The FCPA Files: International Systems and Controls Corp. (1979)

Behind its anodyne name, the Houston-based engineering firm International Systems and Controls concealed a methodical and pervasive culture of corruption. In Saudi Arabia, the company paid $3.5 million in bribes to obtain contracts worth $106 million from the Saline Water Conversion Corporation. In Iran, where it did about a fifth of its total business, it handed off $11.3 million to get another $600 million or so to build forest products complexes. Millions more were disbursed through subsidiaries to well-connected third parties in Algeria to secure deals with Sonatrach, the country’s state-owned oil company, in brazen defiance of local restrictions on the use of sales agents. Similar arrangements were pursued in the Ivory Coast, Nicaragua, Chile, and other locales.
As it turned out, these typically fixed-price deals weren’t always profitable, but the company found ways to handle that inconvenience. Cost overruns were registered as “unbilled receivables”, even if no such amounts had ever been invoiced or otherwise communicated to the customer. Sometimes, the bribes were similarly accounted for as a reimbursable expense. Profits were prematurely recognized, and if payments weren’t coming through on one contract, the balance was added to a different one and maintained as an asset.
None of this did much good for the company’s shareholders. Instead, a handful of insiders enriched themselves using a generously funded and never-audited “deferred compensation plan” whose workings were meticulously omitted from the company’s financial disclosures, however. Taking it a step further, the CEO and Chairman of the Board, J. Thomas Kenneally, even arranged for the company to purchase, furnish, and lavishly renovate an estate in Ireland for his family to summer in, even though it was officially described as “approximately 15,000 square feet of office space, support facilities and visitor accommodations.”
Under pressure from the SEC, the company commissioned a special counsel investigation in 1976, but the board ended up sitting on the tentative report for more than a year. Worse, the “outside directors” charged with overseeing the investigation were hardly disinterested, owning law and consulting firms that together took in fees of more than a million dollars. As with so much else, these conflicts remained undisclosed in the company’s public filings. Eventually, the SEC stepped in and suspended trading in the company’s stock. The case provides a good example of the FCPA’s role in ensuring transparency and protecting investors.
This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance. |