Category: Non-Prosecution Agreement

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

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%

Friday Roundup

Scrutiny alerts and updates, double standard, ripple, job description, new website, quotable and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Vimpelcom / TeliaSonera

As highlighted in this recent post, when recently asked about the slowdown in 2015 DOJ corporate FCPA enforcement Andrew Weissmann (Chief of the DOJ Fraud Section) stated: “just wait three months, it might be a very different picture.”

According to this report:

“Vimpelcom “is set to announce a settlement with the US Department of Justice and Swiss and Dutch authorities that will be “just shy of a billion dollars.” […]  A source close to the DoJ, which does not comment publicly on individual cases, said it is expected that approximately three-quarters of the funds would go to the US government and the remainder to the European governments. […] [S]ources say [the Vimpelcom action] is a precursor for a much larger settlement coming down the line with TeliaSonera, the Swedish telecom operator.”

See this prior post titled “The Burgeoning Uzbekistan Telecommunication Investigations.”

SBM Offshore

Previous posts have highlighted SBM Offshore’s scrutiny including its disclosure in November 2014 that the DOJ informed the company “that it is not prosecuting the Company and has closed its inquiry” into allegations of improper conduct in Brazil and other countries.

Earlier this week, the company disclosed:

“[The DOJ] has informed SBM Offshore that it has re-opened its past inquiry of the Company and has made information requests in connection with that inquiry.  The Company is seeking further clarification about the scope of the inquiry.  The Company remains committed to close-out discussions on this legacy issue which the Company self-reported to the authorities in 2012 and for which it reached a settlement with the Dutch Public Prosecutor in 2014.”

British American Tobacco

This previous Friday roundup highlighted the scrutiny surrounding British American Tobacco. Recently, several members of Congress sent this letter to Andrew Weissmann (Chief of the DOJ’s Fraud Section) stating in pertinent part:

“We are deeply troubled by recent media reports alleging that British American Tobacco (BAT) conspired to bribe politicians and public health officials across Central and East Africa to block, weaken, and delay the passage and implementation of public health laws designed to protect people from the deadly effects of tobacco. We request the Department of Justice to investigate BAT’s alleged bribery to determine whether it violated the Foreign Corrupt Practices Act.”

General Cable

The company has been under FCPA scrutiny since approximately September 2014 and recently disclosed:

“As previously disclosed, we have been reviewing, with the assistance of external counsel, our use and payment of agents in connection with, and certain other transactions involving, our operations in Angola, Thailand, India, China and Egypt (the “Subject Countries”). Our review has focused upon payments and gifts made, offered, contemplated or promised by certain employees in one or more of the Subject Countries, directly and indirectly, and at various times, to employees of public utility companies and/or other officials of state owned entities that raise concerns under the Foreign Corrupt Practices Act (“FCPA”) and possibly under the laws of other jurisdictions. We have substantially completed our internal review in the Subject Countries and, based on our findings, we have increased our outstanding FCPA-related accrual of $24 million by an incremental $4 million, which represents the estimated profit derived from these subject transactions that we believe is probable to be disgorged. We have also identified certain other transactions that may raise concerns under the FCPA for which it is at least reasonably possible we may be required to disgorge estimated profits derived therefrom in an incremental aggregate amount up to $33 million.

The amounts accrued and the additional range of reasonably possible loss solely reflect profits that may be disgorged based on our investigation in the Subject Countries, and do not include, and we are not able to reasonably estimate, the amount of any possible fines, civil or criminal penalties or other relief, any or all of which could be substantial. The SEC and DOJ inquiries into these matters remain ongoing, and we continue to cooperate with the DOJ and the SEC with respect to these matters.”

Qualcomm 

As highlighted in previous posts, Qualcomm has been under FCPA scrutiny for over four years and recently disclosed:

“On March 13, 2014, the Company received a Wells Notice from the SEC’s Los Angeles Regional Office indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company for violations of the anti-bribery, books and records and internal control provisions of the FCPA. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies. The Wells Notice indicated that the recommendation could involve a civil injunctive action and could seek remedies that include disgorgement of profits, the retention of an independent compliance monitor to review the Company’s FCPA policies and procedures, an injunction, civil monetary penalties and prejudgment interest.

