Moog Dinged on FCPA Violations

The Securities and Exchange Commission served up a rather hum-drum FCPA enforcement action last week. While the case certainly isn’t a show-stopper, it does offer compliance professionals a few insights about corporate corruption; so let’s fulfill our due diligence obligations and study it.

The company is Moog Inc., maker of motion controls systems for aerospace, defense, and industrial customers. Moog’s Indian subsidiary, Moog Motion Controls, was discovered paying bribes to government officials there from 2020 to 2022 to tilt government contracts in the company’s favor. Moog eventually disclosed the misconduct to the Justice Department, which kicked the case to the SEC, which settled with Moog last Friday for $600,000 in disgorgement and a $1.1 million civil penalty.

In many respects, this case is simply the latest float in the parade of FCPA enforcement actions we’ve seen before. First, in 2020, Moog employees conspired with an independent agent to funnel bribes to a railway regulator, so that Moog would be placed on a list of approved suppliers for railway contracts. To fund the bribes, Moog structured its contract so that “Agent A” received a 10 percent commission on the value of any contract he helped arrange.

Second, in 2021, Moog wanted to secure a defense contract worth $1.3 million, so it paid bribes to bump competitors off the list of eligible bidders. To do so, Moog employees conspired with “Distributor B” to generate a fictional transaction: the distributor conjured up a fake invoice for a specialized table (which the distributor never delivered), and Moog diverted the cash from that fictional transaction into the actual pocket of the government official awarding the contract. Moog won the deal. 

So, yeah — it’s a lot of that, employees conspiring with third parties to fix contracts and win business. Nothing we haven’t heard before in FCPA land. 

Where Moog Went Wrong

Within that India subsidiary, Moog’s compliance program went wrong everywhere. As the SEC settlement order put it: “Employees freely discussed their misconduct, which reflected a prevailing culture to win business at any cost, including improper means. The widespread misconduct reflected a breakdown in internal accounting controls, training, compliance, and tone at the top of the subsidiary.”

We can flag some internal control issues right away:

• Agent A (and presumably other agents working for Moog out there) was working on commission-based contracts to bring in sales. Such arrangements are a huge red flag for bribery risk. Companies should eliminate them entirely, or at least have a contract management system powerful enough to flag such contracts for extra scrutiny.
• Policies and procedures: when Moog employees conspired with Distributor B, they had Distributor B submit an invoice without any prior requisition order. Invoices received without a matching purchase order issued are another red flag for fraud. Companies should have internal accounting controls to confirm that the right documentation arrived in the right order. 
• And more broadly, we have to question the training and leadership Moog’s India employees received, since they were openly talking about the need to pay bribes. Either they never took any anti-corruption training and didn’t know the corruption was wrong; or (more likely) they did receive training, but then ignored those lessons in favor of paying bribes anyway. That’s a failure of leadership stressing the importance of ethics and compliance.

Pursuant to that last point, another interesting element of this case is that we get a glimpse of the routine nature of corruption in India. That’s not new, of course; compliance officers have known for years that corruption is rampant there — but the Moog settlement order shows us just how routine and expected bribery is. 

For example, when the Moog employees were discussing how to disqualify other bidders and win that defense contract in 2021, they mentioned that the corrupt government official was expecting a bribe equal to 2.5 percent of the contract, In another instance of bid-rigging, another corrupt official was expecting a bribe worth 1 percent.

Why do those details matter? Because they remind compliance officers of the actual world your employees inhabit — one where, in many places, bribery is expected. Where officials solicit bribes because they don’t get paid in a timely manner, or because they need to pay off their bosses if they want to keep their jobs. 

I’m not saying we should tolerate bribery as “part of the culture,” but we should be clear-eyed that bribery often is part of the culture, even when the participants in that culture hate it too. 

That understanding of things matters, because if the company doesn’t want to pay bribes in that environment, then senior managers must accept the risk that they might lose a piece of business — and they need to tell employees on those front lines that losing business for ethical reasons is OK. That’s the only way a corrupt culture changes: slowly, and with real cost; a cost the company should be willing to shoulder.

Where Moog Went Right

The good news is that Moog eventually discovered this India misconduct (the settlement order doesn’t say how) and then disclosed it to the Justice Department. The Justice Department then turned over the matter to the SEC, which praised Moog for its cooperation and “prompt” remediation:

• Firing the offending employees and third parties;
• Strengthening its internal accounting controls for third-party payments;
• Enhancing its its policies and procedures regarding the due diligence process and the use of third parties; 
• Conducting more audits of distributor and intermediary activities; 
• Adopting new policies for management approval for all distributor and reseller agreements;
• Rolling out new employee training on anti-bribery and contract-bidding procedures. 

So goes another company into the annals of FCPA enforcement. The parade, as always, continues.