The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
In addition to anti-bribery provisions, the FCPA also contains more generic books and records and internal controls provisions. While there are a few sentences in this 15 page administrative order  released yesterday against Las Vegas Sands (LVS) that touch upon issues relevant to the anti-bribery provisions, the enforcement action was on balance a pure books and records and internal controls action.
Among other things, the SEC found that LVS lacked supporting documentation or appropriate authorization concerning the company’s involvement with a Chinese basketball team, the purchase of a building, a high-speed ferry service, and other aspects of its casino business in Macau.
The substance of yesterday’s enforcement action has been in the public domain for years. (See this  2012 New York Times article and this  2012 Wall Street Journal article). Indeed, FCPA Professor has been following LVS’s scrutiny since November 2010 upon the “noisy exist” of Steven Jacobs (the former President of Macau Operations) from the company. (See here  for the original post).
In summary fashion, the order states:
“This matter concerns the failure of LVSC to devise and maintain a reasonable system of internal accounting controls over its operations in the People’s Republic of China (“PRC” or “China”) and the Macao Special Administrative Region of the People’s Republic of China (“Macao”) from 2006 through at least 2011. As a result, funds totaling more than $62 million were transferred to a consultant in China over a series of transactions under circumstances that frequently lacked supporting documentation or appropriate authorization. Moreover, most of the transfers occurred despite knowledge by senior LVSC management that they could not account for significant funds previously transferred to the consultant in an environment where significant bribery risks were present. This lack of controls impacted other transactions, such as gifts and entertainment for foreign officials, employee and vendor expense reimbursements, and customer comps. The company also kept inaccurate books and records.
As a result of this conduct, LVSC violated the internal controls and books and records provisions of the Foreign Corrupt Practices Act (“FCPA”).”
As to relevant background, the order states:
“LVSC conducted business in Macao through VML [Venetian Macao Ltd.] until November 2009, when it issued an initial public offering (“IPO”) for SCL [Sands China Ltd. a company incorporated in the Cayman Islands that is publicly traded on the Hong Kong Stock Exchange in which LVSC owns 70%], a public company that is listed on the Hong Kong Stock Exchange. Through SCL, LVSC owns and operates casinos, hotels, convention facilities, retail space, and a 15,000-seat sports arena in Macao. Until March of 2009, LVSC’s operations in Macao and China were overseen by its President and Chief Operating Officer (“President”), who worked in close concert with LVSC’s President of Asian Development.”
The conduct at issue largely focuses on a Chinese consultant “to assist the company with its activities in China.” According to the order:
“The Consultant claimed to be a former Chinese government official and touted his political connections with Chinese government officials as his principle qualification to provide assistance to LVSC. With the approval of the LVSC President, the Consultant was hired to liaise with governmental bodies, provide advice and assistance with approval processes and to serve as an intermediary or “beard” to obscure LVSC’s role in certain transactions.
The Consultant established numerous business entities in China, which he frequently used interchangeably for his interactions with LVSC. In 2007, after the Consultant had been engaged and several payments had been made to him, the company conducted due diligence on him and three of his business entities. The company did not, however, conduct due diligence on at least seven other businesses associated with the Consultant and to which LVSC transferred funds.”
Under the heading “The Basketball Team,” the order states:
“In early 2007, the LVSC President sought to purchase a professional basketball team in China, with the purported purpose being to improve LVSC’s image in China and to bring customers to the casinos because the team could play in the Venetian Macao’s sports arena. The team would wear jerseys with an image of a gold lion, which was the symbol of the Venetian Macao Casino. As the team could not put the name of a gaming company on the jerseys, the team was named “Wei Li Xin,” which translates to “good fortune” and sounds like “Venetian” when pronounced in Chinese. No research or marketing analysis was ever done in connection with the basketball team.
The Chinese Basketball Association (“CBA”), which falls under the PRC State General Administration of Sports (which in turn is organized directly under the State Council of the PRC), would not permit a gaming company to own a league team, and thus neither LVSC nor its relevant subsidiaries could purchase a team. Instead, the Consultant was used as a “beard” to buy the team, and the company entered into what was ostensibly a sponsorship agreement for the team.
