Yesterday the DOJ and SEC announced a net $10 million Foreign Corrupt Practices Act enforcement action against BIT Mining Ltd. (formerly known as 500.com) in connection with a failed Japan bribery scheme concerning efforts to obtain a license to operate a casino.
500.com was formerly an online sports lottery service provider incorporated in the Cayman Islands, with headquarters and major business operations in Shenzhen, China with American Depositary Shares (ADS) traded on the New York Stock Exchange (NYSE). 500.com is now known as BIT Mining, a crypto assets mining business incorporated in the Cayman Islands and headquartered in Ohio with ADSs traded on the NYSE.
The enforcement action involved a DOJ component (net $6 million – a $54 million criminal penalty, reduced to $10 million based on an inability to pay, and further reduced to $6 million reflecting a credit for the amount paid to the SEC) and an SEC component ($4 million civil penalty).
In addition, the DOJ announced that Zhengming Pan (a Chinese national and the former CEO of 500.com) was criminally indicted in June in connection with the same bribery scheme and charged with one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA, one count of violating the anti-bribery provisions of the FCPA, and two counts of violating the books and records provisions of the FCPA.
SEC
In summary fashion, this SEC order finds:
“This matter arises from violations of the anti-bribery, books and records, and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by 500.com, which at the time of the misconduct was an online sports lottery service provider headquartered in Shenzhen, China. From 2017 to 2019, Respondent engaged in a widespread bribery scheme to influence numerous foreign government officials, including members of Japan’s parliament, in its effort to enter the Integrated Resort (“IR”) market and obtain licensing to establish an IR casino in Japan (“the IR project”). At the time, Japan had recently lifted its longstanding ban on casinos and passed legislation to legalize gambling.
The scheme included illicit payments of approximately $2.5 million in the form of fees and reimbursements to sham consultants, cash bribes to IR decision makers, and entertainment and extravagant trips for Japanese officials. 500.com also created a subsidiary, 500.com Nihon, to help orchestrate the bribery scheme. 500.com’s then Senior Executive authorized the improper payments, which were at times paid via a U.S. dollar denominated bank account or a U.S. correspondent bank. In late 2019, 500.com’s offices were raided, and Tokyo prosecutors charged its consultants with bribery and prosecuted prominent government officials for accepting bribes. 500.com was unable to enter the IR market in Japan. The illicit payments were inaccurately reflected in the company’s books and records, and it failed to have sufficient internal accounting controls in place to detect or prevent the misconduct.”
Under the heading “The IR Project in Japan,” the order finds:
In April 2015, 500.com suspended its online lottery services in China after the government made changes to its rules governing online lottery sales. Thereafter, the Company’s net revenues declined substantially.
On December 15, 2016, Japan’s parliament, the National Diet, passed the IR Promotion Act, which legalized gambling in Japan and lifted its long-standing comprehensive ban on casinos. In July 2018, the National Diet enacted the IR Implementation Act, which allowed for the licensing and creation of a limited number of resorts in Japan designed to integrate casinos with other facilities such as hotels, convention centers, entertainment venues, luxury retail areas and restaurants.
500.com’s then Senior Executive learned about the IR Promotion Act in approximately late 2016, and soon sought to bolster the company’s failing business operations by establishing an IR related casino in Japan. In order to facilitate this goal, the company engaged in a widespread bribery scheme designed to influence numerous foreign government officials, including members of Japan’s National Diet.
Between March and July 2017, 500.com hired Japan-based consultants, including but not limited to Consultant 1, Consultant 2, and Consultant 3, to assist with entering the IR market. In July 2017, 500.com created 500.com Nihon, a Tokyo based subsidiary, to facilitate its entry into the IR market, and made Consultant 1 a Director. In a text message dated July 14, 2017, Consultant 1 asked Consultant 2 about “500 Corporation being able to enter into IR in the first attempt” and referenced Senior Executive’s concern about “head-on competition with a major company in Europe or the U.S. in open application” to which Consultant 2 replied, “[t]hat’s why we’re aiming for cities where under-the-table deals can be used.” Later, in September 2017, 500.com hired Consultant 1’s company, Company 1, as another purported consultant on the IR project.