A Wells Notice is not a formal allegation or finding by the SEC of wrongdoing or violation of law. Rather, the purpose of a Wells Notice is to give the recipient an opportunity to make a “Wells submission” setting forth reasons why the proposed enforcement action should not be filed and/or bringing additional facts to the SEC’s attention before any decision is made by the SEC as to whether to commence a proceeding. On April 4, 2014 and May 29, 2014, the Company made Wells submissions to the staff of the Los Angeles Regional Office explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.

On November 19, 2015, the DOJ notified the Company that it was terminating its investigation and would not pursue charges in this matter. The DOJ’s decision is independent of the SEC’s investigation, with which we continue to cooperate.”

Double Standard

While we wait for additional FCPA enforcement actions against financial service firms based on alleged improper internship and hiring practices in the mold of the BNY Mellon action, the Wall Street Journal reports:

“Wall Street is emerging as a particularly dominant funding source for Republicans and Democrats in the presidential election, early campaign-finance reports filed with the Federal Election Commission show. So far, super PACs have received more than one-third of their donations from financial-services executives, according to data from the nonpartisan Center for Responsive Politics.”

Separately, certain FCPA enforcement actions have been based on alleged “foreign officials” receiving speaking fees or excessive honorariums. Against this backdrop, here is the list of Hillary Clinton’s speaking fees for speeches delivered to Wall Street audiences after she left the State Department but while she was a presumptive presidential candidate.

Ripple

Och-Ziff Capital Management has been under FCPA scrutiny since 2011. In this recent investor conference call, a company executive stated: “Uncertainty stemming from the FCPA investigation has also had some impact on investment decisions by certain LPs.”

In other words, a ripple of FCPA scrutiny.

To learn how FCPA scrutiny and enforcement has a range of negative financial impacts on a company beyond enforcement action settlement amounts, see “FCPA Ripples.”

Job Description

What is the Assistant Deputy Chief of the DOJ’s Foreign Corrupt Practices Act Unit expected to do? See here for the job opening and expected duties.

New Website

The U.K. Serious Fraud Office recently unveiled a new website. Among the feature is a “current cases” page which specifically lists the following companies are under investigation for bribery/corruption offenses.

• Alstom Network UK Ltd & Alstom Power Ltd
• ENRC Ltd
• GPT Special Project Management Ltd
• Innovia Securency PTY Ltd
• Rolls-Royce PLC
• Soma Oil & Gas

Quotable

In this Corporate Crime Reporter interview, Crispin Rapinet (a partner at Hogan Lovells in London) states:

“The danger of deferred prosecution agreements is the commercial temptation to deal with a problem that may or may not be in reality a real problem. If you pushed the prosecutor to actually establish that it is a criminal offense, it may not be that straight-forward. But the temptation for any corporate to deal with that risk through a commercial settlement which involves a sum of money and living with someone looking over your shoulder for a period of time is understandably great.

Whether that, from a jurisprudential point of view, is the ideal world is questionable. You can see why people might take the view of — we don’t actually know whether these people have committed a criminal offense or not. But the power of the threat of the cost and time and management distraction associated with defending a claim, to say nothing of the ultimate risk if you are ultimately unsuccessful in your defense, is such that in the overwhelming majority of circumstances where these problems arise, the commercial temptation is to enter into a deferred or non prosecution agreement.”

Spot-on.

For The Reading Stack

An informative read here from Jon Eisenberg (K&L Gates) regarding SEC civil monetary penalties.

Like A Kid In The Candy Store

Like every year around this time, I feel like a kid in a candy store given the number of FCPA year in reviews hitting my inbox.  This post highlights various FCPA or related publications that caught my eye.

Reading the below publications is recommended and should find their way to your reading stack.

However, be warned.  The divergent enforcement statistics contained in them (a result of various creative counting methods) are likely to make you dizzy at times and as to certain issues. There will be more on this issue in the near future.

