The SEC announced today that 3M resolved a $6.5 million Foreign Corrupt Practices Act enforcement.
The basics are as follows.
Approximately 6-10 years ago, a former Marketing Manager of a 3M China-based subsidiary “secretly” provided “tourism activities” for Chinese health care officials.
The Marketing Manager “would create a travel itinerary that included various legitimate business, training and marketing activities for submission to 3M-China’s compliance personnel for approval,” however there were “alternate itineraries” that “consisted of various tourism activities at or near the location of the educational events.”
There is no suggestion that anyone at 3M headquarters knew of or approved of the conduct. Indeed, subsidiary employees, among other things, “falsified internal compliance documents that affirmatively denied and/or omitted mention of the Tourism Activities that were planned as part of the overseas trip.”
In summary fashion, this administrative order finds:
“This matter concerns violations of the books and records and internal accounting control provisions of the Foreign Corrupt Practices Act (“FCPA”) by 3M resulting from conduct by one of its China-based subsidiaries, 3M-China Ltd. (“3M-China”) from at least 2014 to 2018 (the “Relevant Period”). During that time, employees of 3M-China arranged for Chinese health care officials (“Chinese Government Officials” or “Officials”) employed by its state-owned entity customers (“SOE Customers”) to attend overseas conferences, educational events, and health care facility visits (collectively, the “Educational Events”) ostensibly as part of 3M-China’s marketing and outreach efforts, but that in fact were often a pretext to provide overseas travel, sightseeing and entertainment (“Tourism Activities”) to the Officials to obtain and retain business from the SOE Customers. As part of the scheme, funds were transferred to a complicit China-based travel agency and were improperly used by 3M-China and the China-based travel agency to help pay for the Tourism Activities.
In violation of the books and records provisions of the Exchange Act, the overseas travel and Tourism Activities were improperly recorded by 3M-China as legitimate business expenses and then consolidated into 3M’s books and records, rendering them inaccurate. Also, in violation of the internal accounting controls provisions of the Exchange Act, 3M failed to devise and maintain an adequate system of internal accounting controls over the cross-border transfer of funds to vendors, which helped facilitate the scheme.”
Under the heading “3M-China Improperly Funded Tourism Activities for Chinese Government Officials,” the order states:
“During the Relevant Period, a former 3M-China marketing manager (the “Marketing Manager”) colluded with two China-based travel agencies (the “China Travel Agencies”) to secretly provide Tourism Activities for Chinese Government Officials during Educational Events. The Marketing Manager was aided in the scheme by several employees in 3M-China’s sales, marketing and professional services departments.
The Marketing Manager and 3M-China employees (collectively, the “3M-China Employees”) targeted influential Officials of SOE Customers for attendance at overseas Educational Events and, in collusion with the China Travel Agencies, they would create a travel itinerary that included various legitimate business, training and marketing activities for submission to 3M-China’s compliance personnel for approval. The alternate itineraries (the “Alternate Itineraries”) planned by 3M-China Employees and the China Travel Agencies consisted of various Tourism Activities at or near the location of the Educational Events and were provided to the relevant Chinese Government Officials. Provision of the activities in the Alternate Itinerary were designed to improperly induce the Officials to purchase 3M products, and violated company policy.
The 3M-China Employees circulated the Alternate Itineraries through hand delivery or personal WeChat accounts and asked the participants to keep the agenda hidden, and falsified internal compliance documents that affirmatively denied and/or omitted mention of the Tourism Activities that were planned as part of the overseas trip.
In a number of instances the Tourism Activities were the primary reason for the overseas trip. For example: (a) Tourism Activities were scheduled at the same time as the Educational Event activities; (b) the ostensibly Educational Events were in English, and the trips included Chinese Government Officials who neither understood English nor had adequate translation services; and (c) at times Chinese Government Officials missed whole days of the Educational Event or simply never attended at all. Certain Chinese Government Officials also requested Tourism Activities as part of the overseas trip.
During the Relevant Period, 3M-China sent Chinese Government Officials on at least 24 overseas Educational Events that included Tourism Activities. 3M-China Employees also accompanied the Chinese Government Officials on the Tourism Activities. The Educational Events were held at tourist destinations and the Tourism Activities included guided tours, shopping visits, day trips to nearby sites and other leisure activities, all of which were detailed in the Alternate Itineraries.”
The order than provides the following examples:
“2017, St. Paul, MN, Nashville, TN, and Los Angeles, CA. This nine-day trip included eleven Chinese Government Officials. While the official agenda had Educational Event activities for each day of the trip, the Alternate Itinerary had only one day of Educational Event activities, with most of the remaining days scheduled with Tourism Activities. 3M-China employees accompanied the Officials on the Tourism Activities and at least some of the Officials did not understand English and were not provided interpreters.
