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Danish Subsidiary Exposes Analogic To $14.9 Million Enforcement Action

analogic

Yesterday the DOJ and SEC announced (see here and here) a parallel Foreign Corrupt Practices Act enforcement action against medical device manufacturer Analogic Corp. and BK Medical ApS (Analogic’s Danish subsidiary) in which the entities agreed to pay approximately $14.9 million.

The conduct at issue involved alleged improper payments by BK Medical, primarily in Russia through distributors, and the government alleged that BK Medical took various steps to conceal its conduct from Analogic.

The enforcement action involved a DOJ non-prosecution agreement with BK Medical in which the company agreed to pay a $3.4 million criminal penalty and an SEC administrative order against Analogic in which the company agreed to pay approximately $11.5 million in disgorgement and prejudgment interest. In connection with the same administrative order, the SEC also announced that “Lars Frost, BK Medical’s former Chief Financial Officer, agreed to pay a $20,000 civil penalty to settle charges that he knowingly circumvented the internal controls in place at BK Medical and falsified its books and records.

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Olympus Latin America Pays $22.8 Million In Latest FCPA Enforcement Action To Allege That Health Care Professionals Are “Foreign Officials”

olympus

Earlier this week, the DOJ announced (as part of a much larger enforcement action) a Foreign Corrupt Practices Act action against Olympus Latin American Inc. (OLA), a Miami-headquartered company that distributes medical imaging equipment in the Caribbean, Central America, and South America for Olympus Corporation (a Japanese company).

This post highlights the OLA enforcement action (the latest FCPA enforcement based on the theory that certain health care professionals are “foreign officials” under the FCPA) in which the DOJ charged the company in this criminal complaint with conspiring to violate the FCPA’s anti-bribery provisions and violating the FCPA’s anti-bribery provisions. The charges were resolved via this deferred prosecution agreement in which OLA agreed to pay $22.8 million.

According to the charging documents, from 2006 to 2011 OLA provided approximately $3 million in “hundreds of unlawful payments” to publicly employed healthcare professionals in Brazil, Bolivia, Colombia, Argentina, Mexico, and Costa Rica to “induce the purchase of Olympus products, influence public tenders, or prevent public institutions from purchasing or converting to the technology of competitors.” According to the charging documents, OLA recognized approximately $7.5 million in profits as a result of the alleged unlawful payments.

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In-Depth On VimpelCom

VimpelComThis post goes in-depth regarding yesterday’s FCPA enforcement action against VimpelCom (and a related entity) and summarizes the approximate 120 pages of resolution documents.

As highlighted in this previous post, The net $397.5 million U.S. portion of the settlement is the 5th largest FCPA settlement amount of all-time (see here for the current top-ten list).

The resolution documents contain numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. The allegations in the VimpelCom action are egregious and paint a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.

DOJ

Unitel Criminal Information

The conduct at issue centers on  the Uzbek Agency for Communications and Information (“UzACI”), described as an Uzbek governmental entity authorized to regulate operations and formulate state policy in the sphere of communication, information, and the use of radio spectrum in Uzbekistan. According to the information,UzACI was a “department,” “agency,” and “instrumentality” of a foreign government under the FCPA.

The “foreign official” is described as follows: an individual whose identity is known to the United States, who was an Uzbek government official and a close relative of a high-ranking Uzbek government official. Foreign Official had influence over decisions made by UzACI.

Under the heading “Overview of the Corruption Scheme,” the information alleges:

“VimpelCom and UNITEL conspired with others to provide over $114 million in bribes in exchange for Foreign Official’s understood influence over decisions made by UzACI concerning Uzbekistan’s telecommunications market. VimpelCom and UNITEL officials understood that they had to regularly pay Foreign Official millions of dollars in order to continue to obtain necessary UzACI approvals and be allowed to obtain and retain Uzbek telecommunications business.

The conspiracy to make corrupt payments to Foreign Official occurred in stages:

a. First, before entering the Uzbek market, certain VimpelCom management understood that they were required to have Foreign Official as a “local partner” to conduct business in Uzbekistan. As part of its efforts to enter the market, VimpelCom paid $60 million to acquire Buztel, a company in which certain VimpelCom management knew that Foreign Official held an indirect interest via Shell Company [described as a company incorporated in Gibraltar that was beneficially owned by Foreign Official] because certain VimpelCom management knew that the acquisition of Buztel likely would facilitate VimpelCom’s acquisition of Unitel LLC and enable the company to conduct business in Uzbekistan.

b. Second, in 2006, VimpelCom and UNITEL corruptly entered into a lucrative partnership agreement with Foreign Official’s front company, Shell Company, in which Shell Company would obtain an indirect ownership interest in UNITEL that VimpelCom would later repurchase at a guaranteed profit. The true purpose of this agreement was to pay a $37.5 million bribe to Foreign Official in exchange for Foreign Official permitting VimpelCom and UNITEL to conduct business in Uzbekistan.

c. Third, VimpelCom, through a subsidiary, corruptly entered into a contract with Shell Company purportedly to obtain 3G frequencies in 2007. Certain VimpelCom management caused a $25 million bribe to be paid to Foreign Official via Shell Company so that Foreign Official would help UNITEL obtain these valuable telecommunications assets and permit it to conduct business in Uzbekistan.

d. Fourth, VimpelCom, directly or through a subsidiary, knowingly entered into fake consulting contracts with Shell Company for $2 million in 2008 and $30 million in 2011; in both cases, Shell Company did no real work to justify the large consulting fees. The corrupt purpose of these contracts was to provide Foreign Official with approximately $32 million in exchange for valuable telecommunications assets and to allow UNITEL to continue to conduct business in Uzbekistan.

e. Finally, VimpelCom and UNITEL made $20 million in bribe payments to Foreign Official in 2011 and 2012 through purposefully non-transparent transactions with purported “reseller” companies. Through these transactions with reseller companies, VimpelCom and UNITEL made and concealed corrupt payments to Foreign Official through Shell Company, which allowed UNITEL to continue to conduct business in Uzbekistan.

Certain VimpelCom and UNITEL management used U.S.-based email accounts to communicate with others and effectuate the scheme. In addition, VimpelCom and UNITEL each made numerous corrupt payments that were executed through transactions into and out of correspondent bank accounts at financial institutions in New York, New York.”

Next the information alleges how VimpelCom entered the Uzbek market and how company leaders sought legal cover in doing so. Specifically, the information alleges:

“In 2005, as part of a plan of expansion into the CIS region, VimpelCom sought to acquire an Uzbek telecommunications company. Two companies under consideration for acquisition were Unitel LLC, the second largest operator in Uzbekistan with approximately 300,000 subscribers, and Buztel, which was a much smaller operator with only 2,500 subscribers. Although there was a sound business case for purchasing Unitel LLC alone, VimpelCom ultimately purchased Buztel, as well. Certain VimpelCom management knew that Foreign Official held an indirect interest in Buztel, and that purchasing Buztel would ensure Foreign Official’s support for VimpelCom’s entry into the Uzbek telecommunications market.

As reflected in the minutes of a December 13, 2005 VimpelCom Finance Committee meeting, certain VimpelCom management explained that “due to certain political reasons (and this message should be taken by us as is), Buztel should be considered as an entry ticket into [the] Uzbekistan market and the buyer of Buztel would be considered a preferred buyer of Unitel.” Certain VimpelCom management explained that it was “more important to follow the political requirements suggested for entry into the market versus [the] questionable risk of acquisition of Unitel as [a] standalone” and VimpelCom would be “in opposition to a very powerful opponent and bring [the] threat of revocation of licenses after the acquisition of Unitel [as a] stand-alone.”

