Offsets: Performance, Compliance & Risk Management€¦ · suppliers as Indian Offset Partners ... – Anti-bribery provisions prohibit bribes ... • “The ‘VVIP’ Helicopter

Rogers Joseph O’Donnell © 2014

Offsets: Performance, Compliance & Risk Management ABA Section of International Law| March 18, 2014

Robert S. Metzger 750 Ninth Street, N.W., Ste 710

Washington, D.C. 20001 [email protected] www.rjo.com

mailto:[email protected]

Rogers Joseph O’Donnell © 2014 All Rights Reserved

What are “Offsets”

As defined by the Department of Commerce, 15 CFR Part 701: Offsets--Compensation practices required as a condition of purchase in either government-to-government or commercial sales of defense articles and/or defense services as defined by the Arms Export Control Act and the International Traffic in Arms Regulations. Offset Transaction--Any activity for which the U.S. firm claims credit for full or partial fulfillment of the offset agreement. Activities to implement offset agreements may include, but are not limited to, co-production, licensed production, subcontractor production, overseas investment, technology transfer countertrade, barter, counterpurchase, and buy back. Direct Offset--Contractual arrangements that involve defense articles and services referenced in the sales agreement for military exports. Indirect Offset--Contractual arrangements that involve defense goods and services unrelated to the exports referenced in the sales agreement.

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Growing importance of Offsets

• Changing security landscape increases foreign demand

• Shrinking U.S. and EU demand focuses on foreign markets

• State: FMS doubled from $34B in 2011 to $69B in 2012

• Offsets are required by almost all foreign purchasers

• Offsets represent sizable business commitments. In 2010: – US defense contractors reported entering into 24 new offset agreements

with 12 countries valued at $2.0B (BIS Report 2012)

– Those agreements equaled 63.52% of the $3.2B in sales associated with offset requirements

– There were 690 offset transactions (to fulfill offset obligations) with 28 countries with an actual value of $3.6B and offset credit value of $4.4B.

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Offsets are crucial to business opportunity

• Offsets are expected for both FMS and direct sales • For some countries (Turkey, UAE), offsets figure into selection • Generally, the supply contract is contingent on the offset deal • USG’s “hand’s off” policy means direct dealing with sovereign • Enormous range of national regimes, practices and rules

– Established or opaque? Rule-based or “private”? – Percentage of offset required (… 100%, or more) – Fulfillment period; gestation; banking; transfers – Direct vs. Indirect Offsets; measurements and metrics; value added – Eligible partners, supplies and services; amendment – Multipliers, Allowable Discharge Methods – Penalties & Sanctions

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INDIA TURKEY UAE

Minimum Rs 3 billion crores ($65M) $5 million $10 million

Offset % 30% (can be higher) 70 % 60% of cost

Preference Direct, Indirect, FDI, DFI Direct & Indirect Hybrid: I(30) O(70)

Eligible Certain supplies/services (Per RFP Category) As Approved

Discharge Within contract + 2 Within contract + 2 Normally 7 years

Banking Ordinarily 7 years Pre-credit / 5 yrs. NTE 10 Years

Transfer Only Vendor ↔ Tier 1 Limited With approval

Responsible Vendor + Tier 1 Prime & Subs (K) Vendor or Partner

Penalties Maximum 20% 6% LD = 8.5% of contrct

Multipliers 1.50 – 3.0 1.0 – 8.0 1.0 – 3.0

Modification Now – on approval DAC Contemplated By Suppltl. Agrmt?

Offset requirements vary enormously

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TURKEY Req’d Industrialization Plan • Bidders must offer IP/O

in Categories A, B and C A: Turkish industrial activities within scope of the Contract B: product/service export within defense &related fields C: technology cooperation and investment

- RFP sets IP/O liability - SSM can set IP/O activity • IP/O evaluated for

supply contract award Score = 0.5 x T + 0.40 I x 0.10 x E

T = Technical ; I = IP/O; E = Admin

UAE • Approval of the Offset

Plan is mandatory before GHQ Contract

• Satisfaction via a “hybrid” of input (30% max) and output measures (70%)

• Grace period depending on project complexity

• Normal 7 year fulfillment period

• Annual, “progressive” milestones

“Early Planning Rewarded”

INDIA • Vendors select offset

partners & products • Determine if eligible to

discharge offset obligations under 4 categories

• Six avenues for discharge are available (e.g., direct purchase, FDI, ToT)

• Offset obligor or Tier 1 sub • Confirm qualification of

suppliers as Indian Offset Partners (IOPs)

– FDI limit of 26% on defence sector

– Industrial licensing also may be required

Comparing Regimes (example)


Offset Compliance: Business & Legal Risks

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Offsets present a spectrum of business risks

• New Business Capture • The Offset Plan • Agents, Brokers & Consultants • The Offset Contract • Supply Chain • Investments & JVs • Discharge & Measurement • Performance Risks • Penalties & Sanctions

Avascent estimates that $214 billion in offset commitments, worldwide, were generated between 2005-2011. Avascent estimates that rising global demand for military purchases will produce another $225 billion in offset commitments through 2016 , for a total obligation of nearly a half-trillion dollars.

