Approximately 5.5 years ago (see here for the prior post), Clear Channel Outdoor Holdings (a public subsidiary of iHeartMedia and one of the world’s largest outdoor advertising corporations) disclosed FCPA scrutiny based on the conduct of “several employees of Clear Media Limited, an indirect, non-wholly-owned subsidiary of the Company whose ordinary shares are listed …. on the Hong Kong Stock Exchange.”
Today, the SEC (an enforcement agency whose officials have previously stated that it “should focus on bringing matters to resolution swiftly”) announced a $26.1 million FCPA enforcement action against the company.
In summary fashion, this administrative order finds:
“This matter concerns violations of the anti-bribery, recordkeeping, and internal accounting controls provisions of the FCPA by Clear Channel Outdoor Holdings, Inc. (“CCOH”), a Texas-headquartered company in the out-of-home advertising industry, in connection with the actions of its agent, CCOH’s former indirect, majority-owned Chinese subsidiary, Clear Media Limited (“Clear Media”). From at least 2012 through 2017, Clear Media bribed Chinese government officials, both directly and through third parties, to obtain concession contracts required to sell advertising services to public and private sector clients for display on public bus shelters, street furniture, and billboards. In addition, Clear Media used sham intermediaries and false invoices to generate cash for off-book consultants engaged to win advertising business from government and private customers. From at least 2012 through 2019 (the “relevant period”), CCOH failed to ensure that sufficient internal accounting controls were in place at Clear Media. CCOH received approximately $16.4 million in benefits as a result of Clear Media’s improper payments, which were inaccurately recorded as legitimate business expenses in CCOH’s consolidated books and records.”
As stated in the order, iHeartMedia, Inc. served as CCOH’s ultimate corporate parent and owned the majority of CCOH’s outstanding shares and total voting power until May 2019. In May 2019, CCOH fully separated from iHeartMedia as part of the latter’s Chapter 11 bankruptcy proceedings, emerging as a standalone, publicly traded company; at this time, iHeartMedia ceased to own any shares of CCOH.
Clear Media Limited is described as follows:
“Clear Media Limited was, during the relevant period, a Bermuda-incorporated holding company, headquartered in Guangzhou, China, through which CCOH conducted business in China. Since 2005, Clear Media Limited was majority-owned by CCOH. Since December 2001, Clear Media Limited listed a portion of its shares on the Hong Kong Stock Exchange. Clear Media Limited, in turn, operated through a joint venture entity (together, “Clear Media”) between Clear Media Limited and a PRC-incorporated company controlled by Related Group (“JV Partner”) [described as a group of companies in China that were controlled by Executive A’s close family member and included, among others, JV Partner and various cleaning and maintenance entities used by Clear Media.]. Clear Media’s books and records were consolidated into CCOH’s consolidated financial statements for purposes of Commission filings through fiscal year 2020, when CCOH sold its interest in the Clear Media business.”
Under the heading “CCOH’s Control Over Clear Media,” the order states:
“CCOH acquired an interest in certain advertising companies associated with Executive A [described as a Chinese citizen and resident who during the relevant period was Clear Media’s principal executive officer] and Executive A’s Relative in China in 1998. In 2001, Clear Media Limited listed its shares on the Main Board of the Stock Exchange of Hong Kong Limited, and CCOH reorganized its holding through Clear Media. From 2005 through March 2020, CCOH held a majority of Clear Media’s shares. CCOH provided out-of-home advertising services in China solely through Clear Media and, through CCI, consolidated Clear Media’s results in its financial statements.
During the relevant period, Executive A served as Clear Media’s principal executive officer. CCOH exercised control of Clear Media through the participation of two to three executives on Clear Media’s board of directors, including in positions as Executive Chairman and Deputy Chairman of its board. Executives from CCOH’s finance, legal, and compliance functions also participated regularly in Clear Media’s board meetings, as well as in certain Clear Media audit committee meetings.
CCOH controlled the majority of voting shares of Clear Media. CCOH set financial goals for Clear Media; supervised Clear Media’s financial performance, management, and organization; and defined Clear Media management’s scope of responsibility. Using U.S.- based email systems, CCOH executives approved Clear Media’s budget and significant transactions, including tenders for concessions. CCOH also controlled the adoption of Clear Media’s compliance policies and the hiring, firing, and compensation of Executive A and other Clear Media executives. Clear Media reported to CCOH through the Executive Chairman of Clear Media’s board of directors, a role filled by a CCOH executive for Asia Pacific from 2012 until 2015. Thereafter, the Executive Chairman of Clear Media’s board reported to CCOH’s head of the CCI division. CCOH conducted annual audits of Clear Media, including compliance, operational, and SOX audits.”