According to minutes of the meeting, a VimpelCom Finance Committee member questioned the wisdom of purchasing Buztel when Unitel LLC was of a size sufficient for nation-wide coverage and when the $60 million purchase price for Buztel could be better spent developing Unitel LLC’s network. The minutes reflect that same member also “expressed concern on the structure of the deal and FCPA issues” and noted “that if [VimpelCom] goes into this deal under this structure and if the structure violates the FCPA picture, [VimpelCom’s] name could be damaged.”

The Finance Committee voted to move forward with the acquisition process with the understanding that VimpelCom’s board should consider whether to “enter Uzbekistan through acquisitions of both Buztel (as a condition of entry into the market) and Unitel, . . . provided, however, that all issues related to FCPA should be resolved” or “to bid for Unitel only with understanding that potentially it may be more expensive and is connected with risks of business development without [the] local partner.”

During a December 14, 2005 VimpelCom board meeting, the likelihood of corruption was further discussed. For example, certain VimpelCom management explained that Foreign Official was actively influencing and interfering with Buztel’s operations because of Foreign Official’s ownership interest in the company. Certain VimpelCom management added that Foreign Official appeared to have control and influence over the purchase price for Unitel LLC. Certain VimpelCom management also warned that there could be a falling out with the local partner if VimpelCom only purchased Unitel LLC that would make it difficult, if not impossible, to operate in Uzbekistan. Concerns were raised about doing business with Foreign Official and the dangers associated with the Buztel transaction, and there was a recognition that a thorough analysis was needed to ensure that the Buztel payment was not merely a corrupt pretext for other services and favors. There were also numerous requests to ensure that the deal complied with the FCPA. Ultimately, VimpelCom’s board approved the acquisitions of Buztel and Unitel LLC, with a condition that FCPA analysis from an international law firm be provided to VimpelCom.

VimpelCom’s management then sought FCPA advice that could be used to satisfy the board’s requirement while allowing VimpelCom to proceed with a knowingly corrupt deal. Despite the known risks of Foreign Official’s involvement in Buztel, certain VimpelCom management obtained FCPA legal opinions from an international law firm supporting the acquisition of Unitel LLC and Buztel; however, certain VimpelCom management did not disclose to the law firm Foreign Official’s known association with Buztel. As a result, the legal opinion did not address the critical issue identified by the VimpelCom board as a prerequisite to the acquisition. Certain VimpelCom management limited the law firm’s FCPA review of the transaction to ensure that the legal opinion would be favorable.

Having obtained a limited FCPA legal opinion designed to ostensibly satisfy the board’s requirement, certain VimpelCom management then proceeded with the Buztel acquisition and corrupt entry into the Uzbek market. VimpelCom, through subsidiaries, purchased Buztel for approximately $60 million on or about January 18, 2006 and Unitel LLC for approximately $200 million on or about February 10, 2006, along with the assumption of some debt.”

Next, the information alleges how VimpelCom again sought legal cover in entering a local partnership with the Shell Company controlled by the “foreign official.”

“As VimpelCom entered the Uzbek market through the acquisitions of Unitel LLC and Buztel, certain VimpelCom management learned that VimpelCom would be required to enter into a partnership with Shell Company, which was ultimately controlled by Foreign Official, in order to conceal corrupt payments to Foreign Official in exchange for Foreign Official’s support to allow VimpelCom and UNITEL to do business in Uzbekistan.

VimpelCom structured the partnership agreement to hide the bribe payments to Foreign Official. Under the deal, Shell Company obtained an indirect interest of approximately 9 7% in UNITEL for $20 million, and Shell Company received an option to sell its shares back to UNITEL in 2009 for between $57.5 million and $60 million for a guaranteed net profit of at least $37.5 million. In proposing the partnership, VimpelCom justified it in part by explaining that the partner would provide the “[r]evision of the licensing agreement for the major licenses” and “transfer of frequencies,” while also noting that the direct transfer of frequencies was not allowed in Uzbekistan.

VimpelCom’s board approved the partnership on or about April 7, 2006, but its approval again was conditioned on “FCPA analysis by an international law firm” and required that the “the identity of the Partner . . . [be] presented to and approved by the Finance Committee.” VimpelCom received an FCPA opinion on the sale of the indirect interest in UNITEL to Shell Company on or about August 30, 2006. The FCPA advice VimpelCom received was not based on important details that were known to certain VimpelCom management and that certain VimpelCom management failed to provide to outside counsel, including Foreign Official’s control of Shell Company. In addition, documents, including minutes from the Finance Committee’s meeting on August 28, 2006, failed to identify the true identity of the local partner by name while noting the “extremely sensitive” nature of the issue.

On or about March 28, 2007, VimpelCom’s board unanimously approved the partnership agreement with Shell Company, and the deal progressed as planned. Associate A [the information alleges that Associate A was Foreign Official’s close associate and that when Shell Company was incorporated in 2004, Associate A was twenty years old and became Shell Company’s purported sole owner and director] signed the agreement on behalf of Shell Company as the “Director,” and on or about June 12, 2007, Shell Company transferred $20 million from its Latvian bank account to VimpelCom’s bank account. Less than three years later, in or around September 2009, Shell Company exercised its guaranteed option to have VimpelCom’s subsidiary repurchase Shell Company’s shares, and VimpelCom transferred $57,500,000 from its bank account to Shell Company’s bank 10 account in Hong Kong. Both transfers were executed through transactions into and out of correspondent bank accounts at financial institutions in New York, New York.

As a result of VimpelCom’s partnership agreement and transfer of funds to Shell Company, Foreign Official made a net profit of approximately $37.5 million and VimpelCom and UNITEL were able to continue to conduct business in Uzbekistan.”

The information next alleges how various VimpelCom executives and management used “contracts for fake consulting services with Shell Company in order to provide Foreign Official with approximately $32 million in exchange for valuable telecommunications assets and to allow UNITEL to continue to conduct business in Uzbekistan.” According to the indictment:

“VimpelCom did not conduct any FCPA analysis concerning this purported consulting services agreement with Shell Company. This was despite the fact that certain VimpelCom management had received a prior FCPA opinion concerning Shell Company, which explicitly excluded any FCPA analysis associated with consulting services provided by Shell Company. Moreover, during the earlier due diligence process, Shell Company had represented that “[Shell Company] does not contemplate entering into consultancy or similar agreement with VimpelCom . . . .”

The information further alleges:

“In 2011, Executive 1 [described as a high-ranking VimpelCom executive with responsibilities in the Commonwealth of Independent States (“CIS”) region, including oversight of UNITEL in Uzbekistan] conspired with Executive 2 [described as a person who worked with Executive 1 relating to VimpelCom’s business in the CIS region, including oversight of UNITEL in Uzbekistan] and others to direct an additional $30 million payment to Foreign Official through Shell Company. This $30 million bribe payment was made specifically to acquire 4G mobile communication frequencies for UNITEL, but was also part of the broader effort to enable UNITEL to continue to operate in the Uzbek telecommunications market without interference by Foreign Official.”

Regarding the 4G consulting agreement with Shell Company, the information alleges that it “caused substantial internal criticism by some VimpelCom executives, including those who were charged with approving the transaction.” According to the information:

“Certain VimpelCom management again sought an FCPA opinion from outside counsel to provide a plausible cover to go forward with the transaction. Certain VimpelCom management then failed to provide outside counsel with important information, most notably that Shell Company was known to be owned by Foreign Official, because certain VimpelCom management were willing to accept an opinion that focused on Shell Company as a third party without analyzing or addressing the nature of the transaction itself or its high dollar value.