Ultimately, the bribery scheme came to light in late 2019 and Tokyo prosecutors charged both Japanese officials and consultants of 500.com in connection with the bribery scheme. 500.com did not obtain a license for an IR in Japan and was unable to enter the IR market.”
Consultant 1 is described as:
“A Chinese National, and a Director of 500.com Nihon and a Japan based translator, consultant, and Director of Company 1 [a Singapore based subsidiary of a Japanese marketing and media resource company], who was retained by 500.com from April 2017 to June 2020 to assist with the IR project. Consultant 1 was also an agent of 500.com. In August 2020, Consultant 1 pled guilty in Tokyo District Court to paying bribes to Official 1 on behalf of 500.com so that it could enter the IR market.”
Consultant 2 is described as:
“A Japanese National, retained by 500.com from March 2017 to September 2019, as a consultant and agent, to assist with the IR project. In August 2020, Consultant 2 pled guilty in Tokyo District Court to paying bribes on behalf of 500.com to Official 1 in exchange for Official 1’s help establishing an IR in either Hokkaido or Okinawa, Japan. In October 2020, Consultant 2 was convicted of bribery in Tokyo District Court.”
Consultant 3 is described as:
“A Japanese National, retained by 500.com from July 2017 to September 2019, as a consultant and agent, to assist with the IR project. In August 2020, Consultant 3 pled guilty in Tokyo District Court to paying bribes on behalf of 500.com to Official 1 in exchange for Official 1’s help establishing an IR in Japan. In October 2020, Consultant 3 was convicted of bribery in Tokyo District Court.”
Under the heading “500.com Used Consultants to Make Improper Payments to Government Officials Closely Connected to IRs, Including Official 1 and Official 2” the order finds:
“In order to enter the nascent and competitive IR market, 500.com’s Senior Executives and management knew it needed to gain support from influential government officials with ties to IR development in Japan. As a means to gain this needed support, sham consultants were hired to target government officials and pay them bribes on behalf of the company. From 2017 to 2019, improper payments of approximately $2.5 million were paid to further 500.com’s pursuit of entering the IR market, and were made through methods including sham consulting fees and reimbursements, cash bribes, and entertainment and extravagant trips. A portion of the improper payments were paid to, or for the benefit of, government officials. […]
In connection with the bribery scheme, 500.com used a U.S. dollar denominated bank account to facilitate improper payments, and U.S. based email service providers were used at times when communicating about the IR project. During the relevant period, 500.com failed to devise and maintain a system of internal accounting controls sufficient to detect or prevent the improper payments.”
Official 1, a Japanese National, is described during the relevant time period as:
“A member of the Japanese House of Representatives and Liberal Democratic Party, the Vice-Minister of Land, Infrastructure, Transport and Tourism, and the state Minister in charge of IRs at the Cabinet Office in Japan (“Vice-Minister”). In 2021, he was convicted in Tokyo District Court of accepting bribes from 500.com in 2017 and 2018, while the company was seeking to enter Japan’s IR market. The Court sentenced Official 1 to four years in prison and ordered him to pay a fine of JPY 7,600,000 (approximately $72,000).”
Official 2, a Japanese National, is described during the relevant time period as:
“An Assistant for Official 1 in Japan. In 2021, he was convicted in Tokyo District Court of accepting bribes from 500.com in 2017 and 2018. The Court sentenced Official 2 to two years in prison and suspended
the sentence.”
Under the heading “500.com Paid a Bribe Disguised as a “Lecture Fee” to Official 1 for his Attendance at an IR Symposium in Okinawa, Japan, in August 2017,” the order finds:
“In approximately July 2017, 500.com planned an IR Symposium to promote its bid for the development of an IR in Okinawa, Japan. Senior Executive invited Official 1 to be a keynote speaker at the Symposium which was held in August 2017. Official 1 agreed to be paid a lecture fee of JPY 500,000 (approximately $4,600), which Senior Executive approved. Following the lecture, 500.com’s consultants learned that Official 1 would soon be promoted to Vice Minister in charge of IRs and Senior Executive unilaterally approved payment of a larger fee to Official 1 of JPY 2,000,000, even though the speech had already been given and Official 1 had not requested a larger fee.