Central enterprise management by

expert resources is advisable

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Offsets present compliance risks at every juncture

Virtually every facet and phase of a foreign defense procurement and accompanying offset contract

presents compliance risks

• Requirements definition • Political decisions to buy • Evaluation & Selection

Improper influence on need Influence on supply contract award Favors to politicians or bureaucrats

• Eligible offset partners • Selection of suppliers • Acceptable business plan

Favors or bribes to decision-makers Steering to “friends and family” Securing necessary consents

• ToT and investment credit • Multipliers • Valuation & Value Added

Favors or bribes to decision-makers “Buying” desired outcomes Kickbacks to / through suppliers

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Integrity Considerations: Applicable Laws

• U.S. Foreign Corrupt Practices Act (FCPA) – Anti-bribery provisions prohibit bribes (or offers to bribe) made to foreign officials, political parties, etc.,

“whether made directly or through a third party for the purpose of obtaining or retaining business or securing a business advantage.”

– Accounting provisions require accurate books and records and adequate accounting and financial controls – no allegations of bribery are required

– Sanctions include criminal and/or civil penalties, loss of export licenses, debarment or suspension

• U.K. Anti-Bribery Act (UK) – Three offenses (bribery, taking a bribe, bribing a foreign official) apply to UK nationals or residents,

entities incorporated in the UK, or foreign persons acting in the UK – A strict liability offense (failure on the part of a corporation to prevent bribery) applies to UK entities and

to entities “carrying on business” in the UK, even if incorporated elsewhere – Applies to bribes offered or given to any person vs. FCPA (only to corruption involving foreign officials) – No exception for “facilitating payments”; no “corrupt intent” is required for bribery of a foreign official

• National Anti-Corruption Measures

• Integrity Compacts accompanying Supply or Offset Contracts

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Alleged Abuse of Offset Contracts: VVIP Helo

Govt of India Finmeccanica/ Agusta Westland

Offset Contracts

Supply Contract

$65M Four Middlemen: Guido Haschke Carlos Garosa Christian Michel Gautam Khaitan

IDS INFOTECH-INDIA

Software

AEROMATRIX-INDIA

India

IDS-TUNISIA GORDIAN SERVICES-MAURITIUS Former A.C.M & Family

€ 18m paid for derelict WG-30 helicopters?

Services

GLOBAL TRADE & COMMERCE

$753M

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India’s Response: a Parade of ….

• Investigations were mounted by the Central Bureau of Investigation (CBI) . • GOI suspended contract payments; Agusta Westland invoked arbitration • 3 of 12 aircraft received – others built but GOI has refused delivery • April 20: MOD announces “Major Changes” to the DPP

– Greater emphasis on indigenous sources as the “ultimate solution to the scourge of corruption.” – DPP changes announced as answers to the “VVIP scam” – Favored “Buy India” modes reduce direct foreign sales opportunities and are not subject to offsets but …

• May 23: “Office Memorandum” excludes services from offset credit • August 14: CAG Report issued – cited “offsets … allowed in violation of the DPP” • January 1, 2014: GOI cancels the sale; GOI has encashed ~$40M+ of guarantees (so far) • Agusta Westland has not blacklisted (yet); arbitration getting underway • No charges yet filed against any individual or company • Lengthy and expensive litigation – reputational damage

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Finmeccanica, Agusta-Westland and others accused have denied charges

and none have been proven

Can such consequences ever justify the risks of unethical offset arrangements?


Speaker Biography Robert S. Metzger received his B.A. from Middlebury College and is a graduate of Georgetown University Law Center, where he was an Editor of the Georgetown Law Journal. He was a Research Fellow, Center for Science & International Affairs, Harvard Kennedy School of Government.

Mr. Metzger is the Managing Partner of the Washington, D.C. office of Rogers Joseph O’Donnell, PC. He advises leading US and international companies on key public contract compliance challenges and in strategic business pursuits. His transactional practice includes international projects, joint ventures, direct and FMS sales to foreign governments, advice on offset obligations and assistance with compliance counseling. SELECTED PUBLICATIONS & PRESENTATIONS • “Armed At Home,” Open magazine (India), Mar. 24,

2014 • “Advanced Regional Turboprop Aircraft: A National

Aerospace Project for India,” The Economic Times, Nov. 10, 2013

• “Offsets Loom Large As Defense Firms Sell More Abroad,” Law 360, Sept. 30, 2013.

• “The ‘VVIP’ Helicopter Scandal: Steering towards a Positive Response” Indian Defence Review, Vol. 29:2 (Apr-Jun 2013).

• “Making India’s Offsets Work for India,” Indian Defence Review, Vol. 28:1 (Jan-Mar 2013).

• “India’s Revised Offset Guidelines,” Presentation to DIOA/GOCA Fall 2012 Conference, Brewster, Mass, September 2012.

For the ABA Section on International Law, he serves as a Vice-Chair, International Procurement Committee, and as a Member of the Steering Group of the India Committee. Mr. Metzger is a member of the International Institute for Strategic Studies (IISS), London. Academic publications on international security topics include articles in International Security, the Journal of Strategic Studies and Indian Defence Review. He is a Guest Lecturer at George Washington University Law School.

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Documents

Offsets: Performance, Compliance & Risk Management€¦ · suppliers as Indian Offset Partners ... – Anti-bribery provisions prohibit bribes ... • “The ‘VVIP’ Helicopter