Furthermore, the purported FCPA due diligence on Shell Company was flawed in design and execution. No in-house or outside lawyer ever directly contacted Shell Company’s purported owner, Associate A, and instead, the FCPA questionnaires purportedly designed to uncover beneficial owners and potential corruption risks were sent to intermediaries to respond. For example, on or about August 5, 2011, a VimpelCom in-house lawyer emailed FCPA questionnaires to Executive 1 to pass along “to the [Shell Company] representative to fill out.” On or about August 6, 2011, Executive 1 forwarded the FCPA questionnaires both to Executive 1’s personal email account and the personal email account of Associate B. Executive 1 also forwarded the email with the FCPA questionnaires to Executive 2 who replied: “Hardcore, of course . . . But in my opinion with the exception of the first and last names they can answer everything else.”

The information contains several allegations concerning “Witness” (a consultant functioning as a senior VimpelCom executive who was among the chief critics of the 4G consulting agreement with Shell Company). The information alleges:

“In or around August and September 2011, Witness continued to raise concerns. On or about September 2, 2011, Witness emailed a then in-house VimpelCom attorney to explain that Witness was “very concerned about this way of structuring the payment,” and Witness asked whether VimpelCom had received “any official ‘ok’ from US Governmental body/SEC . . . .” On or about September 5, 2011, Witness received a response from VimpelCom’s then in-house counsel that acknowledged that, “[t]his transaction deserves caution but on the legal side the 17 question boils down to whether there is a reasonable basis to believe that our counter-party will make illegal payments. We cannot establish conclusively that there will not be any illegal payments . . . .” VimpelCom’s then in-house counsel added, “. . . . our due diligence is our defense in the event that there is a claim against us so we have to ask ourselves whether the situation warrants additional due diligence. [We are] comfortable that additional due diligence is not warranted. We are going to monitor the process and ensure that real work is being done by the counter-party.” However, VimpelCom, including its in-house attorneys, did not thoroughly monitor the process to ensure that Shell Company performed any services. Once the FCPA opinion was obtained, VimpelCom proceeded with the deal.

The 4G consulting agreement required approvals from certain senior VimpelCom executives reviewing the transaction from their areas of expertise. After receiving repeated assurances from VimpelCom’s then in-house lawyers, in or around mid-September 2011, Witness eventually provided the sign-off for Witness’s expert area for the proposed 4G consulting agreement with Shell Company. However, Witness handwrote an unusual caveat below Witness’s signature: “This sign off is solely related to [my expert area]. My sign off confirm[s] that I have reviewed the technical [] position and approved with it.” Notably, certain other VimpelCom executives specifically limited their approval or expressed reservations before signing off on their expert areas. Executive 2 expressed no reservations before providing the necessary approval on behalf of the business unit.

Soon after providing the limited sign-off on the deal, Witness escalated the matter to the highest levels within VimpelCom management, with whom Witness met on or about September 30, 2011. However, certain VimpelCom management failed to act on Witness’s concerns and the 4G deal remained in place after the meeting.”

The information also alleges how the “reselling” process was used to facilitate the bribery scheme.  According to the information:

“Because of significant currency conversion restrictions in Uzbekistan and the inability to use Uzbek som (the Uzbek unit of currency) to obtain necessary foreign goods, UNITEL frequently entered into non-transparent transactions with purported “reseller” companies to pay foreign vendors in hard currency for the provision of goods in Uzbekistan. Typically, UNITEL would contract with a local Uzbek company in Uzbek som, and that Uzbek company’s related companies located outside of Uzbekistan would agree to pay an end supplier using the hard currency (usually, U.S. dollars). In February and March 2011, Executive 1 conspired with Executive 2 and others to take advantage of the murky reseller process to conceal a $10 million bribe to Foreign Official via Shell Company through various purported reseller transactions to Shell Company.

[…]

By using the reseller scheme, certain VimpelCom and UNITEL executives avoided additional scrutiny, including FCPA analysis, of the transactions and payments.”

Based on the above core conduct, the information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions.

Unitel Plea Agreement

The plea agreements sets forth the advisory sentencing guidelines fine range of $732 million to $1.46 billion. The agreement then states:

“The parties agree that, in light of (a) the complexity of the overall dispositions with Unitel and its parent company, VimpelCom Ltd., and (b) the interrelationship among the charges and conduct underlying those dispositions, an application of the Alternative Fines Act, Title 18, United States Code, Section 3571(d), to this case would unduly complicate or prolong the sentencing process, so that the maximum fine under the Sentencing Guidelines is $500,000 as provided in Title 18, United States Code Section 3571(c)(3). The parties agree that, in light of the VimpelCom DPA, which requires VimpelCom to pay a total monetary penalty of $460,326,398.40 as a result of the misconduct committed by both VimpelCom Ltd. and the defendant, as well as the factors cited in the VimpelCom DPA, no fine should be imposed on the defendant.”

VimpelCom Information

Based on the same core conduct alleged above, VimpelCom was also charged with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and a separate count of violating the FCPA’s internal controls provisions.

Under the heading “VimpelCom’s Failure to Implement and Enforce Internal Accounting Controls,” the information alleges:

“Throughout the time period of VIMPELCOM’s bribery of Foreign Official, VIMPELCOM failed to implement adequate internal accounting controls and failed to enforce the internal accounting controls it did have in place, which permitted the above-referenced bribe payments to occur without detection or remediation.

VIMPELCOM failed to implement a system for conducting, recording, and verifying due diligence on third parties, including joint venture partners, consultants, reseller companies, and suppliers to uncover their true nature, beneficial ownership, and possible corruption risks. Time and again, board members, executives, and employees of VIMPELCOM identified serious concerns with third parties, and VIMPELCOM still failed to undertake adequate due diligence.

Further, VIMPELCOM knowingly failed to require that all consulting agreements be for bona fide services, that agreed-upon payments were commensurate with the services to be performed, and that services paid for were, in fact, performed. VIMPELCOM knowingly failed to conduct meaningful auditing or testing of its consultant agreements, invoices, and payments, including those with Shell Company and, as demonstrated above, failed to conduct adequate investigations of corruption complaints. VIMPELCOM also had no policy regarding payments to bank accounts located in places where the contractual partner neither performed work nor had operations.

In 2011 and 2012, VIMPELCOM paid $20 million in bribes through singlesource decisions with reseller companies that allowed certain executives to structure nontransparent transactions. VIMPELCOM knowingly failed to implement and maintain adequate controls for approving and transacting with reseller companies and intermediaries to ensure that reseller companies were scrutinized and that single-source contracting decisions were justified. Certain VIMPELCOM and Unitel executives took advantage of these control failures to engage in transactions designed to obfuscate the actual purpose of the payments, which was to corruptly influence Foreign Official.

As a result of the facts described herein and the failures of VIMPELCOM’s management, VIMPELCOM also knowingly lacked a sufficient internal audit function to provide reasonable assurances that corporate assets were not used to make bribery payments to foreign officials and failed to enforce audit protocols or conduct adequate internal audits to detect and prevent criminal activity. As discussed above, VIMPELCOM knowingly failed to implement and enforce internal controls to keep a 2012 reseller transaction within a regularly conducted audit after Executive 2 intervened to cause its removal, thereby allowing a bribe payment to Foreign Official, through Shell Company, to go undetected.