The Consultant established an entity called Shenzhen Wei Li Xin to purchase and own the team. In March 2007, an LVSC subsidiary entered into a promissory note agreement with a separate entity associated with the Consultant. Subsequently, approximately $6,072,400 was transferred from the VHQ WFOE [Venetian (Zhuhai Hengpin) Hotel Co. Ltd., an LVSC subsidiary that is a wholly foreign-owned entity] to Shenzhen Wei Li Xin, though neither entity was a party to the promissory note agreement.
In September 2007, an LVSC Senior Director of Finance (who also served as a VML Director of Finance) raised concerns about the basketball transaction to the CFO of LVSC. Of particular concern was the repeated transfer of funds to the Consultant without any supporting documentation for the team’s need for or use of the funds. The LVSC Senior Director of Finance had also learned from a former employee of the Consultant that the Consultant had used LVSC funds to make a payment to a senior CBA official in connection with the Wei Li Xin team.
While the CFO instructed the Senior Director of Finance to conduct financial due diligence on the team, including a review of the team’s books and its players’ contracts, the Consultant would not permit an on-site review. Instead, the Consultant had another of his employees pretend that he worked for the team and present a handwritten list of the team’s expenses, which the LVSC Senior Director of Finance found to be facially unreliable. Within months, the President of LVSC arranged to have the LVSC Senior Director of Finance placed on administrative leave and eventually terminated. Meanwhile, the LVSC President approved the ongoing payments to the Consultant, which were made through the VHQ and VHM WFOEs [Venetian (Zhuhai) Hotel Marketing Co. Ltd., an LVSC subsidiary that is a wholly foreign-owned entity].
Referencing his concerns about the fact that the promissory agreement was with an entity that was different than the entity that received LVSC funds, the inability of LVSC to track the funds that it had transferred to the Consultant, and the lack of recourse should the Consultant fail to purchase the team, the CFO wrote in October 2007, “My . . . concern is how to deal with this from a Sarbanes-Oxley perspective. The manner in which this has transpired is not indicative of a sound control environment. This will be exacerbated by any write-off we would have to take as that will call into question our ability to safeguard assets.”
Due to lack of accountability of funds provided to the Consultant, in late 2007 the company engaged an international accounting firm (“the firm”) to review the basketball transaction. When the firm was instructed to cease its investigation in February 2008, it had already identified over $700,000 in unaccounted for funds that had been transferred to the Consultant. Nonetheless, more than $5 million in additional payments were subsequently made to the Consultant ostensibly in connection with the basketball team.
Within this lax control environment, payments to the Consultant were also falsely recorded in the company’s books and records. For example, in September 2008, approximately $1.5 million was transferred to one of the Consultant’s entities upon the request of an employee who initially stated that the payment was for “bank charges and loan.” The employee subsequently said that the Consultant was actually using the funds to set up a network of state-owned enterprise (“SOE”) travel agencies that would promote the Venetian Macao. No invoice or supporting documentation was received in connection with this payment, and it was booked as a consultancy fee.
In total, between March 2007 and January 2009, pursuant to a series of sponsorship and advertising contracts, approximately $14.8 million was paid to the Consultant in connection with the basketball team. Over one-third of these funds were paid after the firm had identified significant unaccounted for funds, and approximately $6.9 million was transferred without appropriate authorization or supporting documentation.”
Under the heading “The Adelson Center,” the order states:
“Beginning in 2006, the LVSC President looked to develop a non-gaming resort on Hengqin Island, a new resort district in China. Any such development would need the approval of various governmental entities, and the President believed that partnering with a Chinese company would improve LVSC’s chances of receiving the needed approvals.
As part of pursuing this strategy, only one Chinese company was considered as a partner – an SOE whose Chairman was believed to have particular influence in connection with Hengqin, and who was introduced to the company by the same Consultant used for the basketball team.