In August 2017, 500.com paid the lecture fee pursuant to a sham invoice for JPY 2,400,000 ($26,395) issued by an entity owned by Consultant 3. Once payment was received Consultant 3 transferred JPY 2,000,000 to a company controlled or owned by Official 1. The sole purpose of the inflated lecture fee was to improperly influence Official 1 and obtain favorable treatment on IR related matters. 500.com improperly recorded the lecture fee as management expense – advisory fees.”
Under the heading “500.com Entered into a Sham Consulting Agreement with Company 1 for the Purpose of Paying Cash Bribes to Government Officials Connected to IRs in Japan,” the order finds:
“In September 2017, Japan’s Prime Minister abruptly dissolved the lower house of the Japanese National Diet and called for a new general election in October 2017. Hoping to not lose momentum with influential Japanese politicians whose support was needed to enter the IR market, 500.com decided to use Consultant 1’s business, Company 1, to funnel cash to various National Diet members. The purpose of the payments was to influence the IR process and gain access to non-public information.
[…]
Senior Executive oversaw and approved the illicit payment scheme, including the transfer of cash by hand to the National Diet members after it was determined that it was illegal to donate campaign funds directly to the Japanese officials.
In late September 2017, with Senior Executive and Consultant 1’s authorization, 500.com signed a sham consulting agreement to pay, among other things, “[c]osts associated with IR Research and Reports of JPY 26,300,000 (or equivalent US dollars)” to Company 1 within five days. On or about September 22, 2017, 500.com wired $233,715 (approximately JPY 26,400,000) to Company 1’s bank, which then wired the money to a Hong Kong SAR, China (“Hong Kong”) bank affiliated with Consultant 2. The wire payment went through a U.S. correspondent bank account. Afterwards, Consultant 2 withdrew a portion of the money from the Hong Kong bank account. Consultant 2 and Consultant 3 used the money to pay cash bribes to several Japanese officials in Japan connected to IRs, including Official 1 and Official 2.
500.com improperly recorded the payment to Company 1 as management expense – advisory fees.”
Under the heading “500.com Funded Travel by Japanese Officials to Shenzhen, China, and Macau, in December 2017 and Paid Bribes to the Officials to Advance its Effort to Enter the IR Market,” the order finds:
“In late December 2017, 500.com invited Official 1 and three other Japanese officials, including Official 2, to travel on a three-day trip from Tokyo to Shenzhen, China, and then Macau, purportedly to attend an IR related seminar on managing gambling addiction. The real purpose for inviting Official 1, Official 2, and the other officials on the trip was to improperly influence them and gain their support for 500.com entering the IR market. 500.com executives, including Senior Executive, and consultants accompanied the officials on the trip, along with employees of Company 1 and Tour Company, a travel agency that 500.com planned to partner with on the IR project.
500.com made improper payments of approximately $221,614 in connection with the December 2017 trip, including paying for roundtrip private jet transportation from Japan to Shenzhen and Macau, entertainment, meals and hotel costs, shopping, gifts, and cash bribes for Official 1, Official 2, and two other officials. 500.com improperly recorded the payments as management expenses – travel expenses.”
Under the heading “500.com Paid Costs Related to a Ski Trip for Official 1, his Family Members and Official 2 in February 2018,” the order finds:
“With Senior Executive’s approval, 500.com also sponsored a ski trip for Official 1, his family members and Official 2 to Hokkaido, Japan, in February 2018. The ski trip did not involve a legitimate business purpose and was instead part of the effort to improperly influence Official 1 and Official 2 and gain their support for the establishment of an IR in Hokkaido.
