On July 28, 2014, Smith & Wesson Holding Corp. ("Smith & Wesson"), the firearms manufacturer based in Springfield, Massachusetts, agreed to resolve charges brought by the Securities and Exchange Commission ("SEC") for violations of the Foreign Corrupt Practices Act ("FCPA"). The charges stemmed from bribes paid by Smith & Wesson employees via third-party agents in Pakistan, Indonesia, and other countries in connection with the award of contracts for gun sales to military and police forces. Pursuant to the settlement, which was reached through the company consenting to an administrative order filed by the SEC, Smith & Wesson agreed to pay $2 million in fines and to adopt various internal controls and reporting obligations. The settlement also caused a significant disruption to the company's ambitious overseas expansion plan, as Smith & Wesson terminated its entire international sales staff and cancelled all pending international sales transactions.

"This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales," said Kara Brockmeyer, chief of the SEC Enforcement Division's FCPA Unit. "When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating."

According to the SEC's order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department. Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments. Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852. According to the SEC order, this was the only contract secured as a result of the unlawful payments, which resulted in $2 million in fines and a requirement for Smith & Wesson to conduct three compliance reviews over a two-year period and report the results to the SEC.

Smith & Wesson's FCPA troubles underscore the company's lack of preparedness to avoid the pitfalls that present themselves overseas, particularly in high-risk markets. Though the company consented to the SEC order without admitting or denying the SEC's findings, the order made clear that the company failed to implement appropriate internal controls, adopt an FCPA compliance program, or require employees and third-party agents to undergo FCPA training before the company implemented its international expansion plan.

Measures for Avoiding FCPA Concerns in the Global Marketplace

The SEC order concerning Smith & Wesson outlined a number of measures that the company either failed to take entirely or implemented only as remedial measures after it was made aware of the FCPA issues that it faced. These measures included:

  • creating internal controls on payments, gifts, and other transactions in connection with international business activity;
  • implementing an adequate FCPA compliance program;
  • performing anti-corruption risk assessments for the targeted sales markets;
  • conducting due diligence review of third-party agents, especially in countries with high perceived levels of corruption;
  • devising adequate policies and procedures for commission payments, the use of samples for test and evaluation, gifts, and commission advances; and
  • conducting FCPA training for all relevant employees and third-party agents.

Smith & Wesson's failure to implement these measures before it expanded overseas resulted in significant consequences. Other companies seeking to expand their international sales should carefully consider the implementation of FCPA compliance measures, particularly if they are entering high-risk market areas. Doing so will help to ensure that the only hurdles they face in expanding abroad relate to the market forces of supply and demand rather than legal penalties imposed as a result of unlawful conduct. The charges brought against Smith & Wesson serve as a message to small and medium-sized businesses that the SEC will pursue violations of the FCPA even if the amount of the unlawful payments or bribes are considered small, or if relatively little profit results from the unlawful conduct.

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