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Full Penalty Could Have Wiped Out Titan

The record $28.5 million fine Titan Corp. agreed to pay the federal government in connection with admitted violations of bribery laws could have been much worse.

Had the federal government imposed the ultimate sentence, prohibiting the San Diego-based defense firm from bidding on future government contracts, it could have caused Titan’s demise, said the head of an organization that helps companies establish anti-bribery programs.

“It would be a corporate death sentence,” said Alexandra Wrage, the president of Trace International Inc., a Washington, D.C., nonprofit.

Titan agreed to the fines March 1 and pleaded guilty to three felony counts regarding payments of more than $3.5 million made to a contracted agent in the West African nation of Benin for the purpose of winning a telecommunications project. The bribery allegations first surfaced about a year ago, and Titan’s inability to resolve the issue eventually led to the collapse of Titan’s planned sale to Lockheed Martin Corp.

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Titan, a provider of information and communications systems, derives more than 98 percent of its revenues from government contracts. It has 12,000 employees, including about 2,000 in San Diego County.

While the federal penalty is certainly significant and is the most ever levied against any company for violations of the Foreign Corrupt Practices Act, the dollars are comparatively small when measured against all the employee hours, legal fees, and potential lost business Titan has sustained and may incur in the future, Wrage said.

“And how do you assess all the reputational damage that’s been done?” she said.


Record Revenues

Yet, despite a flurry of negative news surrounding the bribery issue, the failure to complete the Lockheed deal, and connections (through its contracted interpreters) to the Abu Ghraib prison scandal in Iraq apparently had little effect on Titan’s financial performance.

On March 2, Titan reported a 2004 net loss of $38.4 million on revenues of $2.05 billion, compared with net income of $29 million on revenues of $1.76 billion in 2003.

The company said it incurred charges of $5.1 million related to the costs of the proposed $2.2 billion merger with Lockheed and dealing with federal investigations regarding the bribery allegations.

In addition to record revenues last year, Titan also won a number of new contracts that pushed its total contract backlog to above $6 billion.

“The amazing thing about Titan is that they haven’t allowed all those distractions to interrupt their core business, and that’s a testament to (Chairman and CEO) Gene Ray,” said Kevin Carroll, the executive director for AeA San Diego, a trade group for the local high-tech industry.

What might also be amazing is the amount of money Titan spent for cash payments funneled to the re-election campaign of the president of the West African nation of Benin. According to the complaint filed by the Securities and Exchange Commission, an unnamed former senior Titan officer directed the payment of about $2 million via its agent in Benin to be given to the election campaign of the incumbent President Mathieu Kerekou.

Titan’s Benin agent received total payments of about $3.5 million while he was a business adviser to Benin’s president. And while the agent lives in Benin, $1 million of the amount was wired to his personal bank account in Monaco, about $500,000 was wired to another personal account in Paris, and $400,000 wired to an account of the agent’s relative in Benin, according to the SEC complaint.


Turning The Page

In its official response to the bribery settlement, Titan said it was “relieved that this chapter in the company’s history is coming to a close.”

As part of its settlement, the company agreed to review its compliance and procedures relating to the Foreign Corrupt Practices Act and adopt a consultant’s recommendations.

The reality of the bribing of government officials to obtain foreign contracts has received more attention in recent years as U.S. firms compete with their counterparts in Europe and Asia.

“It’s widespread in much of the world,” Wrage said. “A recent study by the World Bank estimated the total spent on bribes to be about $1 trillion a year.”

The preponderance of the bribery takes place in developing or Third World nations that often encourage it by not paying civil servants much money.

“But high-level bribery can happen in any country,” Wrage said.

Matt Anderson, director of the U.S. Department of Commerce’s San Diego office, said for a long time the United States was the sole nation that enacted tough laws against paying bribes.

“Up until a few years ago, foreign countries were routinely paying bribes (to win business) and were allowing those companies to deduct the expenses from their income taxes,” he said.

International trade agreements arranged in 1997, and subsequent years, signed by some 33, nations have also resulted in anti-bribery laws being passed.

There is a downside, Wrage said.

“They’ve now put the laws on their books, but they aren’t prosecuting anyone,” she said. “And when they have, they are prosecuting American companies.”

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