Tour Company Executive partnered with 500.com to pay for the ski trip. With Senior Executive’s approval, Consultant 3 and Tour Company paid approximately $6,635 for the trip and 500.com reimbursed Consultant 3 for his share of the costs. 500.com improperly recorded the payment as management expense – entertainment and travel expenses.
In September 2020, Tour Company Executive was found guilty in Tokyo District Court of conspiring with Consultant 2 and Consultant 3 to win influence over the IR project by bribing Official 1 and Official 2 with the Hokkaido ski trip.”
Under the heading “500.com Failed to Follow Its Own Procurement Policy When it Retained Company 1, Company 2, and Company 3 as Consultants,” the order finds:
“During the relevant period, 500.com failed to properly verify that payments to consultants were used for their stated purposes, and it failed to have mitigating controls to verify that services were properly rendered before paying the consultants and corresponding expense reimbursements. Executives at 500.com were able to direct employees to pay invoices without having supporting documented deliverables and to pay cash bribes. Furthermore, 500.com failed to provide anti-bribery and anti-corruption training to employees and third-party consultants who interacted with government officials on its behalf.
Similar deficiencies surrounded the retention of Company 1 and two other business consultants, Company 2 and Company 3, in connection with the IR project.
From August 2017 to August 2018, 500.com engaged Company 2 as a consultant and paid a total of $240,000. While the company received no legitimate deliverables from Company 2, the expense was nevertheless recorded as management expense-advisory fees for the Japan IR project.
Similarly, from January 2018 to September 2019, 500.com also engaged Company 3 as a consultant and paid $310,785 for purported consulting services related to IRs. As with Company 2, despite lacking support for the existence of legitimate deliverables, the Company 3 expenses were also recorded as management expense-advisory fees for the Japan IR project.
Though required by its Procurement Policy, 500.com did not provide its Finance Department with any price comparisons between the anticipated costs of the consulting services for Company 1, Company 2 and Company 3, and prevailing market rates prior to retaining their services.
In addition to the improper payments described above, 500.com also paid approximately $1,004,887 to its consultants, approximately $115,452 in expenses related to the IR project, and an additional $370,774 to Company 1. Senior Executive authorized the payments.”
Based on the above, the order finds that 500.com violated the FCPA’s anti-bribery, books and records, and internal controls provisions and 500.com was ordered to pay a $4 million civil penalty.
The order contains a section titled “Cooperation and Remediation” which states:
“In determining to accept 500.com’s Offer, the Commission considered 500.com’s cooperation, and remedial efforts. 500.com, now known as BIT Mining Ltd., disposed of its entire lottery related business after an announcement in July 2021. In addition, the executives responsible for the misconduct are no longer employed by the company. The company has revised and enhanced its policies and procedures and training programs related to procurement, anti-corruption and the FCPA. During the investigation, the company’s cooperation included providing regular updates to the Commission, sharing facts identified during its own internal investigation, and providing English translations of important documents.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“Investors must have confidence that the operations and performance of public companies reflect merit and legitimate considerations. Bribery and corruption turn that dynamic on its head, distorting the orderly operation of the markets and undermining investor confidence. Here, 500.com’s deficient controls fostered an environment that enabled a bribery scheme involving the highest level of the company and influential Japanese officials. This case underscores the need for robust internal accounting controls that are properly implemented and effective throughout an organization.”
DOJ
The DOJ enforcement action is based on the same core findings in the SEC’s order.
This criminal information alleges in summary fashion:
“From in or around 2017 to in or around December 2019, 500.com, through certain of its officers, directors, employees, and agents, knowingly and willfully conspired and agreed with others to: (i) corruptly offer and pay money and other things of value to foreign officials in Japan to secure improper advantages in order to obtain and retain business for 500.com […] and (ii) maintain false books, records, and accounts that did not accurately and fairly reflect the transactions and dispositions of the assets of 500.com.