Shearman & Sterling

The firm’s Recent Trends and Patterns in FCPA Enforcement is among the best year-after-year.

Content that caught my eye:

“It is … noteworthy that the DOJ’s and SEC’s prioritization of individual prosecutions comes as enforcement agencies continue to struggle while pursuing FCPA charges against individual defendants. Setbacks in United States v. Sigelman and United States v. Firtash may cause the Department to rethink its strategy. Indeed, while the DOJ has had some success extracting plea agreements, when put to its burden of proof the DOJ (and the SEC for that matter) has experienced difficulty in securing convictions and judgments. Given these struggles, it is possible that future individual defendants may be emboldened to test their chances against the government in court, potentially requiring the DOJ to devote even more resources to trying these individuals. While the DOJ and SEC have made it a clear priority to prosecute individuals for violations of the FCPA, the risk-reward calculations that prosecutors must consider before bringing charges could be altered going forward.”

[For more on this general topic, see “What Percentage of DOJ FCPA Losses is Acceptable?“]

[…]

“[Regarding so-called declinations] we note however, in the cases of Eli Lilly, Goodyear, Mead Johnson Nutrition, Hyperdynamics, and Bristol-Myers, the DOJ’s declination decision might also be explained by a possible lack of jurisdiction. Specifically, in each of the cases above, where all of the illicit conduct was committed by subsidiaries of the parent company, the DOJ may have concluded it was too difficult to prove that the subsidiaries’ conduct should be imputed on the corporate parent—bearing in mind that the DOJ has a higher burden of proof to sustain criminal FCPA charges against a company.”

[…]

“The DOJ’s 2015 prosecution of Daren Condrey in United States v. Condrey raises some questions as to whether government prosecutors are remaining faithful to the government instrumentality test set out in the Eleventh Circuit’s 2014 decision in United States v. Esquenazi.”

[For more on this topic, see this prior post]

[…]

“[Regarding the 2015 BNY Mellon “internship” enforcement action] [T]he government’s approach is bad policy. For better or worse, some of the most educated and most qualified potential hires in many countries are the children of government officials—individuals who benefited from their parents’ privileges and had the opportunity to attend prestigious schools, learn foreign languages, etc. If the government infers an intent to apply corrupt influence from the potential hire’s relationship to government officials, it is likely to chill hiring of such individuals, resulting in a completely unnecessary disadvantage to U.S. and other companies covered by the FCPA.”

Debevoise & Plimpton

The firm’s FCPA Update is the best monthly read there is and the most recent edition states:

“Even adding in amounts agreed or ordered to be recovered from individuals in FCPA cases, last year was by any objective measure one of more muted FCPA enforcement. Various theories can be advanced to explain these figures.

One, and probably the most plausible, is that, in a system of FCPA enforcement against companies that almost never ends in a trial, corporate resolutions require companies’ consent. It was only a matter of time for there to be a dry spell of large corporate resolutions. Thus, there were no large settlements last year because of the mundane fact that none of the larger cases in the pipeline was ready to be settled. Because of potential negotiation delays of various kinds in cases in the pipeline, it is conceivable if not likely there will be large settlements in 2016, which may dampen urges to downplay enforcement risk.

Still, a theory warranting consideration is that more companies subject to the FCPA are “getting it,” the possibility being that after a decade of vigorous enforcement the number of big cases that could be brought is markedly decreased. That the number of FCPA-related investigations reported by public companies declined by about 20 percent, year over year, arguably supports this theory.

But negating this theory is the large number of new foreign corruption matters reported daily in the media, and the kinds of political upheaval and developments in technology, social media culture, whistle-blowing, and transparency movements that drive anti-bribery enforcement. Given the broad jurisdictional reach of the FCPA (particularly as construed by the DOJ and SEC), a large percentage of the new cases reported in the media could well subject companies and individuals alike to future FCPA enforcement risks. These risks are magnified by a growing level of cross-border cooperation among anti-bribery enforcement agencies.

