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Will The Local Law Defense Help BAE?

BAE Systems is being investigated by the U.S. Department of Justice for possible violations of the Foreign Corrupt Practices Act. It allegedly paid £1 billion to Saudi Prince Bandar in return for his helping BAE sell 72 Typhoon jet fighters to Saudi Arabia. Prince Bandar may have moved a lot of the money through U.S. bank accounts and -- with BAE's knowledge -- to other members of the Saudi royal family. Those relatives -- along with the prince himself -- presumably are "foreign officials" for purposes of the FCPA. That could make the payments illegal. So if BAE is prosecuted, what defenses can it raise?

One might be the rarely-spotted local law defense. The FCPA allows otherwise prohibited payments if the "payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official?s" country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1). This affirmative defense -- one of only two -- was added to the FCPA in 1988. But it only works if the payment is legal under the written laws of the country in question -- a hurdle that has rendered the defense practically useless except in industry-specific scenarios, such as drug trials paid for by foreign pharmaceuticals but managed by government-employed doctors.

The Notes to the 1988 House and Senate Conference Agreement say in relation to the local law defense: "The House receded to the Senate, with an amendment to make it an affirmative defense that a payment to a foreign official is 'lawful under the written laws and regulations of the foreign official's country.' [emphasis in original] The Conferees wish to make clear that the absence of written laws in a foreign official's country would not by itself be sufficient to satisfy this defense. In interpreting what is 'lawful under the written laws and regulations,' the Conferees intend that the normal rules of legal construction would apply."

We doubt there are any laws or regulations now on the books in Saudi Arabia that would expressly permit members of the royal family to earn a commission on arms sales to the government. But would the King issue a decree -- the country is a true monarchy, after all -- that retroactively authorizes and approves the BAE payments? We don't know the answer. But the question is sure to raise issues for Saudi Arabia and its royal family that are well above our pay grade. Meanwhile, we imagine BAE is giving this some serious attention as it plots its potential defense strategy.

View the Notes to the 1988 House and Senate Conference Agreement Here.

Full post as published by The FCPA Blog on November 26, 2007 (boomark / email).