VIMPELCOM management also knowingly failed to implement and maintain adequate controls governing processes concerning conflicts of interest. For example, certain VIMPELCOM management knew of a conflict with Associate B’s representation of Shell Company, because at the time Associate B was a chief executive of one of Unitel’s primary competitors in Uzbekistan. Moreover, Associate B requested to be contacted about work matters on a personal email account and through a pseudonym. VIMPELCOM failed to implement or enforce any meaningful policy to adequately scrutinize business deals with representatives who had such conflicts of interest or otherwise engaged in non-transparent activities.

Other failures that contributed to VIMPELCOM’s lax control environment were VIMPELCOM’s failure to enforce price thresholds that determined the required level of approval authority, failure to retain documentation of deliverables for contracts, and failure to adequately classify and obtain approvals for purported charitable contributions that were made in exchange for state-provided assets.

VIMPELCOM’s failures to implement and enforce adequate internal controls contributed to an environment where it was possible for VIMPELCOM and Unitel executives to pay Foreign Official through Shell Company over $114 million in bribes.

VIMPELCOM also had particularly severe deficiencies in its general compliance function and its anticorruption compliance policies and procedures. When VIMPELCOM entered the Uzbek market, it had no Chief Compliance Officer (“CCO”). To the extent that compliance was considered by VIMPELCOM, it was the responsibility of the legal department and was thought of as a “completeness check” that legal formalities were followed. When VIMPELCOM later did designate a CCO, whose formal title was the Head of Department of Compliance with Obligations and Disclosure of Information and Corporate Law, the junior executive selected had no background in compliance and was given no staff or support. Furthermore, all of VIMPELCOM’s compliance duties were expected to take a small fraction of the executive’s time. In fact, there was no dedicated compliance function at VIMPELCOM until 2013, and CCO was not a senior management group position until 2014.

During the duration of the conspiracy, certain high-level VIMPELCOM management knew of the FCPA, yet VIMPELCOM had little to no anticorruption compliance program, much less a program that was regularly and appropriately evaluated for effectiveness and provided appropriate incentives. VIMPELCOM’s only anticorruption policy was encapsulated in two, high-level paragraphs in VIMPELCOM’s code of conduct, which required consultation with the legal department “before providing anything of value to a government official.” In fact, VIMPELCOM’s legal department did no internal FCPA review of transactions. When corruption issues were identified in the above-mentioned cases, the subsequent “FCPA review” was seen as a “check list and a confirmation from [outside counsel].” As demonstrated above, certain VIMPELCOM management withheld crucial information in such situations in Uzbekistan from outside counsel and overly restricted the scope of FCPA opinions such that the advice given was of no value. Indeed, VIMPELCOM did not have a specific anti-corruption policy until February 2013. Training on the FCPA during the course of the corruption conspiracy, to the extent it existed at all, was inadequate and ad hoc. In short, rather than implement and enforce a strong anti-corruption ethic, VIMPELCOM sought ways to give itself plausible deniability of illegality while proceeding with business transactions known to be corrupt.”

Under the heading “Scheme to Falsify Books and Records,” the information alleges:

“Due to VIMPELCOM’s failure to implement effective internal accounting controls, VIMPELCOM, acting through certain executives and others, disguised on its books and records over $114 million in bribe payments made for the benefit of Foreign Official in exchange for VIMPELCOM and Unitel’s ability to enter and conduct business in the Uzbek telecommunications market.

Although all of VIMPELCOM’s and Unitel’s bribes to Foreign Official were funneled through Shell Company, it was part of the scheme that certain VIMPELCOM management and others used a variety of non-transparent transactions with different purported business purposes, described above, so that the payments would be inaccurately recorded as legitimate transactions. a. The bribe related to the partnership agreement in which Shell Company first purchased and then sold an indirect equity interest in Unitel was falsely recorded in VIMPELCOM’s consolidated books and records as the receipt of loan proceeds in 2007 to be repaid in 2009 and secured by shares in a VIMPELCOM subsidiary. b. The bribe related to the acquisition of 3G frequencies in 2007 was falsely recorded in VIMPELCOM’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses. c. The bribe in 2008 was falsely recorded in VIMPELCOM’s consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services. d. The bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in VIMPELCOM’s consolidated books and records as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies.

The bribes made through purported reseller transactions in 2011 and 2012 were falsely recorded in VIMPELCOM’s consolidated books and records as “professional services” expenses. VIMPELCOM also created, and caused to be created, false and backdated records to further conceal these improper payments. For example, each bribe payment was concealed by false contracts that were intended to create the appearance of legitimacy. Some of these contracts included provisions prohibiting unlawful payments, including payments that would violate the FCPA, even though certain VIMPELCOM and Unitel executives knew that the payments called for by the contracts were, in fact, bribes to Foreign Official in violation of the FCPA. At times, VIMPELCOM and Unitel executives also created false service acceptance acts, invoices, and other back-up documentation to justify supposedly legitimate business services when, in truth and in fact, those executives knew that no such work was actually performed to justify the generous payments made to Shell Company. Certain VIMPELCOM and Unitel executives also accepted plagiarized work product to falsely substantiate consulting work that was never performed.”

VimpelCom DPA

The criminal charges against VimpelCom were resolved through a DPA with a term of three years.

Under the heading “Relevant Considerations,” the DPA states:

The Offices enter into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the factors considered were the following: (a) the Company failed to self-disclose voluntarily its misconduct to the Offices after an internal investigation had been initiated and uncovered wrongdoing, and as a result the Company was not eligible for a more significant discount on the fine amount or the form of resolution; (b) the Company has provided to the Offices all relevant facts known to the Company, including information about individuals involved in the FCPA misconduct; (c) the Company received full cooperation and remediation credit of 25% for its substantial cooperation with the Offices, including-providing evidence (where not prohibited by relevant foreign data privacy and national security laws and regulations) uncovered during a previously conducted internal investigation; undertaking significant efforts to provide foreign evidence to the Offices (again where not prohibited by relevant foreign data privacy law and national security laws or regulations); conducting additional investigation independently, proactively, and as requested; voluntarily making foreign employees available for interviews; assisting with interviews of former employees; and collecting, analyzing, translating, and organizing voluminous evidence and information for the Offices (again where not prohibited by relevant foreign data privacy law and national security laws or regulations); (d) the Company received additional credit of 20% for its prompt acknowledgement of wrongdoing by Company personnel after being informed by the Offices of their criminal investigation, and the Company’s willingness to resolve promptly its criminal liability on an expedited basis; (e) the Company has engaged in extensive remediation, including terminating the employment of officers and employees when the Company determined that they were complicit in the unlawful payments or otherwise failed their responsibilities in connection with such payments; has been substantially upgrading its anti-corruption compliance program; has retained new leaders of its legal, compliance, and financial gatekeeper functions; and has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement; (f) despite these remedial efforts, the Company recognized the need for, and agreed to, the imposition of an independent compliance monitor, as set forth in Attachment D to this Agreement; (g) the Company has no prior criminal history; and (h) the Company has agreed to continue to cooperate with the Offices as provided below in any investigation of the Company and its officers, directors, employees, agents, and consultants relating to possible violations under investigation-by-the Offices …”.