In furtherance of the scheme, 500.com and its co-conspirators corruptly offered and paid approximately $1.9 million to (i) Japanese officials and (ii) the 500.com Consultants, while knowing that the 500.com Consultants would pay the funds, at least in part, to or for the benefit of Japanese officials, in order to obtain and retain business and other advantages for and on behalf of 500.com, specifically to assist 500.com in its efforts to enter the IR market in Japan. The payments were made with the knowledge, authorization, and at the direction of Pan, and Pan directly participated in discussions about the bribe amounts, method of payment, and concealment efforts.
In connection with the bribery scheme, and in order to facilitate and conceal the corrupt payments, from at least in or around 2017 to in or around 2019, 500.com, acting through its officers, directors, employees, and agents, including Pan, knowingly and willfully falsified Sarbanes-Oxley certifications, and falsely recorded bribe payments as legitimate expenses, including as “Management expense-advisory fees,” in its consolidated books, records, and accounts.”
The criminal charges were resolved through this three year deferred prosecution agreement which highlights the following “relevant considerations.”
“a. the nature and seriousness of the offense conduct … including a multi-year scheme to corruptly pay approximately $1,908,949 to (i) Japanese officials and (ii) third-party intermediaries—while knowing that the intermediaries would pay the funds, in part, to or for the benefit of Japanese officials—in order to obtain improper advantages in connection with the Company’s efforts to obtain business in Japan, and to falsify of the Company’s books and records regarding the payments to these officials and intermediaries;
b. the Company did not receive voluntary disclosure credit … because it did not voluntarily and timely disclose to the Fraud Section and the Office the conduct described in the Statement of Facts;
c. the Company received credit for its cooperation … because it cooperated with their investigation and demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct; the Company also received credit for its cooperation and timely remediation […]. The Company’s cooperation included, among other things, (i) voluntarily producing relevant documents, financial data, and other information to the Fraud Section and the Office, including from foreign countries, while navigating some foreign data privacy and related criminal laws, accompanied by translations of a limited number of documents; (ii) providing the government with facts learned during its internal investigation related to conduct described in the Statement of Facts; and (iii) timely accepting responsibility and reaching a prompt resolution. However, the Company’s cooperation was reactive and was limited in degree and impact;
d. the Company provided to the Fraud Section and the Office all relevant facts known to it, including information about the individuals involved in the conduct described in the … Statement of Facts and conduct disclosed to the Fraud Section and the Office prior to the Agreement;
e. the Company also received credit … because it engaged in timely and appropriate remedial measures, including: (i) terminating and/or declining to renew contracts with all of the third-party intermediaries involved in the scheme; (ii) increasing governance and oversight of compliance risks and audit findings by the Board of Directors; (iii) promoting compliance and ethics through company-wide communications; (iv) incorporating compliance criteria in performance evaluations for senior management; (v) conducting annual risk assessments; (vi) revising policies and procedures concerning investigations, disciplinary actions, and employee use of messaging applications; (vii) creating an anti-corruption policy and engaging in company-wide training and communications to promote it; and (viii) transitioning its business model to an industry that presents a lower corruption risk and reducing its presence in high risk
regions.f. the Company has enhanced and has committed to continuing 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 (Corporate Compliance Program);
g. based on the Company’s remediation and the state of its compliance program, the Company’s agreement to report to the Fraud Section and the Office as set forth in Attachment D to this Agreement (Compliance Reporting Requirements), the Fraud Section and the Office determined that an independent compliance monitor was unnecessary;
h. the Company has no prior criminal, civil, or regulatory history;
i. the Company’s agreement to resolve concurrently a separate investigation by the SEC relating to the conduct … and its agreement to pay a civil penalty in the amount of $4,000,000, which the Fraud Section and the Office are crediting in connection with the Total Criminal Penalty specified in this Agreement;
j. the Company has agreed to continue to cooperate with the Fraud Section and the Office in any ongoing investigation …
k. the Company met its burden of establishing an inability to pay the criminal penalty sought by the Fraud Section and the Office, despite agreeing that the proposed amount was otherwise appropriate based on the law and the facts, and having fully cooperated by providing information and documents and access to appropriate Company personnel to respond to prosecutors’ inquiries. The Fraud Section and the Office, with the assistance of a forensic accounting expert, conducted an independent ability to pay analysis, considering a range of factors outlined in the Justice Department’s Inability to Pay Guidance […] including but not limited to: (i) the factors outlined in 18 U.S.C. § 3572 and Sentencing Guidelines § 8C3.3(b); (ii) the Company’s current financial condition; and (iii) the Company’s alternative sources of capital. Based on that independent analysis, the Fraud Section and the Office determined that paying a criminal penalty greater than $10,000,000 within thirty calendar days of the beginning of the Term would substantially threaten the continued viability of the Company; and;
l. accordingly, after considering (a) through (k) above, the Fraud Section and the Office have determined that the appropriate resolution in this case is a deferred prosecution agreement and a Total Criminal Penalty of $10,000,000 is sufficient but not greater than necessary to achieve the purposes described in 18 U.S.C. § 3553.”