The partnership was initially designed as a joint venture between the SOE and LVSC. In December 2006, LVSC signed a letter of intent with the SOE to establish a joint venture and to buy portions of a building in Beijing (“real estate” or “property”) from the SOE for approximately $42 million. As part of the joint venture, SOE agreed to help LVSC develop Hengqin. However, the SOE Chairman and/or Consultant stated that a “beard” would be needed as the SOE board would not approve a direct relationship with a gaming company. LVSC initially tried to arrange for a U.S.-based entity to invest on its behalf as a “beard,” but the joint-venture deal eventually collapsed.
Instead of a joint venture, the LVSC President authorized using the Consultant as a “beard” to purchase the Beijing building from the SOE. The real estate itself consisted of conference rooms, office space, 55 apartments, and a two-level basement, all of which were largely unfinished. An initial independent appraisal valued the property more than 10% below the agreedupon purchase price, but a second appraisal was obtained suggesting the value was slightly above the purchase price.
Little or no thought appears to have been given by LVSC to a purchase of the building in advance, but ultimately the LVSC President determined that the property would be named after the company’s founder and CEO, and that it would be developed as a business center to help U.S. companies seeking to do business in China. He also planned to set up a high-end “men’s club” in the basement. The “Adelson Center” was scheduled to open in August 2008, during the Beijing Olympics, and in February 2008 the LVSC CEO sent a letter to the President of the United States, inviting him to attend the ribbon-cutting ceremony.
No research or analysis was done to determine whether a need existed for such a business center, the amount of any profit or loss it was likely to generate, or whether it would do anything to improve LVSC’s image in China. Numerous employees were concerned that the purchase of the real estate was solely for political purposes. Nevertheless, between July 2007 and February 2008, approximately $43 million was transferred to one of the Consultant’s entities for the purchase of the real estate. None of the payments was approved by an LVSC employee with sufficient authorization to approve the amounts paid. In addition, LVSC spent approximately $14 million on renovation and miscellaneous expenses. Of these payments, approximately $13.7 million lacked appropriate authorization.
In August 2007, LVSC employees learned that, contrary to their understanding, the basement of the building was not part of the real estate purchased by the Consultant, as the SOE had never obtained a title for the basement. The Consultant informed them that it would be very difficult and costly to obtain a title for the basement, but that he could obtain one if he was given approximately $1.4 million. The Consultant proposed leasing the basement to the company if it would prepay the rent for a period of years.
While significant concerns were raised that the Consultant intended to obtain the basement title by making improper payments to government officials, the company proceeded to 7 lease the basement from the Consultant. No documentation was obtained demonstrating that the Consultant had obtained the title legally or that his entity had actually purchased the basement from the SOE. On April 9, 2008, approximately $3.6 million was wired to an entity affiliated with the Consultant as a prepayment for a five-year lease of the basement. The CFO of LVSC approved the payment, even though it exceeded his approval limit.
For all relevant periods, the Beijing building was managed by a property manager affiliated with the SOE. Nonetheless, between November 2008 and July 2009, approximately $900,000 in purported property management fees were paid to an entity controlled by the Consultant. No property management services were provided by the Consultant’s entity, but the payments were recorded in the company’s books and records as property management fees.
In April 2008, approximately $1.4 million was paid to an entity associated with the Consultant, which was recorded in the company’s books and records as “arts and crafts.” In February 2009, an LVSC accountant raised questions about the payment, because the entity had not obtained any artwork for the Adelson Center. The accountant was told by the LVSC President of Asian Development that the payment actually related to Hengqin Island. No adjustment was made to how the payment was recorded.
In July 2008, pursuant to a series of contracts, the Consultant transferred control to LVSC of the shares of his entity that owned the real estate. In September 2008, the LVSC President of Asian Development signed contracts that cancelled the transfer of shares from the Consultant’s entity and agreed to receive in exchange from the Consultant a promissory note for approximately $43 million. This transaction far exceeded his authority. At or around the same time, a decision was made to shutter the Adelson Center project. In total, the company transferred approximately $61 million in connection with the real estate transaction and ultimately received approximately $44 million in settlement from the Consultant.”