The DPA sets forth the advisory sentencing guidelines fine range of $836 million to $1.67 billion. The DPA then states:

“The Company agrees to pay total monetary penalties in the amount of $460,326,398.40 (the “Total Criminal Penalty”), $40,000,000 of which will be paid as forfeiture … This Total Criminal Penalty is 45% below the bottom of the applicable Sentencing Guidelines fine range, which reflects a reduction of 25% for the Company’s full cooperation as permitted by relevant foreign data privacy and national security laws and regulations and a reduction of 20% for the Company’s prompt acknowledgement of wrongdoing and willingness to resolve its criminal liability on an expedited basis. The Company will pay $190,163,199.20 of-the-Total Criminal Penalty to the United States Treasury within ten (10)  business days of the sentencing by the Court of VimpelCom’s subsidiary Unitel LLC in connection with its guilty plea and plea agreement entered into simultaneously herewith, except that the parties agree that any criminal penalties that might be imposed by the Court on VimpelCom’s subsidiary Unitel LLC in connection with its guilty plea and plea agreement will be deducted from the $190,163,199.20. The Total Criminal Penalty will be offset by up to $230,163,199.20 for any criminal penalties paid to the Organization of the Public Prosecution Service of the Netherlands (“Dutch Prosecution Service”) in connection with the settlement of the Company’s potential prosecution in the Netherlands. Should any amount of such payment to the Dutch Prosecution Service be returned to the Company or any affiliated entity for any reason, then the remaining balance of the Total Criminal Penalty will be paid to the U.S. Treasury within ten (10) business days of such event. The Company and the Offices agree that this penalty is appropriate given the facts and circumstances of this case, including the Company’s prompt acknowledgment of wrongdoing, willingness to resolve its criminal liability on an expedited basis, full cooperation, and extensive remediation in this matter.”

SEC

The SEC’s settled civil complaint is based on the same core conduct alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“From 2006 to at least 2012, VimpelCom offered and paid bribes to a government official in Uzbekistan in connection with its Uzbek operations. During the course of the bribery scheme, VimpelCom made or caused to be made at least $114 million in improper payments in order to obtain and retain business that generated more than $2.5 billion in revenues for VimpelCom.

These payments were primarily made through sham contracts, but were also, in certain instances, made under the guise of legitimate charitable contributions or sponsorships. These payments were improperly characterized in the books of records of VimpelCom’s subsidiaries as legitimate expenses, and consolidated in VimpelCom’s financial statements which were filed with the Commission throughout the relevant period.”

Unlike the DOJ resolution documents, the SEC complaint alleges under the heading “Payments to Charities” as follows.

“VimpelCom also made what were ostensibly charitable payments in order to improperly influence Local Partner A. In connection with corruptly influencing Local Partner A, representatives of Local Partner A directed VimpelCom to make at least $502,000 in payments to charities directly affiliated with Local Partner A.

Unitel had insufficient internal accounting controls and maintained inaccurate books and records regarding its charitable contributions. From 2009 and through 2013, Unitel provided approximately $38 million in sponsorships or charitable contributions in Uzbekistan. Despite the presence ofred flags, these transactions were not vetted to ensure that they were not improperly benefitting government officials.”

The complaint charges VimpelCom with violating the FCPA’s anti-bribery provisions, books and records provisions, and internal controls provisions.

VimpelCom’s Uzbekistan Bribery Scheme Nets $397.5 Million FCPA Enforcement Action

VimpelComThis is the first of several posts in the coming days regarding the Foreign Corrupt Practices Act and related enforcement action against VimpelCom and a related entity announced yesterday by the DOJ and SEC (see here for the DOJ release, here for the SEC release).

Yesterday’s enforcement action is expected to be the first enforcement action concerning the Uzbek bribery scandal with additional enforcement actions (of similar or greater settlement amounts) against TeliaSonera and Mobile TeleSystems expected in the future.

After accounting for various credits and deductions, VimpelCom will pay $230.1 million to the DOJ, $167.5 million to the SEC, and $397.5 million to Dutch regulators. The net $397.5 million U.S. portion of the settlement is the 5th largest FCPA settlement amount of all-time (see here for the current top-ten list).

A future post will contain an in-depth overview of the U.S. VimpelCom resolution documents which total approximately 120 pages and another future post will highlight various issues to consider from the U.S. enforcement action.

DOJ

The DOJ component involved a guilty plea by Unitel LLC (an entity headquartered and incorporated in Uzbekistan which conducted VimpelCom’s mobile telecommunications business in Uzbekistan) to a criminal information charging it with conspiracy to violate the FCPA’s anti-bribery provisions.

In addition, VimpelCom (a Bermuda company that was headquartered in Moscow, Russia until 2010 when it moved its headquarters to Amsterdam, the Netherlands and which has shares traded on NASDAQ and previously the New York Stock Exchange) entered into a deferred prosecution agreement (and here) to resolve a criminal information charging it with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and a separate count of violating the FCPA’s internal controls provisions.

To resolve the DOJ actions, VimpelCom agreed to pay a total criminal penalty of approximately $230.1 million, including$40 million in criminal forfeiture.

In the DOJ release, Assistant Attorney General Leslie Caldwell stated:

“These cases combine a landmark FCPA resolution for corporate bribery with one of the largest forfeiture actions we have ever brought to recover bribe proceeds from a corrupt government official. The Criminal Division’s FCPA enforcement program and our Kleptocracy Initiative are two sides of the same anti-corruption coin.  The FCPA resolution in this case is also one of the most significant coordinated international and multi-agency resolutions in the history of the FCPA, and demonstrates our commitment both to pursuing justice and to bringing about corporate reform.”

Preet Bharara (U.S. Attorney, Southern District of New York) stated:

“Today we mark the resolution of criminal charges and civil proceedings against corrupt corporate entities that made bribery a foundation of their business model. As they have admitted in court filings, VimpelCom, the world’s sixth largest telecommunications company, with securities traded in New York, and its subsidiary, Unitel, built their business in Uzbekistan on over $114 million in bribes funneled to a government official.  Those payments, falsely recorded in the company’s books and records, were then laundered through bank accounts and assets around the world, including through accounts in New York.”

Richard Weber (Chief of Internal Revenue Service-Criminal Investigation (IRS-CI) stated:

“Today’s admission of guilt by VimpelCom and Unitel to paying bribes to government officials is a victory for all who fight corruption at all levels. It also demonstrates the skill and tenacity of IRS Criminal Investigation special agents when it comes to delving underneath layers of financial transactions designed to conceal illegal payments for gain.  The global economy demands a level playing field for all.  When certain VimpelCom and Unitel executives chose to use deception in order to continue this scheme and take advantage of insider knowledge, they also chose to become criminals.  IRS-CI pledges to continue our efforts on the international stage to stop corrupt financial schemes such as this one.”

SEC

VimpelCom also agreed to resolve a settled civil complaint charging it with violating the FCPA’s anti-bribery provisions, books and records provisions, and internal controls provisions. The company resolved the complaint by agreeing to pay a total of $375 million in disgorgement of profits and prejudgment interest.

In the SEC release, Andrew Ceresney (Director of the SEC Enforcement Division) stated:

“VimpelCom made massive revenues in Uzbekistan by paying over $100 million to an official with significant influence over top leaders of the Uzbek government. These old-fashioned bribes, hidden through sham contracts and charitable contributions, left the company’s books and records riddled with inaccuracies.”

Kara Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated:

“International cooperation among regulators is critical to holding companies responsible for all facets of a bribery scheme.  This closely coordinated settlement is a product of the extraordinary efforts of the SEC, Department of Justice, and law enforcement partners around the globe to jointly pursue those who break the law to win business.”

Dutch Enforcement Action

According to the DOJ and SEC releases, VimpelCom also resolved a Public Prosecution Service of the Netherlands (OM) enforcement action by agreeing to pay a $230.1 million criminal penalty.

