RTX compliance fines now top $1 Billion.

Compliance-challenged defense contracting giant RTX has agreed to pay nearly $1 billion to settle charges of government contract fraud, foreign bribery, and export control violations.

The settlement comes on the heels of a $200 million settlement in August with the State Department [12717] for a raft of  export control violations.  

Raytheon will enter into a three-year deferred prosecution agreement (DPA) in connection with a criminal information filed today in the District of Massachusetts charging the firm with two counts of major fraud against the United States.

As part of that resolution, Raytheon admitted to engaging in two separate schemes to defraud the Department of Defense (DOD) in connection with the provision of defense articles and services, including PATRIOT missile systems and a radar system.

Separately, Raytheon entered into a three-year DPA in connection with a criminal information unsealed today in the Eastern District of New York charging Raytheon with two counts: conspiracy to violate the anti-bribery provision of the FCPA for a scheme to bribe a government official in Qatar and conspiracy to violate the AECA for willfully failing to disclose the bribes in export licensing applications with the Department of State as required by part 130 of ITAR.

Both agreements require that Raytheon retain an independent compliance monitor for three years, enhance its internal compliance program, report evidence of additional misconduct to the Justice Department, and cooperate in any ongoing or future criminal investigations.

Raytheon also reached a separate False Claims Act settlement with the department relating to the defective pricing schemes. The Justice Department’s FCPA and ITAR resolution is coordinated with the Securities and Exchange Commission (SEC).

Debarment Deliberations

The Justice Department’s resolutions ensure that the appropriate federal agencies can proceed with determining whether Raytheon or any other individuals or entities associated with the company should be suspended or debarred as federal contractors.

Pursuant to the Federal Acquisition Regulations (FAR), when more than one agency has an interest in an entity’s potential suspension or debarment, the FAR requires that the Interagency Suspension and Debarment Committee (ISDC) identify the lead agency for conducting governmentwide suspension or debarment proceedings.

In connection with this resolution, the Justice Department has referred Raytheon’s factual admissions to the appropriate officials within the DOD to initiate the process with the ISDC to identify which federal agency will take the lead in such administrative proceedings, which occur independently of the Justice Department’s criminal and civil resolutions.

“Through deliberate and deceptive actions, Raytheon not only defrauded the U.S. government — it compromised the integrity of our defense procurement process,” said Acting U.S. Attorney Joshua S. Levy for the District of Massachusetts

Qatari Bribery

RTX will pay fines of more than $289 million to avoid criminal prosecution under the Foreign Corrupt Practices Act (FCPA) for funnelling $1.9 million through a consulting firm owned by the Emir's brother in 2014.

Wednesday's settlement with the Justice Department defers for three years prosecution for conspiring to violate the Foreign Corrupt Practices Act and conspiring to violate the Arms Export Control Act. 

Speaking at the time to the Wall Street Journal,  Ryan Rohlfsen, a former member of the DOJ’s FCPA unit and co-chair of the global anti-corruption and international risk practice Ropes & Gray LLP said   “There are red flags all over the place from an FCPA liability standpoint” 

Criminal Investigations Continue

As part of the DPA, Raytheon and RTX have agreed to continue to cooperate with the Criminal Division’s Fraud Section, the National Security Division’s Counterintelligence and Export Control Section, and the U.S. Attorney’s Office for the Eastern District of New York in any ongoing or future criminal investigations.

In addition to the independent compliance monitor, Raytheon and RTX have agreed to continue to enhance Raytheon’s compliance program..

Calculation of settlement

Raytheon received credit for its affirmative acceptance of responsibility and cooperation with the department’s investigation, which included

1. providing information obtained through its internal investigation, which allowed the government to preserve and obtain evidence as part of its own independent investigation;
2.  facilitating interviews with current and former employees;
3.  making detailed factual presentations to the government;
4.  proactively disclosing certain evidence of which the government was previously unaware and identifying key documents in materials it produced; and
5.  engaging experts to conduct financial analyses.

The settlement notes, "however, in the initial phases of the investigation, prior to in or around 2022, Raytheon was at times slow to respond to the government’s requests and failed to provide relevant information in its possession."

