We’re only eight months into 2014 and it has already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law. The agencies also have nailed down some hefty settlements this year: like the $384 million that Alcoa Inc. and one of its subsidiaries agreed to hand over in January.

With big-ticket settlements such as this on the books, the $2 million that firearms manufacturer Smith & Wesson Holding Corp. recently agreed to pay to settle FCPA charges might sound like a small-caliber hit. But a closer look at the case offers some lessons about FCPA enforcement and how companies should respond when faced with bribery and corruption accusations.

The SEC announced on July 28 that it had settled with the Springfield, Mass.-based company, which it alleged had engaged in a systematic pattern of bribery from 2007 to early 2010 in order to get contracts to sell firearms to foreign military and law enforcement in countries such as Indonesia, Turkey and Pakistan. In the Pakistan incident, the only transaction that Smith & Wesson actually profited from before the Feds came knocking, the company authorized a third-party agent in the country to provide more than $11,000 worth of firearms plus cash payments to a Pakistani police department in order to obtain a contract. Smith & Wesson got the contract and earned $107,852, which they agreed to pay the SEC in disgorgement as part of the settlement.

Bill Michael, cochairman of Mayer Brown’s global anticorruption and FCPA practice, told CorpCounsel.com the fact that the SEC was willing to go after a company that only profited by a little more than $100,000 from allegedly illegal actions should be a lesson and warning to those who would skirt antibribery law. “Apparently, no case may be too small,” he said.

In some ways, Smith & Wesson’s story is a familiar one. In 2007, when the alleged FCPA violations occurred, the company was on the move, trying to expand into new overseas markets, apparently without taking into account many of the dangers that go along with this sort of international growth. “If you look at the risk profiles of countries they were trying to do business in, those are extremely risky markets,” Gregory Paw, a partner at Pepper Hamilton and member of the firm’s white-collar litigation and investigations practice group, told CorpCounsel.com.

According to the SEC settlement order, Smith & Wesson did not perform anticorruption risk assessments, failed to conduct due diligence on its new third-party agents and generally lacked an appropriate FCPA compliance program.

The lack of proper compliance on Smith & Wesson’s part may have something to do with the company’s size. “If you go to a large-scale company or a Fortune 500 company that’s dealing with international markets, they’ll have a well-established program for how they deal with new business agents,” said Paw. For small- and medium-sized companies such as Smith & Wesson, the systems to scrutinize third parties in a sufficient way might not exist. In the SEC statement announcing the settlement, Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA unit, said the deal was “a wake-up call” for smaller businesses.

Part of the problem for Smith & Wesson may have been concentrating the oversight power for bribery and corruption matters almost completely in the hands of the company’s vice president of international sales. According to the settlement order, this person had “almost complete authority” to conduct the company’s international business, “including the sole ability to approve most commissions.”

According to Paw, any company can reduce FCPA risk simply by insisting that “four eyes” look at possible commissions and transactions. “That’s a pretty simple procedure that can be put in place, but it just makes the company pause and say, ‘Two people have to look at this and say yes before we do it,’” he said.

The entire international sales team ended up paying a price for the alleged bribery and cover-up: the whole staff was fired promptly after the SEC started investigating. The company conducted an internal investigation of charges, terminated certain pending transactions and reevaluated foreign markets where it was looking to do business. The company also revamped its internal controls, conducted internal audits, enhanced FCPA compliance policies and procedures, and created a special committee for ethics and compliance.

In its announcement of the settlement, the SEC indicated that it took cooperation from Smith & Wesson into consideration when putting together the settlement.

Mitchell Fuerst, managing partner at Fuerst Ittleman David & Joseph, told CorpCounsel.com that although he has no insider knowledge of the SEC or Smith & Wesson, it does seem that the penalty could have been a lot worse for the firearms manufacturer, and could have involved criminal charges against executives, or domestic or U.S. State Department sanctions. “Smith & Wesson potentially had the risk that it could be debarred from selling products to governmental bodies in the U.S.—state, federal and local—as result of its misconduct,” he said. “That probably would have been a $100 million sanction imposed upon Smith & Wesson that would have been too difficult for it to bear.” He added that the outcome suggests that the problem was probably contained in the international sales department, rather than being a companywide corruption issue.

Michael agreed that the situation could have been much worse. “Taking those steps of an internal investigation, remedial actions, enhancing your compliance program and those sort of things can pay dividends during the decision making by regulators and law enforcement agencies,” he told CorpCounsel.com.

Smith & Wesson’s remedial measures set a good example and likely helped stave off larger penalties, but there were certainly other costs to the company stemming from the government’s investigation besides the $2 million penalty at the end. Paw pointed out that years of internal investigations, accounting evaluations, legal consultations, reports to prepare and government meetings really add up. That’s not to mention the blemishes the company now has on its reputation. “It really hurts, in a long-lasting way, the name of the company,” Paw said.

Reprinted with permission from the August 5, 2014 edition of Corporate Counsel © 2014 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.