And as the Obama Administration heads into its final year, with a new Attorney General and Assistant Attorney General for the Criminal Division now settled into their roles, the likelihood of increased enforcement seems relatively high.”

Gibson Dunn

The firm’s Year-End FCPA Update is also a quality read year after year.

Gibson Dunn also released (here) its always informative “Year-End Update on Corporate Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs).”

It begins as follows.

“2015 was a blockbuster year in corporate non-prosecution agreements (“NPA”) and deferred prosecution agreements (“DPA”), by sheer numbers alone.  Skyrocketing to 100 [87 NPAs and 13 DPAs], in 2015 the number of agreements more than doubled the numbers in every prior year since 2000 , when Gibson Dunn first began tracking NPA and DPA data.”

Davis Polk

The firm’s Trends in Anti-Corruption Enforcement is here. A visual FCPA Resolution Tracker is here.

Jenner Block

The firm’s Business Guide to Anti-Corruption Laws 2016 is here.

Hogan Lovells

The firm’s Global Bribery and Corruption Review is here.

Arnold & Porter

The firms Global Anti-Corruption Insights is here.

On The Concentration Of Power …

The DOJ often speaks of the rule of law in connection with Foreign Corrupt Practices Act enforcement.

For instance, in 2010 then DOJ Assistant Attorney General Lanny Breuer delivered a speech before the Council on Foreign Relations titled “International Criminal Law Enforcement:  Rule of Law, Anti-Corruption and Beyond” and how the increase in FCPA enforcement was consistent with U.S.’s global approach to promote the rule of law. Breuer began his speech by asking two rhetorical questions:  is the rule of law “more than just a catch phrase” and “does the rule of law have any real meaning” and concluded his speech by saying that there is nothing “more critical, both to our country and to other nations, than establishing true rule of law.”

A commonly accepted rule of law principle includes limited government powers.

The World Justice Project defines this factor as a “system of checks and balances to limit the reach of excessive government power” and “the distribution of authority in a manner that ensures that no single organ of government has the practical ability to exercise unchecked power.”

Regardless of what one thinks about the efficacy and policy merits of non-prosecution and deferred prosecution agreements, one must concede that NPAs and DPAs represent a concentration of power by a “single organ of government” (the DOJ).

This concentration of power has, with increasing frequency, been criticized including on these pages since 2010 (see here for the article “The Facade of FCPA Enforcement,” and here for the more recent article “Measuring the Impact of NPAs and DPAs on FCPA Enforcement”).

A notable development this year has been U.S. v. Fokker Services.

Although not an FCPA case (it involves criminal charges against the company to unlawfully export U.S. origin goods and services to Iran, Sudan, and Burma), the case has been followed closely here at FCPA Professor because of its potential impact on FCPA enforcement.

As highlighted in this prior post, U.S. District Court Judge Richard Leon (D.D.C.) refused to rubber stamp the DPA agreed to by the DOJ and Fokker Services.  Judge Leon’s decision is being appealed to the D.C. Circuit and as noted in this prior post the DOJ’s position is basically “hands off our DPAs.” See here for additional briefs filed in the matter. In September, the D.C. Circuit heard oral arguments and the audio file of the arguments is here. For a good summary of the oral argument, see here. The appeal presents an uncommon situation in which the DOJ and criminal defendant share similar positions – that is, wanting the DPA to be approved so both sides can move on. Yet as evidenced in the oral argument, the court seems to have serious concerns regarding the substantive and procedural arguments of the parties.

Big picture, what is at issue in Fokker Services is the concentration of power.

While we await the D.C. Circuit’s decision, it is worth noting that concentration of power has always been issue of concern in this country.

In 1788 James Madison penned what would become known as Federalist Paper No. 51 titled “The Structure of the Government Must Furnish the Proper Checks and Balances Between the Different Departments.”

