US Investigating Raytheon for bribery of Qatar Royal Family Member

Qatar Bribery: Last year, while reporting that U.S. authorities were investigating Raytheon Technologies Corp. for improper payments in the Middle East, I posited a hypothesis that the investigations were related to a California Court case stemming from a soured consultancy agreement with the State of Qatar (Tarek Fouad v. the State of Qatar).

My hypothesis may have not been misplaced, as the Wall Street Journal managed to track down sources familiar with the matter and reported this week that U.S. authorities were indeed investigating whether payments by the weapons maker to a consultant for the Qatar Armed Forces (QAF) may have been bribery intended for a member of Qatar’s ruling royal family. Details.

The US Lawsuit

The lawsuit filed in California Courts in 2019 revealed serious allegations that Raytheon had funneled around 7 million Qatari riyal (approx. $1.9 million) in bribes through Digital Soula Systems (DSS), a Qatari defense and security-consulting firm, partly-owned by Sheikh Joaan Al Thani, a brother of the country’s ruling emir.

The derivative action, was filed in 2019 by a former Digital Soula Systems shareholder and director, Tarek Fouad, against the State of Qatar and the QAF. Fouad claimed in his suit that the QAF had failed to pay for consulting work DSS did on a defense procurement contract. Fouad additionally alleged Sheikh Joaan had personally benefited from payments from Raytheon on work related to this acquisition.

DSS reportedly contracted with the QAF in March 2015 to advise on the acquisition of an advanced command-and-control system (also known as “the Falcon Project”). Due to major delays amid dysfunction and infighting within the QAF, the Qataris eventually abandoned the proposed project, according to former DSS employees.

After the project collapsed Tarek Fouad, a dual U.S. and British citizen sued the QAF for $4.4 million in fees he said he was owed for the consulting work. In the lawsuit, Mr. Fouad also alleged that his two former co-directors (and co-shareholders) at DSS had negotiated an illegitimate settlement with the QAF in order to avoid prosecution in Qatar for facilitating the alleged bribery by Raytheon.

Tarek Fouad’s lawsuit was eventually dismissed in 2020 by a California district court judge who found that the U.S. was an improper forum for resolving the dispute.

The Qatar bribery allegations made during the lawsuit however led to the double inquiries by the U.S. Securities and Exchange Commission and the U.S. Justice Department. As reported by the Wall Street Journal, the SEC began making inquiries into the lawsuit’s bribery allegations in the months after it was filed, according to one of the people familiar with the matter. The DOJ soon followed suit, the person added.

Both agencies are empowered to investigate and separately enforce the Foreign Corrupt Practices Act (FCPA), which prohibits companies from paying bribes to foreign public officials to gain a business advantage, and requires companies to maintain controls and accurate books and records regarding such payments.

Raytheon publicly disclosed the double FCPA criminal investigation in its securities filings last year, mentioning that authorities were conducting investigations into whether there were improper payments made by Raytheon or its joint venture with France’s Thales SA in the Middle East since 2014. The company hasn’t provided any further details about the probes.

The Wall Street Journal further reported that Law firm Wilmer Cutler Pickering Hale and Dorr LLP was hired by Raytheon to conduct an independent investigation into the Qatar bribery allegations made during the lawsuit. The firm has interviewed people with knowledge of Digital Soula Systems and its dealings with Raytheon, according to several people who said they were contacted by the law firm.

As the investigations are ongoing, it is too early to extract enforcement compliance lessons, however the opportunity to shed light into otherwise secretive defense contracts, is worth the analysis, particularly as reference is made to Raytheon’s compliance department and due diligence process in the lawsuit.

The Alleged Qatar Bribery Scheme

As is often the case in defense/aerospace bribery allegations, it only takes one soured consultancy agreement for the can of worms to become public.

Fouad alleged in his suit that the bribes were paid to Sheikh Joaan bin Hamad bin Khalifa Al Thani, the brother of Qatar’s emir. According to Fouad, these bribes were made by Raytheon in an “apparent effort” to influence Qatar’s acquisition of defense systems.

It is worth noting that Raytheon has been awarded more than $7 billion contracts in Qatar since 2014 (starting date for the U.S. investigations). The contracts include the building and servicing of Raytheon’s Patriot missile system and other air-defense infrastructure, as per public records.

Fouad alleged in his suit, that Raytheon between 2014 and 2016 directed a series of payments into bank accounts associated with DSS. Bank statements included in his lawsuit show several such payments from Raytheon in 2014.

The payments were labeled as compensation for defense studies that DSS would produce for Raytheon.

But after extracting metadata from the studies’ digital files, it appears that Raytheon itself had created the defense studies, according to a forensic report commissioned by Fouad and included in his lawsuit.

Fouad argued in the lawsuit that the work orders for the studies were a sham, since none of the deliverables were created by DSS directly or indirectly for Raytheon. “This form of bribe is often referred to as a no-work contract,” he stated.