Under the heading “Clear Media Made Improper Payments to Obtain and Retain Business in China and Inaccurately Documented and Recorded the Payments,” the order finds:
“From at least 2012 through 2017, acting directly and through third parties, Clear Media provided improper benefits to obtain and renew concessions and advertising contracts in China and failed to appropriately document and record those payments in its books and records.
To obtain concession contracts from local Chinese government transport authorities, Clear Media provided cash-equivalent gift cards, golf clubs, vases, and other expensive and unidentified gifts and entertainment, some of which were provided “due to being in the negotiation process with clients for a renewal.” Executive A spent hundreds of thousands of dollars, subject to no advance review or approval, on government officials for first-class travel, hotel rooms, meals, and entertainment. Clear Media’s documentation often failed to identify the officials who received the benefits or to specify the amount spent on each official’s behalf. In one instance in September 2015, Clear Media employees were cautioned by local Clear Media management not to “describe the purposes of the Hospitality Costs too specifically, e.g., for the purpose of winning the contract.”
Clear Media also provided improper benefits to government officials through vendors known as “cleaning and maintenance entities,” which helped obtain Clear Media’s concession contracts as well as build, clean, and maintain its advertising displays. Many of Clear Media’s cleaning and maintenance vendors were Related Group companies. Contrary to Clear Media’s policies, Clear Media made certain payments to the cleaning and maintenance entities based solely on oral agreements, often disguising payments for the benefit of government officials as various “subsidies” or “special request” expenses. Written contracts Clear Media had with such entities often lacked specificity as to payment rates and amounts, and certain contracts did not have anti-corruption provisions or audit rights, contrary to Clear Media’s policies. Further, the cleaning and maintenance entities did not detail the services they provided, as Clear Media’s policies required before paying vendors.
In addition to cleaning and maintenance expenses, the budget Clear Media allocated to cleaning and maintenance entities included salaries, bonuses, entertainment, and other expenses. Records indicate that Clear Media also maintained an annual reserve of $525,000 to $600,000 for “special funding” or “special request funding” for ad hoc requests, and that “from discussions in Hangzhou [in 2017,] special request funding ha[d] been used [in Hangzhou] solely for Government official entertaining.”
In December 2016, Clear Media’s Hangzhou branch spent $12,800 on customer entertainment while it was seeking the renewal of a priority concession with a Hangzhou transit authority (the “Hangzhou Concession”). In January 2017, Clear Media provided its Hangzhou branch with approximately $14,000 to entertain government officials “due to the need to renegotiate” the Hangzhou Concession. Clear Media’s Hangzhou branch then transferred approximately $20,350 to its cleaning and maintenance entity, classifying the payment as a “subsidy” or an “allowance.” The same month, the Hangzhou Concession was renewed.
Similarly, the general manager of Clear Media’s cleaning and maintenance entity in Shanghai told CCOH’s internal auditors during a 2017 audit that his main responsibility, along with Executive A, was to maintain a “close relationship” with Shanghai government officials, including through entertainment, in order to avoid having the Shanghai concession put out for public tender. He stated that Clear Media would lose the concession in an open tender because it was unable to compete based on price. Clear Media entered into a ten-year concession agreement with Shanghai public transit authorities in December 2016.
In addition to improper payments made to obtain concession contracts, Clear Media engaged in a “customer development expense” scheme from at least 2013 through 2017. Through this scheme, Clear Media developed an off-book cash fund for payments made to undisclosed consultants to win, grow, or retain advertising business from approximately 70 private and government customers. Clear Media purportedly considered the identities of the consultants to be sensitive and confidential information and did not properly diligence or document them. In some cases, Clear Media withdrew cash directly from its bank account for personnel to pay the undisclosed consultants. In others, Clear Media created false invoices and tax records to justify cash payments to three shell company intermediaries that provided no actual services. The shell companies, whose legal representatives included Executive A’s driver and personal assistant, were controlled by Related Group. After a series of cash deposits and withdrawals through layers of bank accounts held in the names of employees of Clear Media and Related Group companies, Clear Media sales directors distributed the cash to 19 different undisclosed consultants. The payments ranged from two to five percent of the advertising contracts’ value. Clear Media had no written agreements with the consultants or records of the payments made to them.”
