Boeing and the Conduct of Due Diligence on Sub-Suppliers

by Thomas Fox
Contact

The Foreign Corrupt Practices Act (FCPA) act has language which makes illegal a direct or indirect act which might be used to obtain or retain business from prohibited parties. This has caused companies to begin to look at their suppliers as one area which might give them FCPA exposure. I have been considering the role of suppliers in a compliance program as I followed the issue of the smoldering batteries in the Boeing 787 Dreamliner.

As reported in a New York Times (NYT) article by James B. Stewart, entitled Japan’s Role in Making Batteries for Boeing, the construction of the batteries at issue was outsourced by Boeing to a Japanese company called GS Yuasa. Stewart’s article points out the need for close review of suppliers and what can happen if the quality does not meet the standards required for the project. However, I considered the article from the FCPA perspective. Stewart initially noted that “No one has claimed that GS Yuasa was chosen for the 787 for anything but merit.” But then he goes on to say that “Boeing has long been dogged by suspicion that in return for awarding major contracts to Japanese companies, which also receive subsidies from the Japanese government, the countries airlines buy Boeing aircraft almost exclusively.”

The question all of this raised for me is just how much due diligence should a company engage in for its suppliers? The first thing to note is that GS Yuasa is not a direct contractor to Boeing. The Japanese company is a subcontractor to a French company named Thales, which was contracted by Boeing to supply the electrical system. However, Stewart noted that Boeing approved the Thales/GS Yuasa contract and relationship. Does this mean that Boeing performed any kind of due diligence on GS Yuasa? The article does not specify any of these facts. However, Stewart asks the question of whether the outsourcing of this work was a for the benefit of sales of planes to Japan? He quotes Richard L. Aboulafia who said, “And then there’s Japan. All the normal ways of doing business are upended.” When asked if there might be a ‘quid pro quo’ Aboulafia said, “Yes, absolutely. But no one will talk about it, and no one can prove it.” He went on to say that in Japan “there is a unique relationship between the airlines, the suppliers and the government. The government supported the airlines, the government and the industries and they developed together. The government has enormous influence. They all work together.”

Are these questions which should be explored in due diligence? I think this situation brings up the issue of how far down in the supply chain that a company needs to go in performing due diligence. Many contracts with suppliers require that if there is a sub-supplier that sub needs to go through due diligence. However, in the case of GS Yuasa, Boeing had the right to select the supplier and if you have that right you probably need to perform due diligence on the supplier.

The key question that Stewart raises in his article is whether Boeing is using the hiring of GS Yuasa as leverage to gain sales to the Japanese government. GS Yuasa admitted that the battery component of its company is a money loser, even with the Boeing contract. This obviously raises the question of why the company is in such a business. The company also admitted that it had received subsidies to the tune of $3.5 billion from the Japanese Ministry of Economy, Trade and Industry to “begin mass production of lithium-ion batteries…”.

However, does Boeing have strong supplier relationships with other Japanese companies? In addition to the sales to Japan Air, Boeing works closely with Japan’s Defense Ministry and Boeing was quoted in the article as saying that it had “a long history of working together to meet Japan’s defense needs.” In addition to the hiring of GS Yuasa, Boeing said that its Japanese partners had “designed and developed 35 percent of the 787 airframe structure, including the main box wing, which is the first time Boeing has ever entrusted such a critical design component to another company.”

Stewart penultimately notes that “any questions about GS Yuasa may be premature.” In addition to the investigation of GS Yuasa, both the French company Thales and Securaplane, an American subsidiary of the UK engineering company Meggitt which makes the battery chargers, are also being looked at in connection with the fires aboard the Boeing planes. Stewart does believe the “whatever the outcome, experts said that with so many lives at stake, the design and manufacturing of new aircraft should be based solely on legitimate issues of cost and quality, and the selection process for suppliers should be transparent and untainted by other commercial or political concerns.

To end his article, Stewart quotes Aboulafia who states that “The greatest enemy of good aircraft is people who interfere with the freedom to shop for the highest quality.” I think that the same could be said in conjunction with the FCPA and the Supply Chain.  If a company allows inferior quality into its supply chain through the bribery or corruption that the FCPA is designed to stop it could well allow an inferior product to be constructed. While such actions may not have the catastrophic and very public impact that the apparent battery failures on the 787 have sustained the damage can be severe.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

Written by:

Thomas Fox
Contact
more
less

Compliance Evangelist on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!