Under the heading “Macao Operations,” the order states:
“In 2007, LVSC set up a high-speed ferry business to transport customers from China and Hong Kong to Macao. LVSC sought to contract with a ferry services provider to operate the ferries. Under pressure from the LVSC President, LVSC employees selected a recently-formed ferry company (“New Ferry”) that was partially-owned by an older, Chinese stateowned ferry company (“Old Ferry”). The LVSC President stated in an email to an LVSC executive that the selection of New Ferry would be politically advantageous to LVSC.
The shareholders of New Ferry included Old Ferry and a shipping company (“Shipping”) that was indirectly owned by the Consultant and the SOE Chairman. Given the contract values, due diligence was required on the respective entities and principals under LVSC’s policies. While it was known that Old Ferry and Shipping owned New Ferry, due diligence was only done on Old Ferry, and in July 2007, two Hong Kong subsidiaries of LVSC signed a contract with New Ferry as Operator and Guarantor, respectively.
As part of its contract, each year New Ferry submitted a detailed budget which included a “Business Entertainment” line item that was divided into separate amounts for 8 business partners and for government officials. In 2010, SCL’s internal audit department, Audit Services Group (“ASG”), concluded that New Ferry was spending the majority of the entertainment expense on government officials. In addition to providing meals to government officials, New Ferry gave them “red envelopes” containing cash around the Chinese New Year. New Ferry personnel told an SCL auditor that it was necessary to provide meals and entertainment to government officials to secure routes for the ferries. ASG failed to elevate this issue within the company.
LVSC had policies and procedures in place at VML regarding purchasing, but they were not enforced. Employees were able to use cash advances and expense reimbursements to circumvent those policies and procedures. For example, in September 2006, the LVSC President of Asian Development used a cash advance of approximately $28,000 from VML to pay for a topographic map of Hengqin. In another instance, in October 2006, he arranged a forum at the Great Hall of the People in Beijing. Afterward, he submitted a personal expense report for which he was reimbursed approximately $86,000.
In 2008, VML’s professional service engagement controls did not require prehiring due diligence. Furthermore, LVSC did not require engagement letters with specific controls on professional service providers. For example, LVSC had no controls in place to ensure that legal engagements were consistent with the FCPA.
Beginning in March 2009, LVSC’s policy regarding payments to outside counsel explicitly required the submission of original backup documentation when seeking reimbursement for expenses in excess of $100. This policy was not uniformly enforced. For example, in September 2009, an outside counsel (“Attorney”) submitted a bill to VML for “Expenses in Beijing,” in the amount of approximately $25,000, but he provided no documentation to support the expenses and was nonetheless paid. Later, Attorney stated that he actually requested the funds on behalf of a friend who was an unpaid consultant to LVSC. This payment was recorded in the books and records as a reimbursement of legal expenses, despite the lack of documentation.
In its Macao casinos and hotels, LVSC provides complimentary items and services (“comps”) such as restaurant meals and hotel stays to actual and potential gaming customers and business contacts. LVSC employees are allowed to give comps up to a certain amount, depending on their position in the company. Non-gaming comps required the approval of an LVSC vice president, and LVSC used players’ names to determine whether comps were provided to players who actually earned them due to the amount they played.
During the relevant period, VML employees often failed to record the comp recipients’ names, which resulted in an inability to track or audit comps. In particular, this precluded the identification of comp recipients who were government officials or Politically Exposed Persons (“PEPs”).”
Under the heading “Legal Standards and FCPA Violations,” the order states:
“As a result of the conduct described above, LVSC violated [the books and records provisions] because its books and records did not, in reasonable detail, accurately and fairly reflect the purpose of the payments. LVSC violated [the internal controls provisions] because it did not devise and maintain a reasonable system of internal accounting controls over operations in Macao and China to ensure that access to assets was permitted and that transactions were executed in accordance with management’s authorization; in addition, that transactions were recorded as necessary to maintain accountability for assets, particularly with regard to the accounts payable process, the purchasing process, due diligence, and controls surrounding contracts.”