After accounting for various credits (for instance the SEC $375 million in disgorgement of profits and prejudgment interest was divided between the SEC and OM, the DOJ agreed to credit the penalty paid to the OM and the SEC agreed to credit the DOJ forfeiture) the net U.S. portion of the settlement amounts to $397.5 million – the 5th largest of all-time from a settlement perspective.

As noted in the SEC’s release: “the settlement requires VimpelCom to pay $167.5 million to the SEC, $230.1 million to the U.S. Department of Justice, and $397.5 million to Dutch regulators.”

Asset Recovery

Separate and distinct from the above components of the VimpelCom enforcement action, the DOJ also announced as part of its Kleptocracy Asset Recovery Initiative the filing of a civil complaint seeking the forfeiture of more than $550 million held in Swiss bank account, which allegedly constitute bribe payments made by VimpelCom and two separate telecommunications companies, or funds involved in the laundering of those payments, to the Uzbek official. As noted in the DOJ release, yesterday’s civil complaint follows an earlier civil complaint filed in June 29, 2015 which seeks forfeiture of more than $300 million.

In this release, Jean-Yves Charlier (Chief Executive Officer of VimpelCom) stated:

“Resolving this has been a top priority for VimpelCom. While this has been a very challenging experience for our business and our employees, we are pleased to have now reached settlements with the authorities. The wrongdoing, which we deeply regret, is unacceptable. We have taken, and will continue to take, strong measures to embed a culture of integrity across the group. We have significantly strengthened our internal controls and compliance program. Since the launch of the investigation, VimpelCom has appointed a new Chief Executive Officer, Chief Financial Officer, Group General Counsel, Chief Performance Officer and Group Chief Compliance Officer to drive the necessary change forward.”

As part of the settlements, […] VimpelCom has also agreed to oversight by an independent compliance monitor to promote continued, and regular, compliance enhancements across the Company and its subsidiaries. VimpelCom’s cooperation in the investigation and actions in rapidly resolving this matter, together with substantial upgrades to its compliance program, have been recognized by the authorities in the settlements.”

Yesterday VimpelCom’s Nasdaq shares closed down 1.6%.

Mark Rochon and John Davis (both of Miller Chevalier) represented the VimpelCom entities.

PTC Inc. And Related Entities Pay $28 Million In Yet Another FCPA Enforcement Action Involving Travel And Entertainment Provided To Alleged “Foreign Officials”

World Tour

Approximately 5-10 years ago, foreign subsidiaries of PTC Inc. (a software company formerly known as Parametric Technology Corp.) arranged for alleged Chinese “foreign officials” to travel often to the U.S. to visit PTC’s facilities. The trips morphed to include non-business leisure travel to places such as New York, Las Vegas, Honolulu and included activities such as guided tours, golfing and other leisure activities. In addition, the foreign subsidiaries sometimes provided gifts (such as iPods, gift cards, wine and clothing) ranging from $50 to $600 to the alleged “foreign officials.”

The end result is that approximately $28 million is flowing into the U.S. treasury in the latest corporate FCPA enforcement action involving travel and entertainment of alleged “foreign officials”

The enforcement action, which has been expected for some time, involved:

  • a DOJ non-prosecution agreement against Parametric Technology (Shanghai) Software Co. Ltd. and Parametric Technology (Hong Kong) Limited (collectively the “Companies”), but not PTC Inc., in which the Companies agreed to a criminal penalty of $14,540,000;
  • an SEC administrative order against PTC Inc. which the company agreed to resolve through a payment of approximately $13.7 million ($11.9 million in disgorgement and $1.8 in prejudgment interest); and
  • an SEC DPA against Yu Kai Yuan (A Chinese citizen who resides in Shanghai and a former employee of the PTC China entities) in what the SEC called “its first DPA with an individual in an FCPA case.”

DOJ

The conduct focused on the following entities as described in the NPA.

“Parametric Technology (Shanghai) Software Company Ltd. and Parametric Technology (Hong Kong) Ltd. are wholly owned, separate subsidiaries ofPTC through which PTC’s Chinese operations, including sales to Chinese customers, are managed. While the two entities comprising PTC China are structured separately, during the relevant period they conducted business as a single unit.”

According to the NPA:

“Many of PTC China’s customers were Chinese state-owned entities (“SOEs”) that were controlled by the government of China and performed functions that the Chinese government treated as its own, and thus were instrumentalities of the Chinese government as that term is used in the Foreign Corrupt Practices Act (“FCPA”) […] PTC China employees were aware that many of its customers were Chinese SOEs whose employees were Chinese government officials.”

Under the heading “Improper Payments,” the NPA states:

“PTC China routinely engaged the services of local “business partners,” Chinese companies that helped PTC China find prospective contracts, assisted PTC China in the sales process with Chinese SOEs, and provided additional services to PTC China’s customers that had been outsourced by PTC China, including information technology services. Business Partner 1 [described as a Chinese company that worked with PTC on contracts with Chinese SOEs, providing sales assistance and certain outsourcing services] and Business Partner 2 [described the same way as Business Partner 1] were the primary business partners used by PTC China. PTC China failed to conduct meaningful due diligence of its Chinese business partners, notably with respect to corruption risks or anti-corruption controls of these Chinese business partners.

PTC China’s senior sales staff had wide discretion in setting the fee arrangements with Chinese business partners. Generally, commissions to business partners were set as a percentage of the contract price if PTC China won the contract in question. These commissions were typically referred to as “influence fees” to help PTC China win contracts. If the business partner was to provide subcontracted services such as information technology services, those services might either be included in the total commission or itemized separately using a line item referred to as “COD,” for “completely outsourced deals.”

PTC had a corporate theatre at its headquarters in Massachusetts that is designed for demonstrations of its products, and PTC headquarters is also equipped to provide customer training on its products. According to PTC policy, PTC should not pay for customer travel to its headquarters for such training. However, during contract negotiations, Chinese SOE customers frequently requested that PTC China provide employees with travel to the United States, nominally for training at PTC headquarters in Massachusetts, but primarily for recreational travel to other parts of the United States. PTC China, its business partner, and the SOE would determine a travel budget, which was then added into the contract price. In some cases, the overseas travel costs were specifically itemized in the initial contract documents for approval by senior PTC China sales staff; however, the overseas travel costs line item was removed from the final contract documents that were signed by PTC and the SOEs. Instead, for a time, the money budgeted for overseas travel was disguised using the COD line item to make it appear as though the travel expenses were subcontracting payments to the business partner, or simply included in the business partner’s overall commission.

Following PTC’s discovery that the COD line item was being improperly used in certain instances, travel costs were included in the business partner commissions by PTC China to avoid detection by PTC. The business partners, often Business Partner 1 or Business Partner 2, then paid for the overseas trips using the funds received from PTC China. The business partners provided PTC China with false documents indicating that they had performed subcontracted services even though there were no such services contemplated or performed and even though the funds were in fact used for, in part, improper recreational travel for Chinese SOE employees. For some of the more expensive trips for important Chinese SOE customers, the payments to the business partners were spread among and hidden within several contracts.

Some of the overseas travel expenses paid for by the business partners were tracked by PTC China sales staff on spreadsheets that they maintained separately from PTC China’s electronic accounting records to help PTC China better understand the composition of, and negotiate, fees with the Chinese business partners.

Generally, the trips included one or two days of business activities at PTC headquarters in order to justify the trips, preceded or followed by several days of sightseeing that lacked any business purpose and that was in fact the primary reason for the trip.