DSS was a consulting firm with 3 shareholders. It was majoritarily-owned by Sheikh Joaan, who was the majority owner of a company called Al Sedriah, which held a 60% stake in Digital Soula Systems. The other two shareholders were an active-duty lieutenant colonel for the QAF, and Fouad.

Raytheon’s compliance team was aware of this shareholding. An email, included by Fouad in his lawsuit, appears to show a member of Raytheon’s compliance team conducting due diligence by asking Fouad in 2013 for information about Al Sedriah’s owners. Mr. Fouad in his response identified Sheikh Joaan as Al Sedriah’s owner.

Compliance Reflections

As earlier mentioned it is too early to talk about misconduct in this case, as the investigations into this Qatar bribery are still ongoing. The investigations may take years, or may be even closed with no evidence of misconduct. It remains to be seen whether the alleged bribery in Qatar is bona fide and is the only facet being investigated, or whether the investigations cover additional countries. Raytheon did mention in its 2020 securities filing that “improper payments in the Middle East” were under investigation. It is understood Raytheon has been awarded contracts in Israel, Saudi Arabia, Kuwait, Bahrain, Egypt, Jordan and the UAE.

With regards to Qatar, Raytheon’s compliance team did not seem alarmed that DSS had a member of the Qatari ruling family as well as an active military official with some degree of influence/insight into Qatari defense acquisitions. Or were they in fact alarmed, but their concerns overruled by the Business Development?

Raytheon prides itself in having a strong ethics and anti-corruption program. Publicly, the company has a policy to control the use of agents (which they call IBDP), which addresses the associated corruption risks and provides details of specific controls to mitigate these risks. As part of this policy, Raytheon commits to establishing and verifying that the use of an agent is, in each case, based on a legitimate business need, and is based on a robust enhanced due diligence (which entails “ in person interview, Restricted Party and Politically Exposed Person screenings, financial records review, key person analysis, review of company background reports from commercial sources, and expanded due diligence for high-risk engagements“)

All new IBDPs go through several levels of approval: the Business Unit Office of General Counsel, ACIA, Raytheon Washington Office General Counsel, Raytheon International, and the Senior Vice-President of Business Development. Further, the due diligence process is refreshed frequently as change orders and modifications arise, but in any event, no less than once every two years.

Which in practice means that the Qatari relationship with DSS should have not only gone through an extensive due diligence, several levels of approval, but also have been conducted twice since the relationship may have lasted more than two years (from 2014-2017). That sole email dated 2013, submitted by Tarek Fouad as part of the lawsuit, doesn’t suggest such an extensive level of due diligence.

This detail is of importance as defense procurement in the region is likely to be similar to some extent. According to the Stockholm International Peace Research Institute, of the world’s 10 largest importers of major arms between 2015-2019,  six countries in the Middle East – Saudi Arabia, Egypt, Algeria, Iraq, Qatar, and the UAE – are at high, very high or critical of corruption in the defence sector as measured by TI’s Government Defence Integrity Index (GI)

In 2015 Qatar’s overall GI ranking in Band F placed it in the highest risk category for corruption in the defense and security sector. Qatar has been described as having “no defined process for acquisition planning – the process through which the state identifies what arms it will buy –all Qatari military procurement is exempted from public tender and most contracts are single-sourced.” In other words, the procurement process may be restricted to certain preferred bidders or the procurement may be made with a direct single supplier.

Qatar imposes no restrictions on the use of agents and intermediaries, which are common in Qatari defense deals, and no anti-corruption requirements are stipulated in contracts with suppliers. There is no specific law in Qatar governing corruption or bribery. Qatar’s Military Service Law No. 31/2006 prohibits inter alia a military service officer from accepting gifts, gratuitous payments whether directly or through an intermediary, but enforcement appears to be rare.

Knowing these components, I would imagine Raytheon compliance would have taken the highest risk-based measures to limit their bribery/corruption exposure in Qatar, or at the very least involved the US embassy when confronted with questionable consultancy structures/improper payments.

Raytheon is no stranger to US investigations, in 2013, the SEC and the DOJ closed an investigation into the company for potential FCPA misconduct ‘without recommending enforcement action.’ Raytheon since completed a self-initiated internal review of certain international operations and had voluntarily disclosed the results to SEC and DOJ.

Despite some local laws preventing the use of agents in defense procurement, the use agents/consultants continues to be the practice in the region, for their ability to “open doors” in that part of the world. Refusal to engage in bribery may even damage existing and long-standing relationships usually involving close interaction with public officials.

Corruption in the defense sector is particularly dangerous, divisive and wasteful; it emboldens hostile parties (as demonstrated recently in Afghanistan), renders armies less dependable, and robs populations internationally of the resources needed to achieve sustainable development.

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