Under the heading “Cooperation and Remedial Efforts,” the order states:
“In connection with the investigation by the Staff, the LVSC Audit Committee retained outside counsel to conduct an internal investigation. The LVSC Audit Committee provided significant cooperation with the Commission’s investigation by sharing in real-time the facts discovered during the course of its internal investigation and provided information that may not have been otherwise available to the Staff; facilitating the interviews of certain key foreign witnesses; voluntarily producing translations of key documents; and producing large volumes of business, financial, and accounting documents in response to requests.
LVSC undertook various remedial measures, including hiring a new general counsel and new heads of the internal audit and compliance functions. In addition, the company 10 established a new Board of Directors Compliance Committee and increased the compliance and accounting budgets. LVSC updated the Code of Business Conduct, the Anti-Corruption Policy, the guidelines regarding comps for government officials, and the SOE and expense policy. The company also developed and implemented enhanced anti-corruption training and an electronic procurement and contract management system. Furthermore, LVSC enhanced its screening of both third parties and new hires and its contracting process.”
In this release , Andrew Ceresney (Director of the SEC Enforcement Division) stated:
“Publicly traded companies must have appropriate financial controls in place to ensure that expenses are paid for bona fide services. Las Vegas Sands failed to implement controls to prevent tens of millions of dollars from being paid out without appropriate documentation or authorization.”
Based on the above findings and without admitting or denying the findings, LVS agreed to pay a $9 million penalty. As noted in the SEC release the company also “agreed to retain an independent consultant for two years to review its FCPA-related internal controls, recordkeeping, and financial reporting policies and procedures and its ethics and compliance functions.”
The order states: “LVS acknowledges that the Commission is not imposing a civil penalty in excess of $9 million based upon its cooperation in a Commission investigation and related enforcement action.”
In this release , LVS stated:
“[A]fter more than five years, the Securities and Exchange Commission (SEC) has closed its exhaustive investigation of the company for its compliance with the United States Foreign Corrupt Practices Act (FCPA).
The SEC made no finding of corrupt intent or bribery by Las Vegas Sands. The company neither admitted nor denied any of the SEC findings. The administrative order from the SEC includes a $9 million civil monetary penalty under the internal controls and books and records provisions of the FCPA and an agreement to retain an independent compliance consultant for a period of two years.
Since its receipt of the February 9, 2011 subpoena from the SEC, the company has disclosed its belief that the investigation was a result of allegations made in an employment lawsuit filed by Steve Jacobs, a former executive who was employed by the company for only nine months.
Regardless of the origins of the subpoena, the SEC’s comprehensive investigation, including the allegations made by Jacobs, is resolved via the commission’s findings. Ultimately, not one of Jacobs’ allegations was the basis for those findings.
The SEC findings were primarily related to projects which started in 2006 – a period long before Steve Jacobs’ tenure began with the company or any of its subsidiaries. The projects were orchestrated through a consultant whose activities under a former company president and other former employees were not sufficiently monitored.
The SEC’s conclusion was consistent with the preliminary findings of the company’s audit committee, which were disclosed in the company’s 2012 annual report.
“We are pleased to have the matter resolved. We are committed to having a world class compliance program that builds on the strong policies we already have in place. While we started corrective action on this particular matter prior to the initiation of the government investigations, we understand that running an industry-leading compliance operation takes time, resources and the full support of senior management – I’m proud to say our company has exactly that,” stated Las Vegas Sands Chairman and Chief Executive Officer Sheldon G. Adelson. “We will build on this experience, which has reemphasized to our 50,000 team members worldwide the same values I have made the foundation of my seven decades in business – integrity and reputation matter.”
At the time of the events in question, the company’s compliance function was shared with the legal function. Today, it is a free-standing function with enhanced financial controls, an independent global controller, a larger internal audit program, and a newly created board compliance committee, which is in addition to the existing oversight functions of the board’s audit committee.”
Laurence Urgenson  (Mayer Brown) represented LVS.
Yesterday’s LVS’s stock closed up .88%