Next, the order contains a section titled “From 2012 Through 2017, CCOH’s Internal Auditors Identified Bribery-Related Concerns and Internal Accounting Control Deficiencies at Clear Media” which finds in summary fashion:
“From 2012 through 2017, CCOH’s internal auditors repeatedly reported elevated bribery risks at Clear Media and concerns regarding Clear Media’s compliance program and internal accounting controls, including in relation to cleaning and maintenance vendors; travel, gifts, and entertainment; compliance training; and whistleblower hotline implementation. While CCOH audit reports identified certain remedial actions to be taken by Clear Media, CCOH failed to ensure that Clear Media took adequate steps to sufficiently address these repeated concerns. In some cases, CCOH’s internal auditors erroneously reported that audit issues were remediated based on information provided by Clear Media, only to note the same issues in later audits; failed to elevate certain concerns they identified at Clear Media; and failed to adequately test high-risk transactions to detect long-running payment schemes.”
Thereafter, the order contains a section titled “In 2017, Clear Media Blocked CCOH’s Internal Auditors’ Access to Records,” which finds:
“Given the risks surrounding Clear Media’s payments to cleaning and maintenance entities, in 2017, CCOH’s internal auditors requested support concerning the entities’ monthly expenditures, as well as for the payments made to entertain officials renegotiating the Hangzhou Concession in early 2017. Executive A blocked CCOH’s internal auditors, Clear Media’s internal auditor, and Executive B [described as a Singaporean citizen and Chinese resident who was a senior executive officer of Clear Media] from obtaining access to the requested records.
Following the 2017 audit, CCOH’s internal auditors raised concerns about access to records with Clear Media management and with Clear Media’s Chairman of the Board and Audit Committee Chair. Executive A’s actions were then reported to CCOH’s senior executives and audit committee. CCOH’s internal auditors assigned Clear Media an “unsatisfactory” audit rating due largely to CCOH’s internal auditors’ inability to provide assurance on the appropriateness or validity of Clear Media’s payments to cleaning and maintenance vendors.”
The order next contains a section titled “In 2018, a Misappropriation Scheme Came to Light, Revealing Additional Weaknesses in Clear Media’s Internal Accounting Controls” which finds in pertinent part:
“In January 2018, a Clear Media cashier confessed to Chinese authorities that he had participated in a decade-long misappropriation scheme. Clear Media’s board engaged local counsel and the Hong Kong branch of an accounting firm to investigate the misappropriation. In February 2018, Clear Media’s external auditors also identified suspicious commission payments made to entities related to Executive A. Clear Media’s investigation found that:
• Between 2007 and 2017, at least three Clear Media employees engaged in a series of unrecorded and allegedly unauthorized transactions to misappropriate approximately USD $10.2 million;
• Between 2011 and 2018, undisclosed, “off-book” bank accounts in Clear Media’s name were used to receive government subsidies totalling at least USD $5.2 million that were not recorded as income; and
• Between at least 2015 and 2017, Clear Media made approximately USD $9.8 million in cash “customer development” payments, both through Clear Media personnel and Related Group shell companies, to 19 secret consultants to obtain or retain business with approximately 70 government and private customers.
Executive A prevented investigators from interviewing Related Group employees regarding the “customer development” expenses and from accessing its records. Clear Media eventually permitted external legal counsel in China to contact five of the 19 consultants by telephone, all of whom denied making improper payments. Investigators had no access, however, to the secret consultants’ books and records to verify how the “customer development” fees were used.
While CCOH did not become aware of the “customer development” expense scheme until 2018, later investigation revealed that Clear Media’s payments to secret consultants began no later than 2013. CCOH’s monitoring of Clear Media failed to detect the repeated, large cash withdrawals and commission payments that Clear Media made for at least five years, from 2013 through 2017, in furtherance of the “customer development” scheme.
At the same time, as of 2018, many of the issues CCOH’s internal auditors did identify in audits of Clear Media since 2012 remained insufficiently or only partially remediated by Clear Media. For example, a compliance questionnaire Clear Media completed in March 2018 reflected that Clear Media did not conduct due diligence on agents, did not require approval of new suppliers before processing payments to them, did not obtain required legal department approval of 9 related party transactions, did not include CCOH’s anti-bribery contractual provisions and audit clauses in its model contracts, and did not publicize the CCOH whistleblower hotline.”
