Venice, Fat Leonard And Red Flags | Thomas Fox – Compliance Evangelist

Venice is one of the most unique and beautiful cities on earth. It was a great maritime power for over 1000 years. At the height of its power, it was the richest city on earth, worth almost 10 times more than the entire country of France in 1300. Even today, it is still dominated by the sea in all aspects, from the transportation of its daily food stuffs, to the flooding which is regular occurrence due to the fact the city is sinking into the Adriatic.

Venice’s maritime heritage sets the scene for today’s post which is about the Fat Leonard scandal involving the US Navy. The scandal led the Navy to taking action against seven officers over a criminal investigation into ship supply contracts for the Navy in the Pacific. The supply contracts where all with a company named Glenn Defense Marine Asia. As reported by the New York Times (NYT), the allegations are that the company, led by a Malaysian named nicknamed “Fat Leonard”, won over $200 MM in contracts “to provide fuel, food and other services to warships by submitting extremely low bids.” The company then used bribery and corruption of Navy officers to help inflate the company’s billing and to “cover his tracks.” Apparently complaints were raised by Navy contracting officials as early as 2009 about the company, yet it was awarded three new contracts in June 2011, giving Glenn Defense Marine Asia “control over supplies and dockside services for its [the US Navy’s] fleet across the Pacific.”

For the compliance professional, this scandal involving the US involves some clear and unfortunately stark lessons learned regarding the warning signs of corruption, i.e. Red Flags.

Background Investigation

For any Foreign Corrupt Practices Act (FCPA) compliance program, a mandatory staple is to know with whom you are doing business. This is referred to as due diligence. A variety of sources are reviewed during the due diligence process, including background checks on third parties who do business with a company through the sales chain and supply chain. It turns out that Mr. Francis had spent time in jail on handgun charges. More significantly, the Navy encountered problems with Glenn Defense Marine Asia in its initial contracts with the company.

Rates and Pricing

Most compliance practitioners review contract rates to make sure that the rates do not create such a large amount of money to facilitate the payment of bribes or to create the incentive to pay bribes to win contracts. However, contract pricing and rates can be a significant indicator that something may not be quite right with a third party. In the case of Glenn Defense Marine Asia, it was its low-ball bidding which should have raised a red flag. In the bidding for the 2011 Pacific-wide supply contract, another company, DaeKee Global Company bid $67.9MM, while Glenn Defense Marine Asia bid only $21.6MM. Another NYT article quoted Robert Burton, a former acting administrator for the Office of Federal Procurement who said, “That type of huge price discrepancy is certainly a red flag.” He was further quoted to say, “Contracting officers should have raised questions.” Glenn Defense Marine Asia’s business plan was then to overcharge the US Navy using inflated prices and submit billing for delivery of non-existent goods and services.

Lavish Gift-Giving

To take this next step, the company needed the active assistance of US Naval officers. Once Glenn Defense Marine Asia was able to secure the contract to supply the Pacific-wide stores, it went to work on the naval officers now caught up on the criminal investigation. In one email the company said that “We gotta get him hooked on something” when discussing how to corrupt one naval officer to help Glenn Defense Marine Asia get over-charges paid to make up for the low bid on the contract. The company used lavish gifts and entertainment to cultivate officers who could send additional work in the direction of the company and approve the payment of inflated billing or billing for non-existent work. The gifts ranged from tickets to concerts, first class travel across the globe and payments of up to $100,000 in cash.

While most companies have compliance programs in place to deal with the lavish gift-giving and perform background due diligence on entities with which they do business they do not often focus on pricing. This scandal involving Glenn Defense Marine Asia and the US Navy makes clear that if a potential third party representative using an extra-ordinary low rate to entice your company to do business with it, something may be amiss. As Burton was pointed out in the NYT article, a huge price discrepancy is itself a red flag. If pricing is so low, as not to make business sense, it means the price difference will be made up somewhere else. In the case of the US Navy it was through over-charging for goods and services and billing for non-existent bills and services. If the same happens with a foreign government or state owned enterprise subject to the FCPA, it could well be that your company would be in hot water for going with the lowest bidder to represent your company. This does not mean that your company cannot do business with the lowest bidder, but it does mean that if a bid is so low as to defy commercial expectations, there needs to be further analysis to determine why the bid is so low.

The Fat Leonard scandal presents some tangible lessons for the anti-corruption compliance practitioner. Just as Venice grew wealthy through smart trading, it is incumbent to know who you are doing business with, watch out for red flags and manage your business relationships after the contract is signed.

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