Yesterday, the DOJ and SEC announced (here and here) a parallel Foreign Corrupt Practices Act enforcement action against Japan-based Panasonic Corp. and a U.S. subsidiary Panasonic Avionics Corp. (PAC).
As stated in the enforcement action, Panasonic was an issuer until April 2013 and again “for a brief period between 2015 and 2016 as a result of a share swap that retriggered Panasonic’s obligation to file its financial statements with the SEC.”
As highlighted in this post, the enforcement action consisted of:
- A criminal information against Panasonic Avionics Corp. charging knowing and willful violations of the FCPA’s books and records provisions resolved through a deferred prosecution agreement in which PAC agreed to pay an approximate $137 million criminal penalty; and
- An administrative cease and desist order against Panasonic finding FCPA anti-bribery, books and records, and internal controls violations in which the company agreed to pay approximately $143 million in disgorgement and prejudgment interest. (The SEC action also found that Panasonic materially overstated its pre-tax income in connection with the core conduct).
DOJ
Panasonic Avionics Corp., headquartered in California, is described as a wholly-owned subsidiary of Panasonic that designs and distributes in-flight entertainment systems (IFE) and global communications services (GCS) for airlines and airplane manufacturers.
Under the heading “Overview of the Scheme,” the information alleges:
“Between 2007 and 2013, PAC employees, including senior executives, engaged in a scheme to retain consultants for improper purposes other than for providing actual consulting services. The consultants were retained through Service Provider [described as a California corporation related to another corporation retained by PAC for technical publication services] and were paid for out of a budget over which PAC Executive 1 [described as an officer and high-level executive of PAC from at least 2005 until he was separated from the Company in 2017] had complete control and discretion without meaningful oversight by anyone at PAC or Panasonic. First, in July 2007, PAC executives began negotiating a consulting position with Foreign Official [described as a senior contracts official at Middle East Airline until February 2008 – the Middle East Airline is described as a commercial airline based in the Middle East that is wholly-owned by a foreign government] at the same time that Foreign Official was involved in negotiating a lucrative contract amendment on behalf of Middle East Airline with PAC. Although Foreign Official ultimately did little work for PAC, over a six-year period PAC made $875,000 in payments to Foreign Official that were accounted for in Panasonic’s accounting books and records as legitimate consulting expenses. Second, in October 2007, PAC retained as a consultant Domestic Airline Consultant [employed as an account manager at PAC until April 2007 who then served as a consultant for Domestic Airline until December 2013 – the Domestic Airline is described as publicly-owned commercial airlines based in the U.S.] who was already working as a consultant for Domestic Airline, and then used Domestic Airline Consultant to obtain confidential non-public business information about the airline, including information about its negotiations with PAC competitors. Over a five-year period, PAC made $825,000 in payments to Domestic Airline Consultant that were accounted for in Panasonic’s accounting books and records as legitimate consulting expenses. Despite knowing that PAC was falsely recording these payments as legitimate consulting expenses, PAC Executive 1 falsely certified in Sarbanes-Oxley certifications that “no deficiencies have been identified and the internal control[s] over financial reporting have effectively functioned in [the] company.”
Between 2007 and 2016, certain PAC employees also concealed PAC’s use of sales agents in Asia, some of which did not pass PAC’s internal diligence requirements. PAC formally terminated its relationship with these sales agents, as required by PAC’s compliance policies, but certain PAC employees then secretly continued to use the agents by having them rehired as subagents through PAC Sales Agent 2 [described as a sales agent based in Malaysia that PAC contracted directly with to obtain and manage contracts with multiple airlines, including state-owned airlines, throughout Asia until PAC terminated its contract in 2015], which had passed PAC’s due diligence checks. Through this process, PAC employees hid more than $7 million in payments to at least thirteen sub-agents, some of which had not passed due diligence checks, by improperly reporting them as legitimate commission payments to PAC Sales Agent 2 or other sales agents. Despite receiving warnings and red flags about this conduct, PAC Executive 2 and other PAC employees took no action to prevent the continued use of PAC Sales Agent 2 to funnel payments to other sales agents.”
