A combined $959m has been set aside by RTX Corp, formerly known as Raytheon, as part of a deal with the US government to settle a criminal investigation into pricing for missile and defense services, as well as a separate corruption probe.
The company said in a recent filing that it expects to enter into a deferred prosecution agreement with the Department of Justice (DOJ) and to be subject to an administrative order with the SEC. This is an attempt to resolve the previously disclosed criminal and civil government investigations into improper payments made by Raytheon Company and its joint venture, Thales-Raytheon Systems, in connection with certain Middle East contracts since 2012.
RTX set aside $575m to settle those claims, as well as an additional $285m to settle violations of US export-controls regulations with the State Department’s defense trade arm. The company said it expects to finalize all three agreements in the second half of 2024.
Pricing claims in old contracts
DOJ began investigating Raytheon in October 2020. It looked into pricing claims made by the company for missiles and defense contracts entered into between 2011 and 2013, as well as one from 2017, filings show.
That probe was sparked by a California lawsuit alleging that RTX had funneled the equivalent of around $1.9m in Qatari riyal through a consulting firm partially owned by a brother of the Qatar’s emir – so, bribes intended for a member of the country’s ruling royal family.
That lawsuit was dismissed last year on jurisdictional grounds, but federal authorities started investigating.
Cooperation and an independent monitor
“While the financial impact of these items is above what we had previously reserved, we believe the provisions we have taken put these issues behind us financially, and we will continue to cooperate with the government and external monitors as we move forward,” Neil Mitchill Jr., RTX’s chief financial officer, said on an earnings call with investors Thursday.
In the earnings call, the company characterized the bribery and contract pricing matters as legacy issues. “We’ve already taken robust corrective actions to address the legacy gaps that led to these issues, implementing enhanced compliance and training measures,” the company said.
As part of the resolution of each of the matters, RTX will be required to retain independent compliance monitors over the three-year term of the agreements, with the charges being dismissed if terms are complied with in each agreement.
“In total, we expect to pay about $1 billion related to these matters this year and have incorporated that into our updated free cash flow outlook for the year,” the report notes. “[W]e believe the provisions we have taken put these issues behind us financially, and we will continue to cooperate with the government and external monitors as we move forward,” it said.
A business in demand
Combat in Ukraine and Israel has consumed high volumes of munitions, including Patriot air defense interceptors, used to shoot down Russian missiles, and vast quantities of artillery rounds. RTX is one of the key players in the defense manufacturing sector supplying critical weaponry and the components for them in increasingly drawn out conflicts.
Despite the large sum set aside for these settlements, the earnings call report ended on an upbeat note of profitability, as did its second quarter profit announcement.
Author’s Note: FCPA risk in M&A
The SEC and DOJ have outlined in their well-known Foreign Corrupt Practices Act (FCPA) Resource Guide the practical tips businesses can use to reduce foreign bribery risk following a business combination such as a merger and acquisition (M&A).
The Guide notes that businesses should take the following actions, including:
- conducting FCPA-specific, risk-based due diligence on the potential target company;
- ensuring codes of conduct and all policies and procedures pertaining to the law are now adequate for the new organization; and
- providing all directors, officers, and employees of the newly acquired businesses or merged entities training on the law.
After an FCPA-specific audit of the new business has occurred, the Guide notes, any corrupt payments discovered must be disclosed.
“DOJ and SEC will give meaningful credit to companies who undertake these actions, and, in appropriate circumstances, DOJ and SEC may consequently decline to bring enforcement actions,” the Guide notes, as do subsequent guidance documents from the DOJ detailing their Corporate Enforcement Program.