2017, Boston, MA and St. Paul, MN. This seven-day trip included twelve Chinese Government Officials. While the official 3M-China agenda had Educational Event activities for each day, the Alternate Itinerary had primarily Tourism Activities. At least some of the Chinese Government Officials did not understand English, interpreters were not provided, and the Chinese Government Officials mostly participated in Tourism Activities rather than attend the Educational Events.
2016, Chicago, IL. This eight-day trip included five Chinese Government Officials, two of whom were accompanied by their spouses. One Official and his spouse left Chicago in the evening after the Educational Event started and returned after the Event had ended in order to participate in Tourism Activities. Another Official attended one day of the Educational Event, then left Chicago and never returned. Three other Chinese Government Officials participated in full days of Tourism Activities nearly every day of the scheduled Educational Event activities. The Officials were not seen at the Educational Event activities and did not attend a dinner that 3M had organized for them.
2016, Brisbane & Sydney, Australia. This eight-day trip included four Chinese Government Officials. While the official 3M-China agenda had Educational Event activities scheduled for each non-travel day of the trip, the Alternate Itinerary only scheduled two half-days for Educational Event activities, with the bulk of the time scheduled for Tourism Activities. At least some of the Chinese Government Officials did not understand English, were not provided interpreters, and joined the Tourism Activities for entire days rather than attending the conference.”
Thereafter, the order states:
“In order to cover certain of their own non-reimbursable expenses related to Tourism Activites, 3M-China Employees would at times work with the collusive China Travel Agencies to inflate their billing invoices for ostensibly legitimate, line item expenses (e.g. travel costs). In other instances, the 3M-China Employees submitted unpermitted invoices directly to the China Travel Agencies for reimbursement. In addition, the China Travel Agencies, with the support of the 3M-China Employees, at times directed that 3M-China’s distributors pay for portions of the non-reimburseable expenses.
3M-China Employees measured the impact that the provision of overseas Educational Activities had on sales. Certain 3M-China Employees tracked the effect of providing overseas Educational Events to Chinese Government Officials on 3M-China’s sales to SOE Customers. One 3M-China Employee tracked post-trip sales to the SOE Customer to ensure they were consistent with 3M-China’s sales goals. 3M-China management asked for the “return on investment” from an Educational Event (i.e. the effect of providing health care officials with overseas travel on sales to the SOE Customer) by comparing sales figures before and after an Educational Event.
From at least 2014 through 2017, 3M-China paid nearly $1 million to fund at least 24 trips for Chinese Government Officials that included Tourism Activities. The costs of these trips were improperly recorded in 3M’s books and records as legitimate business expenses, without any indication that they included Tourism Activities. As a result of the above conduct, 3M improperly benefited by at least $3.5 million from increased sales.”
Under the heading “3M Provided Funds to a China Travel Agency that was Used to Pay for Improper Tourism Activities,” the order states:
“As part of their scheme, 3M-China Employees arranged for 3M to directly provide funds to one of the China Travel Agencies, which it then improperly used to offset some of the costs of the Tourism Activities. 3M-China lacked oversight over the use of these funds: the funds were not allocated for particular projects, but would be distributed at the discretion of the China Travel Agency and the 3M-China Employees.
3M’s records indicate that between February 2016 and September 2018, 3M made 15 transfers totaling $254,000 to the China Travel Agency for vaguely described “marketing” efforts. 3M had insufficient controls over the fund transfers, which did not adequately describe the purpose or uses of the funds.”
Based on the above, the SEC found that 3M violated the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, 3M agreed to pay approximately $6.5 million ($3.5 million in disgorgement, 1 million in prejudgment interest, and a $2 million civil penalty).
Under the heading “3M’s Self-Reporting, Cooperation and Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered 3M’s self-reporting, cooperation and remedial efforts. 3M promptly self-reported the misconduct after first learning of it. The company’s cooperation included making witnesses available for interviews, voluntarily producing translations of relevant documents, sharing facts uncovered during its internal investigation – including notes of witness interviews – and providing comprehensive, periodic updates on its investigation. 3M also undertook significant remedial measures, including disciplining and/or terminating involved employees, terminating its relationship with the China Travel Agencies, and further enhancements to its internal controls environment and compliance program including additional controls over is cross-border fund transfers.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“This matter highlights the dangers to companies with global operations posed by inadequate internal accounting controls. Those dangers were exacerbated here by complicit third-party vendors.”
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