The DPA contains an advisory fine range $60 million – $120 million and states:
“The Fraud Section and the Office and the Company agree, based on the application of the Sentencing Guidelines, that the appropriate criminal penalty is $54,000,000. This reflects a 10 percent discount off the bottom of the Sentencing Guidelines fine range.
The Company has made representations to the Fraud Section and the Office, and provided supporting evidence, that the Company has an inability to pay a $54,000,000 criminal penalty. Based on those representations, and an independent analysis verifying the accuracy of those representations conducted by the Fraud Section and the Office (with the assistance of a forensic accounting expert), the parties agree that a criminal penalty of $10,000,000 (“Total Criminal Penalty”) is appropriate. Because there were no proceeds traceable to the commission of the offenses charged in the Information, forfeiture is not required.
The Company and the Fraud Section and the Office agree that the Company will pay a monetary penalty in the amount of $6,000,000, no later than thirty calendar days after the beginning of the Term. The Fraud Section and the Office agree to credit toward the Total Criminal Penalty the amount paid by the Company to the SEC, up to a maximum of $4,000,000 (the “Penalty Credit Amount”). Due to the Company’s inability to pay, the Company’s payment obligations to the Fraud Section and the Office will be complete upon the Company’s payment $6,000,000, so long as the Company pays the full Penalty Credit Amount to the SEC as agreed.”
In the DOJ release, Principal Deputy Assistant Attorney General Nicole Argentieri stated:
“BIT Mining, under the alleged direction of then-CEO Zhengming Pan, agreed to pay nearly $2 million in bribes to Japanese government officials to win a contract to open a lucrative resort and casino in Japan. Pan has been indicted for his alleged role in directing company consultants to pay the bribes and to conceal the illicit payments through sham consulting contracts. [This] resolution and the charges against Pan demonstrate the department’s continued commitment to holding both corporate and individual wrongdoers accountable for their crimes.”
U.S. Attorney Philip Sellinger for the District of New Jersey stated:
“Paying bribes to foreign government officials is a serious crime. The top leadership of BIT Mining, then known as 500.com, directed consultants to pay bribes to Japanese government officials to win a bid to open a large resort in Japan. The illegal scheme started at the top, with the company’s CEO allegedly fully involved in directing the illicit payments and the subsequent efforts to conceal them. The company has admitted its crimes and agreed to pay a $10 million penalty, and its then-CEO has been charged for his role in the scheme. This agreement and indictment hold both the corporation as an entity and its top leadership accountable.”
Assistant Director Chad Yarbrough of the FBI Criminal Investigative Division stated:
“[This] indictment against the former CEO of BIT Mining for bribing Japanese officials highlights the FBI’s commitment to holding individuals accountable for illegal conduct. This type of criminal activity undermines the integrity of business practices. The FBI will relentlessly pursue those involved in illegal schemes creating unfair advantages and ensure they face the full consequences of the law.”
BIT Mining was represented by Wilson Sonsini attorneys Caz Hashemi and Tarek Helou.