For example, in April 2008, two PTC China sales employees accompanied six employees of a Chinese SOE, including its president, on a trip to the United States. In addition to a one-day stop at PTC headquarters in Massachusetts, the group went on sightseeing visits to New York, Las Vegas, Los Angeles, and Honolulu. Travel records, e-mails, and photographs confirm that the additional stops on the trip were recreational and included tours of landmarks in New York, including Rockefeller Center, the Statue of Liberty, the United Nations, and the Empire State Building, a tour of the Grand Canyon in Las Vegas, and golfing and a tour of Pearl Harbor in Honolulu. Documents indicate that the trip cost over $50,000, which was paid for by Business Partner 1 at PTC China’s direction, and for which PTC China paid Business Partner 1. Within a year of the trip, PTC booked several contracts with the SOE totaling over $1 million.

In May 2010, a PTC China employee accompanied two employees of a Chinese SOE, including its information technology vice director and information technology project supervisor, on a trip to the United States. The trip included one day at PTC headquarters in Massachusetts, but also included sightseeing stops in New York, Atlanta, Las Vegas, and Los Angeles. These additional stops included shopping at an outlet mall and other stores, a Grand Canyon tour in Las Vegas, and a Universal Studios tour in Los Angeles. Subsequently, in July 2010, another PTC China employee accompanied seven employees of the same Chinese SOE on a second visit to the United States. In addition to stopping at PTC’s headquarters in Massachusetts, the trip included sightseeing visits to New York, Washington, DC, Las Vegas, San Diego, and Los Angeles, with recreational trips to various museums, the Empire State Building in New York, and Universal Studios in Los Angeles. Both trips were paid for by Business Partner 2 at PTC China’s direction, and for which PTC China paid Business Partner 2. The SOE entered into over $9 million worth of contracts with PTC.

In September 2010, a PTC China employee accompanied nine employees of three Chinese SOEs on a trip to the United States. The group spent one day at PTC’s headquarters in Massachusetts. The two-week long trip also included sightseeing stops in New York, Los Angeles, Las Vegas, and Honolulu and included tours of the Empire State Building, Universal Studios, and Pearl Harbor. An internal e-mail from the time one of the Chinese SOE customers entered into a contract with PTC prior to the trip actually taking place stated that “the customer just want sightseeing instead of the overseas training.” The Chinese SOEs whose employees went on the trip collectively entered into more than $3.5 million in contracts with PTC.

Overall, PTC China, through its business partners, paid over $1.1 million to fund, directly or indirectly, 24 trips for over 100 Chinese SOE employees that included a recreational component. In addition to the recreational trips, between in or around 2009 and in or around 2011, PTC China employees also provided over $250,000 in improper gifts and entertainment directly to Chinese SOE employees, in contravention of PTC policies imposing monetary limits and approval requirements for gifts and entertainment for government officials. PTC China’s sales staff’s longstanding practice of providing gifts to Chinese government officials was done at least in part to obtain or retain SOE business for and on behalf of PTC.”

The three-year NPA states:

“The [DOJ] enters into this Non-Prosecution Agreement based on the individual facts and circumstances presented by this case and the Companies. Among the factors considered in deciding what credit the Companies should receive were the following: (a) the Companies did not receive voluntary disclosure credit because, although the Companies, through their parent corporation PTC Inc., reported to the Office in 2011 certain misconduct identified through a then-ongoing internal investigation, they did not voluntarily disclose relevant facts known to PTC Inc. at the time of the initial disclosure until the Office uncovered salient facts regarding the Companies’ responsibility for the improper travel and entertainment expenditures at issue independently and brought them to the Companies’ attention, after which the Companies disclosed information that they had learned as part of an earlier internal investigation; (b) the Companies received partial cooperation credit of 15% off the bottom of the Sentencing Guidelines fine range for their cooperation with the Office’s investigation, including collecting, analyzing, and organizing voluminous evidence and information for the Office, but did not receive full cooperation credit for the reasons described in (a) above; (c) by the conclusion of the investigation, the Companies had provided to the Office all relevant facts known to them, including information about individuals involved in the FCP A misconduct; (d) the Companies engaged in extensive remedial measures, including a review and enhancement of the Companies’ and PTC Inc.’s compliance program, the establishment of a dedicated compliance team at the corporate level and at PTC China and enhanced policies for business partners, the termination of the business partners involved in the misconduct described in the Statement of Facts attached hereto as Attachment A, and the implementation of new customer travel policies and additional controls around expense reimbursement; (e) the Companies have committed to continue to enhance their compliance program and internal controls, including ensuring that their compliance program satisfies the minimum elements set forth in Attachment B to this Agreement; (f) based on the Companies’ remediation and the state of their compliance program, and that of their parent company PTC Inc., and the Companies’ agreement to report to the Office as set forth in Attachment C to this Agreement, the Office determined that an independent compliance monitor was unnecessary; (g) the nature and seriousness of the offense; (h) the Companies have no prior criminal history; and (i) the Companies have agreed to continue to cooperate with the Office in any ongoing investigation of the conduct of the Companies and their officers, directors, employees, agents, business partners, and consultants relating to violations of the Foreign Corrupt Practices Act (“FCPA”).”

In the NPA, the Companies admitted, accepted and acknowledged responsibility for the above conduct and, as standard in corporate FCPA enforcement actions, agreed to a so-called “muzzle clause.”

Pursuant to the NPA, the Companies agreed to pay a monetary penalty of approximately $14.5 million. In the NPA, the Companies agreed to report to the DOJ periodically, at no less than 12 month intervals during the three year term of the NPA “regarding regarding remediation and implementation of the compliance program and internal controls, policies and procedures” described in Attachment B of the NPA.

SEC

This administrative order, finding that PTC violated the FCPA’s anti-bribery, books and records and internal control provisions, is based on the same core conduct described in the DOJ NPA.

In summary fashion, the order states:

“This matter concerns violations of the anti-bribery, books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by PTC. From at least 2006 into 2011, two wholly-owned PTC subsidiaries (collectively, “PTC-China”) provided improper payments totaling nearly $1.5 million to government officials (“Chinese government officials” or “officials”) who were employed by Chinese state owned entities (“SOEs”) that were PTC customers. These payments were made to obtain or retain business from the SOEs. Specifically, PTC-China provided non-business travel, primarily sightseeing and tourist activities, as well as improper gifts and entertainment, to the Chinese government officials. PTC earned approximately $11.85 million in profits from sales contracts with SOEs whose officials received the improper payments.

PTC-China made these improper payments in two primary ways: 1) by providing at least $1,179,912 to third party agents, disguised as commission payments or sub-contracting fees, which were then used to pay for non-business related foreign travel for Chinese government officials; and 2) by allowing its sales staff to provide Chinese government officials with gifts and excessive entertainment of over $274,313. The payments were recorded as legitimate commissions and business expenses in PTC-China’s books and records, when in fact they were improper payments designed to benefit the Chinese government officials. PTC-China’s books and records were consolidated into PTC’s books and records, thereby causing PTC’s books and records to be inaccurate. PTC failed to devise and maintain an adequate system of internal accounting controls sufficient to prevent and detect these improper payments that occurred over several years.”

