is a foreign company is not likely to help that situation.”
BAE Systems Inc, the US subsidiary, declined to comment on the potential fallout of the British case, referring all queries to the company’s London headquarters. In London, BAE said it was continuing to “expend considerable effort seeking to resolve (the issues) at the earliest opportunity” and would go to court “if necessary.”
BAE, the largest defence contractor in Europe and fifth largest in the United States, is facing allegations that it used bribery and corruption in arms deals in the Czech Republic, South Africa, Tanzania and Romania during the 1990s.
Britain has dropped an investigation into alleged bribery of Saudi Arabian officials by BAE, but the US Justice Department is continuing its own investigation of that matter.
US officials remain tight-lipped about any progress in the case, saying only that it is still under way.
Separately, a senior Justice Department official said in prepared remarks to a conference on white collar crime that the agency will continue to “pursue vigorously” violations of the Foreign Corrupt Practices Act.
“I fully expect that the number of FCPA prosecutions of corporations and individuals alike will continue to rise,” Lanny Breuer, assistant attorney general for the department’s criminal division, said in the prepared remarks.
The US investigation has not had much negative impact on BAE Systems thus far, said one source familiar with the investigation, who was not authorized to speak on the record.
He said the probe had not prevented BAE from winning approval from the US government to buy Armour Holdings in 2007 for $4.5 billion (R34.8 billion) which was at that time the largest ever foreign purchase of a US defence company.
Just two years earlier, the company also acquired United Defence Industries, a major maker of combat vehicles, artillery and naval guns, expanding its role in the US defence market.
“If history is any guide, this latest news should not have too much of an impact either,” said the source.
But he conceded that BAE was more vulnerable now after losing two big truck deals, and given mounting pressure on the US defence budgets.
US government auditors are due to rule by December 14 on a protest filed by BAE against the Army’s decision in August to award an order worth up to $2 billion (R15 billion) for mid-sized military trucks to Oshkosh.
Jim McAleese, a Virginia-based defence consultant, cautioned that these were different times given broad public frustration about corporate excesses and corruption.
“It’s going to be increasingly difficult for the US government, the Pentagon and Congress to give the benefit of the doubt to any company that is being prosecuted for corruption or integrity violations,” said McAleese.
BAE’s US subsidiary is shielded somewhat from the British investigations because of special legal firewalls set up in 1999.
Under the terms of BAE’s Special Security Agreement, the US unit has its own board of directors and chief executive, and must follow detailed rules on what information can be shared between the parent company and its US unit.
But Walt Havenstein resigned as chief executive of BAE’s US unit in June, and the company has not yet filled his position, creating a “leadership vacuum” that could be problematic, McAleese said.
“The longer that the leadership vacuum remains and the longer that they’re fighting publicly with their customer, the more likely it is that the public will attribute any ethics problems of the corporate parent to its US operations as well,” he said.
Pic: BAE logo