The final substantive section of the order is titled “Throughout 2019, Clear Media Continued to Block Access to Financial Records
and Pay Cleaning and Maintenance Entities Without Adequate Support” which states:
“Executive A continued to deny CCOH’s internal auditors access to financial records related to the cleaning and maintenance entities’ expenses in 2019. CCOH’s internal auditors reported this to their executive management, along with continuing concerns regarding Clear Media’s whistleblowing hotline implementation and provision of meals and entertainment.
Accounting Firm assigned Clear Media “unsatisfactory” ratings in two internal audits it conducted in 2019. Accounting Firm found that Clear Media continued to pay substantial “business development assistance fees” to cleaning and maintenance entities related to acquiring or renewing concession rights; there were no formal contractual agreements in respect to these services or bases to support the amounts paid. Accounting Firm concluded that these payments created a “critical risk” to Clear Media’s operational performance, financial statements, and reputation or could result in legal fines and penalties. Accounting Firm further found a high risk associated with Clear Media’s payments to the entities to clean and maintain bus shelters, which also lacked an adequately documented basis, and recommended clarification of pricing models and monitoring of payments for appropriateness.
In May 2019, CCOH legally separated from its former ultimate parent company, had a new class of stockholders, and formed a new board of directors. Despite various remedial efforts, by the end of 2019, CCOH still could not assure itself that Clear Media’s payments to cleaning and maintenance entities were being spent appropriately, consistent with CCOH management’s policies, and in compliance with anti-corruption laws. In November 2019, CCOH announced a strategic review of its interest in Clear Media. In March 2020, CCOH disposed of its interest in Clear Media.”
Based on the above, the order finds that CCOH violated the FCPA’s anti-bribery, books and records, and internal controls provisions.
Without admitting or denying the SEC’s findings, CCOH agreed to pay approximately $26.1 million (disgorgement of $16,355,567, prejudgment interest of $3,760,920, and a civil monetary penalty in the amount of $6,000,000). According to the order, CCOH shall pay approximately $13 million within 30 days with the remainder due in equal installments over an approximate three year period.
Under the heading “Cooperation and Remediation” the order states:
“CCOH’s cooperation included: (1) promptly sharing facts developed in its own internal investigation; (2) proactively producing relevant documents, including documents from Clear Media, both prior to and following the sale of CCOH’s interest in Clear Media, that were located overseas; (3) producing, in real time, documentation of audits of Clear Media internal controls during the course of the investigation; (4) providing translations of documents; (5) facilitating the production of documents from third parties; and (6) facilitating the Commission’s staff’s interviews of current and former employees of CCOH’s foreign subsidiaries and of certain third parties.
CCOH’s remediation efforts include: (1) disposing of its interest in Clear Media; (2) enhancing CCOH’s anti-corruption compliance policies, procedures, and related internal accounting controls surrounding third-party due diligence, contracting, payments, and monitoring; gifts, meals, entertainment, and travel; conflicts of interest; and the monitoring and remediation of internal audit issues and actions; (3) implementing annual compliance reviews of internal accounting controls across its business units; (4) increasing human and financial resources for compliance, including the hiring of a dedicated Compliance Director; (5) introducing ethics and compliance considerations into performance evaluations and compensation decisions; and (6) enhancing online and live anti-corruption training programs.”
In the SEC’s release, Charles Cain (Chief of the SEC Enforcement Division’s FCPA Unit) stated:
“As the SEC’s order finds, Clear Media bribed Chinese officials with expensive gifts and entertainment and used off-book consultants to obtain contracts from Chinese authorities. Despite repeated red flags raised by its internal auditors, Clear Channel failed to address the deficient internal accounting controls that allowed Clear Media to continue these improper payments for many years.”
This statement from CCOH notes:
“In connection with the settlement, the U.S. Department of Justice has declined to pursue any charges against the Company. As the SEC’s resolution acknowledges, the Company cooperated with the SEC throughout its investigation; has since sold its entire interest in Clear Media; and has undertaken a number of actions to enhance and strengthen its compliance policies and procedures and related recordkeeping and internal controls. Resolving these legacy matters is important to the Company, which believes this settlement is in the best interests of the Company and its shareholders. The Company remains deeply committed to promoting a culture of ethical conduct and compliance.”
Clear Channel was represented by Anita Bandy of Skadden Arps Slate Meagher & Flom LLP.
