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Two For Tuesday In FCPA Enforcement Land – First Up Nortek

Just when you think you’ve seen all possible combinations of Foreign Corrupt Practices Act enforcement, along comes yesterday’s “two for Tuesday” in which the SEC announced in the same press release [1] two non-prosecution agreements against two separate companies and the DOJ simultaneously released two so-called “declination” letters against the same two companies.

This post highlights the enforcement action against Nortek Inc. and a second post today [2] highlights the enforcement action against Akamai Technologies. From there future posts will highlight issues to consider from the enforcement actions (and there are many including the question of just what charges – based on the SEC’s statement of facts – did the DOJ actually decline?”).

The Nortek enforcement action was based on the conduct of an “indirect wholly-owned subsidiary” (Linear Electronics (Shenzhen) Co. Ltd. (“Linear China”).

Based on the SEC’s findings, highlighted below, Nortek agreed to a SEC non-prosecution agreement [3] for what the NPA termed “possible violations of the books and records and internal accounting controls provisions of the FCPA.”

Pursuant to the NPA, Nortek agreed to pay approximately $322,000 in disgorgement and prejudgment interest.

The Statement of Facts in the NPA (stripped of identifying information, self-reporting, and remedial measures issues) is approximately one page and states in full:

“From at least 2009 to 2014, Linear China’s managing director, accounting manager, customs liaison officer, and other employees made or approved improper payments and gifts to local Chinese officials in order to receive preferential treatment, relaxed regulatory oversight, and/or reduced customs duties, taxes, and fees.

The improper payments and gifts to local Chinese officials included cash payments, gift cards, meals, travel, accommodations, and entertainment. Linear China made the illicit payments to local officials from multiple different governmental departments, including customs, tax, fire, police, labor, health inspection, environmental protection, and telecommunications.

Linear China’s improper payments were systemic and went undetected for several years. From 2009 through 2014, Linear China made more than 400 payments to local Chinese officials. At least one improper payment was made every month during those 5 years. These payments totaled approximately $290,000.

In some instances, Linear China’s accounting department entered the illicit payments as entries in various accounts and supported the expenditures with false or misleading information and supporting documentation.”

Under the heading “Nortek’s Inadequate Internal Accounting Controls and Inaccurate Books and Records,” the NPA states:

“As evidenced by Linear China’s illicit payments made directly to Chinese officials in the ordinary course of business over many years, Nortek failed to devise and maintain a system of internal accounting controls at Linear China sufficient to provide reasonable assurances that, among other things, transactions were executed in accordance with management’s general or specific authorization, and transactions were recorded as necessary to maintain accountability for assets. Linear China made improper payments from multiple accounts, which Nortek failed to review or test. Nortek failed to notice obvious red flags in Linear China’s financial records, including the number and size of Linear China’s meals and entertainment expenses. Further, Nortek failed to establish procedures to ensure its Linear China employees were trained in anti-corruption compliance.

From 2009 through 2014, certain Linear China employees paid bribes that were inaccurately recorded in Linear China’s books, records and accounts, which were consolidated into the books and records of Nortek.”

Under the heading “Nortek’s Self-Report,” the NPA states:

“Nortek timely self-reported this matter to the Division of Enforcement and conducted a prompt and thorough investigation. In 2014, Nortek conducted an internal audit of Linear China’s books and records. The internal audit team identified questionable payments made to local Chinese officials. As a result, Nortek conducted an internal investigation of Linear China’s conduct and forensically analyzed Linear China’s financial records. The internal investigation confirmed Linear China had made improper payments to Chinese officials local to Shenzhen, China. Before completing its internal investigation, Nortek promptly self-reported its preliminary findings to both the SEC and the Department of Justice.”

Under the heading “Remedial Measures and Cooperation,” the NPA states:

“Upon learning of the bribes, Nortek took immediate action to end the illicit payments and implemented significant remedial measures. Once the employees at Linear China were interviewed by the internal investigation, those involved were terminated, including Linear China’s managing director and chief financial officer. Nortek also comprehensively reviewed its then existing compliance program and undertook significant corrective action to enhance its compliance program and ensure that its employees around the globe were receiving adequate training. As part of its remedial efforts, Nortek: (i) revised its internal audit testing and protocols to focus on quickly discovering any FCPA-related improprieties; (ii) strengthened its anti-corruption policies; (iii) developed a Compliance Committee consisting ofrepresentatives from management and subsidiaries to supervise compliance implementation of Nortek’s policies and training; (iv) provided extensive mandatory in-person and on-line trainings on the FCPA and anti-corruption policies to its employees around the globe in appropriate languages; and (v) adjusted its internal audit schedules to prioritize facilities located in geographic areas known for higher incidences of corruption.

Nortek provided comprehensive, organized, and real-time cooperation with the staff of the Enforcement Division during the course of its internal investigation, including: (i) sharing the detailed findings of its internal investigation, including identifying all improper payments and potential improper payments made to foreign officials and providing its summaries of witness interviews; (ii) timely updating the staff with additional findings when its investigation uncovered new information; (iii) effectively segregating, organizing, and presenting the most salient documents to the staff; (iv) voluntarily translating documents from Chinese into English; (v) voluntarily making witnesses available for interviews, including those in China; and (vi) conducting a risk assessment to determine whether the improper conduct at Linear China occurred at Nortek’s other manufacturing locations in China.”

The NPA contains a so-called muzzle clause in which Nortek, as well as its attorneys, employee and agents, agree not to take any action or to make or permit any public statement “denying, directly or indirectly, the factual basis of any aspect” of the NPA.”

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

“When companies self-report and lay all their cards on the table, non-prosecution agreements are an effective way to get the money back and save the government substantial time and resources while crediting extensive cooperation.”

Kara Brockmeyer (SEC FCPA Unit Chief) stated:

“Akamai and Nortek each promptly tightened their internal controls after discovering the bribes and took swift remedial measures to eliminate the problems.  They handled it the right way and got expeditious resolutions as a result.”
DOJ “Declination” Letter
Yesterday, the DOJ released this letter [4] from new FCPA Unit Chief Daniel Kahn to Nortek’s counsel which states in full:
“I write regarding the investigation by the Department of Justice, Criminal Division, Fraud Section into your client Nortek, Inc. (“Nortek” or the “Company”) concerning possible violations of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, et seq. Based upon the information known to the Department at this time, we have closed our inquiry into this matter. Consistent with the FCPA Pilot Program, we have reached this conclusion despite the bribery by employees of the Company’s subsidiary in China, based on a number of factors, including but not limited to the fact that Nortek’s internal audit function identified the misconduct, Nortek’s prompt voluntary self-disclosure, the thorough investigation undertaken by the Company, its fulsome cooperation in this matter (including by identifying all individuals involved in or responsible for the misconduct and by providing all facts relating to that misconduct to the Department) and its agreement to continue to cooperate in any ongoing investigations of individuals, the steps that the Company has taken to enhance its compliance program and its internal accounting controls, the Company’s full remediation (including terminating the employment of all five individuals involved in the China misconduct, which included two high-level executives of the China subsidiary), and the fact that Nortek will be disgorging to the SEC the full amount of disgorgement as determined by the SEC. If additional information or evidence should be made available to us in the future, we may reopen our inquiry.”
*****

Nortek was represented by Brian Saulnier [5] and Luke Cadigan [6] of K&L Gates.

Yesterday’s Nortek’s stock price fell .06%.