Raytheon also engaged in timely remedial measures, including

1.  recalibrating third party review and approval processes to lower company risk tolerance;
2. implementing enhanced controls over sales intermediary payments;
3.  hiring empowered subject matter experts to oversee its anti-corruption compliance program and third party management;
4.  implementing data analytics to improve third party monitoring; and
5.  developing a multipronged communications strategy to enhance ethics and compliance training and communications.

In light of these considerations, as well as Raytheon’s prior history, the criminal penalty calculated under the U.S. Sentencing Guidelines reflects a 20% reduction off the 20th percentile above the low end of the otherwise applicable guidelines fine range.

ITAR Violations

In addition to the FCPA violations, Raytheon, through certain of its employees and agents, engaged in a scheme to willfully violate the AECA and ITAR Part 130 by failing to disclose to the State Department, Directorate of Defense Trade Controls, fees and commissions paid in connection with two Qatar-related contracts — specifically, the bribes Raytheon paid to the high-level QEAF official through sham subcontracts.

The ITAR-related financial penalty of $21,904,850 includes a cooperation and remediation credit of 20% off the otherwise applicable penalty.

The Justice Department reached this resolution with Raytheon based on a number of factors, including, among others, the nature and seriousness of the offense. Raytheon received credit for its cooperation with the department’s investigation, which included (i) gathering evidence of interest to the government and proactively identifying key documents related to willful ITAR-related misconduct; (ii) making factual presentations concerning the ITAR-related misconduct; and (iii) facilitating witness interviews and expediting the government’s ability to meet with witnesses. Raytheon did not receive full credit for its cooperation because in the initial phase of the investigation, before the National Security Division joined the investigation, it failed to provide information relevant to the ITAR violations beyond what was requested in the FCPA investigation.

Raytheon also received credit for remediation, which included, in addition to the remediation described above in connection with the FCPA case, (i) hiring additional empowered subject matter experts in legal and compliance; (ii) developing a multipronged communications strategy to enhance ethics and compliance training and communications; and (iii) making enhancements to its ITAR-related compliance program.

Defective Pricing (Bid Fraud)

From 2012 through 2013 and again from 2017 through 2018, Raytheon employees provided false and fraudulent information to the DOD during contract negotiations concerning two contracts with the United States for the benefit of a foreign partner — one to purchase PATRIOT missile systems and the other to operate and maintain a radar system.

In both instances, Raytheon employees provided false and fraudulent information to DOD in order to mislead DOD into awarding the two contracts at inflated prices. These schemes to defraud caused the DOD to pay Raytheon over $111 million more than Raytheon should have been paid on the contracts.

Raytheon will pay a criminal monetary penalty of $146,787,972, pay $111,203,009 in victim compensation, and retain an independent compliance monitor for three years.  These sums reflect a 25% reduction off the 10th percentile above the low end of the otherwise applicable guidelines fine range. 

Qui Tam  - Whistleblower Case

Raytheon also entered into a civil False Claims Act settlement to resolve allegations that it provided untruthful certified cost or pricing data when negotiating prices with the DOD for numerous government contracts and double billed on a weapons maintenance contract.

Under the False Claims Act settlement, which is the second largest government procurement fraud recovery under the Act, Raytheon will pay $428 million for knowingly failing to provide truthful certified cost and pricing data during negotiations on numerous government contracts between 2009 and 2020, in violation of the Truth in Negotiations Act (TINA).

Raytheon also admitted that by misrepresenting its costs during contract negotiations it overcharged the United States on these contracts and received profits in excess of the negotiated profit rates. Further, Raytheon admitted that it failed to disclose truthful cost or pricing data on a contract to staff a radar station. Raytheon also admitted that it billed the same costs twice on a DOD contract.

Raytheon received credit under the Justice Department’s guidelines for taking disclosure, cooperation, and remediation into account in False Claims Act cases for cooperation provided by RTX.

The civil settlement includes the resolution of a lawsuit filed under the qui tam or whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery.  The former Raytheon employee who initiated the suit will receive $4.2 million as her share of the settlement.

Compliance Culture Wanting

The question for the RTX Board to answer is does leadership have what it takes to create a compliant organization?   Both UTX and Raytheon were subject to Deferred Prosecution Agreements before the this Summer's  settlement with the State Department for endemic compliance failures, failures the firm tried to attribute to acquisitions.   A glance at the firm's top management roster may offer a clue to what's amiss.