In pertinent part, Madison wrote:

“To what expedient, then, shall we finally resort, for maintaining in practice the necessary partition of power among the several departments, as laid down in the Constitution? The only answer that can be given is, that as all these exterior provisions are found to be inadequate, the defect must be supplied, by so contriving the interior structure of the government as that its several constituent parts may, by their mutual relations, be the means of keeping each other in their proper places. Without presuming to undertake a full development of this important idea, I will hazard a few general observations, which may perhaps place it in a clearer light, and enable us to form a more correct judgment of the principles and structure of the government planned by the convention.

In order to lay a due foundation for that separate and distinct exercise of the different powers of government, which to a certain extent is admitted on all hands to be essential to the preservation of liberty, it is evident that each department should have a will of its own; and consequently should be so constituted that the members of each should have as little agency as possible in the appointment of the members of the others. Were this principle rigorously adhered to, it would require that all the appointments for the supreme executive, legislative, and judiciary magistracies should be drawn from the same fountain of authority, the people, through channels having no communication whatever with one another. Perhaps such a plan of constructing the several departments would be less difficult in practice than it may in contemplation appear. Some difficulties, however, and some additional expense would attend the execution of it. Some deviations, therefore, from the principle must be admitted. In the constitution of the judiciary department in particular, it might be inexpedient to insist rigorously on the principle: first, because peculiar qualifications being essential in the members, the primary consideration ought to be to select that mode of choice which best secures these qualifications; secondly, because the permanent tenure by which the appointments are held in that department, must soon destroy all sense of dependence on the authority conferring them.

It is equally evident, that the members of each department should be as little dependent as possible on those of the others, for the emoluments annexed to their offices. Were the executive magistrate, or the judges, not independent of the legislature in this particular, their independence in every other would be merely nominal.

But the great security against a gradual concentration of the several powers in the same department, consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachments of the others. The provision for defense must in this, as in all other cases, be made commensurate to the danger of attack. Ambition must be made to counteract ambition. The interest of the man must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.

This policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public. We see it particularly displayed in all the subordinate distributions of power, where the constant aim is to divide and arrange the several offices in such a manner as that each may be a check on the other — that the private interest of every individual may be a sentinel over the public rights.”

In more modern times, it is worth noting (see here) that the United Kingdom rejected NPAs because they represented too extreme a concentration of power.  In the words of the U.K. Ministry of Justice, “the lack of judicial oversight is likely to make [NPAs] unsuitable for the constitutional arrangements and legal traditions in England and Wales.  We have concluded that [NPAs] are not suitable for this jurisdiction due to their markedly lesser degree of transparency, including the absence of judicial oversight.”

Moreover, it is worth noting that the U.K.’s regime for DPAs does provide for a system of early and consistent checks and balances by the judiciary.

New Article – Measuring The Impact Of NPAs And DPAs On FCPA Enforcement

My new article was recently published in the U.C. Davis Law Review.

*****

The summary is as follows.

“Historically, the Department of Justice (“DOJ”) had two choices when a business organization was the subject of Foreign Corrupt Practices Act (“FCPA”) scrutiny: either charge the entity with an FCPA violation or not charge. However, in 2004 the DOJ brought to FCPA enforcement a third option: alternative resolution vehicles called non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”).

The use of alternative resolution vehicles to resolve FCPA scrutiny is not authorized by the FCPA nor any other specific Congressional legislation. Moreover, DOJ policy states that alternative resolution vehicles are to be used only “under appropriate circumstances.” However, this article demonstrates that alternative resolution vehicles have become the dominant way the DOJ resolves corporate FCPA scrutiny and serve as an obvious reason for the general increase in FCPA enforcement over the past decade. To the many cheerleaders of increased FCPA enforcement, NPAs and DPAs are thus worthy of applause.

Yet in a legal system based on the rule of law, quality of enforcement is more important than quantity of enforcement. Through empirical data and various case studies, this article measures the impact NPAs and DPAs have on the quality of FCPA enforcement and concludes that NPAs and DPAs — while resulting in higher quantity of FCPA enforcement — result in lower quality of FCPA enforcement. This disturbing finding matters not only in the specific context of the FCPA but more broadly as other nations with “FCPA-like” laws adopt U.S.-style alternative resolution vehicles.”