Yesterday, Veraz Networks, Inc. (see here ) joined a long list of telecommunications companies to recently settle an FCPA enforcement action. Veraz, a California-based telecommunications provider, went public in April 2007 and sells its telecommunication products through both direct and indirect sales channels with a majority of its revenue coming from sales outside of the U.S.
Other telecommunications companies, or individuals employed in that industry, to recently resolve FCPA enforcement actions include: UTStarcom (see here  and here  for the enforcement action), Latin Node, Inc. (see  here for the enforcement action), Lucent Technologies (see here  and here  for the enforcement action), Siemens (in part, see here  for the enforcement action), various individuals in connection with the Haiti Teleco matter (see here  for the enforcement action), and various employees of ITXC Corporation (see here  for the enforcement action). Pending FCPA enforcement actions against telecommunications companies presumably include: Magygar Telekom (see here ) and Global Crossing Limited (see here ).
That’s a long list.
Back to Veraz.
According to the SEC release (see here ), Veraz violated the FCPA’s books and records and internal control provisions in connection with “improper payments made by Veraz to foreign officials in China and Vietnam after the company went public in 2007.”
The SEC complaint (see here ) alleges that “from 2007 to 2008, Veraz resellers, consultants, and employees made and offered payments to employees of government-controlled telecommunications companies in China and Vietnam with the purpose and effect of improperly influencing these foreign officials to award or continue to do business with Veraz.” According to the complaint, a Veraz supervisor referred to certain of these payments as the “gift scheme.” The complaint further alleges that “Veraz failed to accurately record these improper payments on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent them in violation of the FCPA […] and to put in place internal controls that are reasonably designed to ensure that their books and records are accurate.”
The SEC’s sparse factual allegations fall under two headings: “Veraz Made Improper Payments to Chinese Government Officials” and “Veraz Made Improper Payments to Vietnamese Government Officials.”
As to payments to “Chinese Government Officials,” the SEC alleges that Veraz engaged a consultant in China to assist Veraz sell products “to a telecommunications company controlled by the government of China.” The complaint further alleges that the consultant “provided approximately $4,500 worth of gifts to officials” of the telecommunications company “in an attempt to secure a business deal for Veraz.” The complaint further alleges that the consultant “also offered a separate improper payment to officials” at the telecommunications company “to secure a deal for Veraz valued at approximately $233,000.” According to the complaint, “Veraz discovered this improper offer of payment prior to receiving any money from the transaction and cancelled the sale.”
As to payments to “Vietnamese Government Officials,” the SEC alleges that “Veraz sold products to a telecommunications company controlled by the government of Vietnam through a Singapore-based reseller.” According to the complaint, a “Veraz employee, through the Singapore-based reseller, at times made or offered illicit payments to the CEO” of the telecommunications company “in order to win business for Veraz.” The complaint further alleges that Veraz “approved of and reimbursed its employee for questionable expenses related” to the telecommunications company “including gifts and entertainment” for employees of the company and “flowers for the wife of the CEO” of the company.
In both instances, according to the complaint: (i) Veraz did not make or keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the improper gifts or payments provided by Veraz; and (ii) Veraz failed to devise and maintain an effective system of internal controls to prevent or detect violations of the FCPA.
Based on these allegations, the SEC charged Veraz with violating the FCPA’s books and records and internal control provisions.
According to the SEC’s release, Veraz, without admitting or denying the SEC’s allegations, consented to entry of a final judgment permanently enjoining Veraz from future FCPA violations and ordering Veraz to pay a $300,000 civil penalty.
In an article to be published later this summer titled “The Facade of FCPA Enforcement,” I highlight four pillars which contribute to the facade of FCPA enforcement.
The first pillar highlights the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action. Just who were those Chinese and Vietnamese Government officials? The SEC complaint contains these wonderfully descriptive allegations: “a telecommunications company controlled by the government of China” and a “telecommunications company controlled by the government of Vietnam.” What was the nature of the “illicit payments” made or offered to the CEO of the Vietnamese telecommunications company and what were the “questionable expenses” related to the same company? The complaint does not elaborate.
The second pillar highlights the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action. True, the enforcement action does not allege antibribery violations, but let’s face it, if Veraz’s books and records did not adequately reflect sales and marketing expenses associated with domestic customers and if Veraz did not have sufficient internal controls to prevent and detect such expenses, we would not be reading about this case as an “FCPA enforcement action” even though such conduct would similarly violate the FCPA’s books and records and internal control provisions. Rather, this is an FCPA enforcement action (in the traditional sense) because the improperly recorded payments were directed at “foreign officials” – so alleges the SEC under the theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.
The third pillar highlights highlights the opaque nature of FCPA enforcement and how similar enforcement actions, based on the government’s own allegations, are resolved with materially different charges and penalties. Check as to the Veraz enforcement action. If ever there were carbon copy FCPA enforcement actions, it would seem to be Veraz, UTStarcom and Lucent. All principally involved providing things of value to Chinese “foreign officials” (employees of alleged state-owned enterprises). One would expect then that the charges would be similar as well. Wrong. Veraz appears to be only an SEC enforcement action charging only FCPA books and records and internal control violations. UTStarcom involved a DOJ non-prosecution agreement and an SEC enforcement action charging FCPA antibribery as well as books and records and internal control violations. Lucent also involved a DOJ non-prosecution agreement and an SEC enforcement action charging only FCPA books and records and internal control violations. Thus, three similar cases resolved three distinct ways.
[The fourth pillar highlights how seemingly clear-cut instances of corporate bribery and corruption (per the government’s own allegations) are resolved without FCPA antibribery charges. Veraz is not BAE, Siemens, or Daimler – and thus this pillar is of little significance here].
One final point demonstrated by the Veraz enforcement action: resolution fines/penalties represent merely the “tip of the iceberg” in terms of the costs associated with an FCPA inquiry.
The final fine amount, $300,000, is 1/10 the amount of expenses incurred by the company in connection with the SEC investigation. As stated in the company’s most recent 10-Q filing (May 2010) (see here ) “as of March 31, 2010, the Company has incurred expenses relating to the SEC investigation of approximately $3 million.”
No wonder Forbes (see here ) recently termed the increase in FCPA enforcement the “bribery racket.” No wonder the Wall Street Journal Law Blog (see here ) recently posed the question – “is the FCPA Just a Full-Employment Act for the Private Bar?”