In pertinent part, the order states as follows regarding the leisure travel:

“PTC-China employees and the business partners typically arranged the overseas sightseeing trips in conjunction with a visit to a PTC facility. Most often, PTC-China sales staff arranged for Chinese government officials to visit PTC’s corporate headquarters in Massachusetts, for PTC to market and demonstrate the company’s products and services. The trips typically consisted of one day of business activities at PTC’s facility, followed or preceded by additional days of sightseeing visits that lacked any business purpose, all of which were paid for by the business partners using funds from their grossed up success fees and subcontracting payments. Some PTC employees in the United States generally understood that SOE officials were spending additional days in the country, including for tourist activities. And certain PTC employees based in China were aware that PTC-China employees were accompanying Chinese government officials to tourist destinations.

Typical travel destinations in the United States included New York, Las Vegas, San Diego, Los Angeles, and Honolulu, and involved guided tours, golfing, and other leisure activities. PTC-China sales staff usually accompanied the Chinese government officials on these trips. The Chinese government officials who went on the trips in turn were often signatories on the purchase agreements with PTC.

[…]

Overall, from 2006 into 2011, PTC-China, through its business partners, paid at least $1,179,912 to fund at least 10 trips for Chinese government officials that included significant non-business travel. The costs of these trips were improperly recorded in PTC’s books and records as COD or business partner related commissions or subcontracting payments, without any indication that they were primarily for sightseeing and other non-business related activities. PTC improperly profited by at least $11,858,000 from contracts obtained from the SOEs whose government officials participated on these trips.”

In pertinent part, the order states as follows regarding the “gifts and excessive entertainment”:

“From 2009 through 2011, PTC-China sales staff corruptly provided at least $274,313 in improper gifts and entertainment directly to Chinese government officials. The value of the gifts and entertainment generally ranged from $50 to $600, and often included small electronics (e.g., cell phones, iPods, and GPS systems), gift cards, wine, and clothing. PTC-China sales staff’s long standing practice of providing the gifts to Chinese government officials was done at least in part to obtain or retain SOE business.

By providing these gifts, PTC-China violated PTC’s corporate governance and internal controls policies. These policies included: $50 monetary limits on the provision of gifts and business entertainment to government officials; requiring PTC-China sales staff to obtain preapprovals for business expenses over $500; and requiring that PTC-China sales staff document the date, place, attendees, and purpose of business entertainment and the recipient. These gifts were improperly recorded as legitimate business expenses.”

Under the heading “PTC Failed to Devise and Maintain a System of Internal Accounting Controls,” the order states:

“From at least 2006 through 2011, PTC failed to devise and maintain an adequate internal accounting controls system to address the potential FCPA problems posed by its ownership of, and control over, PTC-China. Notably, during 2006, 2008, and 2010, PTC investigated compliance issues at PTC-China, including possible corruption involving its business partners. However, PTC failed to identify and stop the ongoing and systemic illicit payments to Chinese government officials by PTC-China personnel as described above and did not undertake effective remedial actions.

Despite these compliance issues, PTC failed to undertake periodic comprehensive risk assessments for PTC-China and to ensure that its internal accounting controls procedures were suited to PTC-China’s particular circumstances (in particular, its ongoing dealings with Chinese government officials). PTC’s Code of Ethics and Anti-Bribery policies for the provision of business entertainment were vague (i.e., stating that employees should use “good taste” and consider the “customary business standards in the community” when providing business entertainment) and not risk-based to China. And PTC did not have independent compliance staff or an internal audit function that had authority to review and test its internal accounting controls processes or intervene into management decisions and, if appropriate, take remedial actions.

As a result, PTC failed to identify and correct corporate governance and compliance breakdowns at PTC-China. Notably, PTC failed to: properly vet PTC-China’s business partners, which played a significant role for PTC-China as described above; police for corrupt payments by its business partners; monitor and supervise PTC-China’s senior sales staff to ensure that they enforced anti-corruption policies and kept accurate records concerning gifts to Chinese government officials; properly scrutinize travel related expenses to prevent reimbursement for employees’ airfare, lodging, and other expenses that were either personal in nature or gifts for customers; limit the number or total value of gifts PTC-China’s sales staff could provide to any single individual or entity; and provide sufficient FCPA training for its employees.”

Based on the above findings, the order finds that PTC violated the FCPA’s anti-bribery provisions, books and records provisions and internal control provisions. As to the anti-bribery findings, the order states:

“PTC-China used third party business partners to pay bribes in the form of travel, gifts and entertainment to Chinese government officials to obtain and retain business. PTC exercised substantial control over PTC-China by, among other things, creating functional reporting lines, approving PTC-China’s key decisions, and setting PTC-China’s business and financial goals. PTC entered into contracts directly with the SOEs as a result of the bribes paid through PTCChina’s business partners, and earned significant income from these contracts. Under applicable agency principles, PTC-China and its employees acted as agents of PTC during the relevant time and were acting within the scope of their authority and for the benefit of PTC when participating in the bribery scheme.”

Under the heading “PTC’s Self-Disclosure and Remedial Efforts,” the order states:

“PTC only discovered the improper payments to or for the benefit of Chinese government officials in 2011, while investigating complaints concerning a senior PTC-China salesperson. Upon learning this information, PTC, with the oversight of the Audit Committee of the Board of Directors, engaged independent counsel and an independent forensic consulting firm to undertake an investigation. PTC voluntarily self-reported the results of its internal investigation to the Commission and responded to information requests from the Commission staff. PTC did not, however, uncover or disclose the full scope and extent of PTC-China’s FCPA issues until 2014.

As part of its internal review and investigation, PTC undertook significant remedial measures including terminating the senior staff at PTC-China implicated in the FCPA violations. PTC also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies worldwide, and implemented additional specific enhancements in China. These steps included: (1) reviewing and enhancing its anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer and a new compliance director in China; (3) expanding its other compliance resources in China, including hiring a new vice president of finance for Asia and adding additional legal staff in China; (4) hiring a new management team in China, including a new China President; (5) enhancing its FCPA training for employees; (6) severing its relationships with the business partners that were implicated in the FCPA violations and discontinuing the use of COD partners or business referral partners generally; (7) implementing a comprehensive due diligence program for all other business partners that includes a risk-scoring system operated by a third party vendor and that includes FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption certifications from sales staff; and (9) undertaking periodic compliance audits.”

The order states, under the heading “Non-Imposition of a Civil Penalty” as follows:

“[PTC] acknowledges that the Commission is not imposing a civil penalty based upon its payment of a $14,540,000 criminal fine as part of [PTC’s] subsidiaries’ settlement with the United States Department of Justice.”

As noted in this SEC release, PTC agreed to pay $11.858 million in disgorgement and $1.764 million in prejudgment interest. In the release, (Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit) stated:

“PTC failed to stop illicit payments despite indications of potential corruption by agents working with its Chinese subsidiaries, and the misconduct continued unabated for several years.”

Yuan DPA

Based on the same core conduct alleged above, the DPA alleges that Yuan caused violations of the FCPA’s books and records and internal controls provisions. Without admitting or denying the SEC’s allegations, Yuan agreed to refrain from violating the securities laws and agreed to a so-called “muzzle clause.”

Roger Witten (Wilmer Cutler) represented the PTC entities.

Elizabeth Gray (Willkie Farr) represented Yuan.

In this release PTC stated that the enforcement action involved “expenditures by certain former employees and business partners in China between 2006 and 2011.” The company further stated:

“The company is pleased to have resolved this matter. In connection with the agreements, PTC and its China subsidiaries will pay $28.2 million in penalties and interest to these agencies. PTC has implemented extensive remedial measures related to these matters, including the termination of the responsible employees and business partners, the establishment of an entirely new leadership team in China, the establishment of a dedicated compliance function, and other enhancements to compliance programs.”

PTC’s stock closed yesterday up .1%

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