Regarding the budget the PAC executive had control over, the information alleges:
“To cover expenses incurred by at least one senior PAC executive, such as travel, corporate entertainment, and consultancy payments, PAC designated an Office of the President Budget. The Office of the President Budget was set annually by a PAC finance executive, in consultation with PAC Executive 1. The funds allocated to the Office of the President Budget were set on a yearly basis, based on the previous year’s costs and adjusted if changes in expenses were expected. The Office of the President Budget was neither reviewed nor approved by any Panasonic personnel. During the relevant period, the amount allocated to the Office of the President Budget exceeded several hundred thousand dollars per year.
Funds expended from the Office of the President Budget were booked on PAC’s general ledger in various categories, including travel, payroll, and consultant payments. As a wholly-owned subsidiary of Panasonic, PAC’s financials were consolidated into Panasonic’s books, records, and accounts. Expenses from the Office of the President Budget would roll up into the “other general administrative expenses” line item on the books of a Panasonic reporting segment and then ultimately into the “selling and general administrative expenses” line item on Panasonic’s books, records, and accounts.
Despite providing for a discretionary fund, PAC failed to maintain internal accounting controls reasonably designed to ensure that funds expended from the Office of the President Budget were used for their intended purposes, were used in accordance with the law, and were properly recorded in PAC’s, and ultimately Panasonic’s, books and records. In fact, PAC Executive 1 had complete discretion over how to spend the funds allocated in the budget without meaningful oversight by PAC Finance or any other personnel at PAC.
Beginning in at least October 2007 and continuing until at least January 2014, PAC Executive 1 used the Office of the President Budget to make payments to multiple individuals, including consultants that performed limited or no work for PAC with little to no supervision by anyone at PAC.”
Regarding the service provider through which the consultants were retained, the information alleges:
“Instead of paying these consultants directly from PAC, PAC Executive 1 arranged for these consultants to be formally retained, and paid, through Service Provider. Other than providing basic administrative and payroll services, Service Provider was not involved in managing or otherwise working with the consultants, but instead acted as a pass through for purposes of invoicing PAC for the consultants, with PAC paying Service Provider a percentage of the consultant’s payments. PAC would then pay the consultants through Service Provider for consulting work ostensibly provided by the consultants, even when there was little or no evidence of services being performed to justify the payments.”
The information then alleges that in 2010 PAC Executive 3 (described as a senior finance executive at PAC from approximately 2009 until June 2012 when he left PAC to assume a finance position within Panasonic) “requested PAC’s Internal Audit Department conduct an audit of PAC’s ‘vendor selection, payment processing and contract execution.” The information then alleges:
“At the conclusion of the audit, PAC’s Internal Audit Department issued a report (the “Selected Vendor Audit Report”) that identified a number of compliance risks associated with PAC’s use of Service Provider to retain and pay consultants, including the lack of supervision over certain consultants and a lack of deliverables provided to PAC from both Service Provider and the consultants themselves.
Specifically, the Selected Vendor Audit Report identified as a “critical risk” that PAC continued to pay consultants through Service Provider even though PAC’s agreement with Service Provider had expired in May 2009. In addition, the report identified as a “high risk” the fact that payments were made to multiple consultants in the absence of any deliverables provided to PAC. The report also noted that PAC’s procurement department was “not involved in hiring these consultants” and that the “visibility of the contract process needs to be enhanced.” An initial version of the report, drafted in September 2010, concluded with a recommendation that “[Service Provider] consultant payments should be carefully reviewed in light of FCPA regulation [sic] due to lack of clarity in deliverables.” PAC Executive 3 received this version of the Selected Vendor Audit Report in March 2011 and other senior PAC executives received this report in May 2012.
In December of 2010, an abbreviated version of the Selected Vendor Audit Report was circulated among other PAC employees, including PAC Executive 2 and PAC Executive 3. PAC Executive 4 received this version of the report in November 2012. Although this version of the Selected Vendor Audit Report still identified the risks associated with the payments made through Service Provider and the lack of deliverables for certain consultants, it omitted the final concluding recommendation mentioning the FCPA and certain other observations and recommendations, including the recommendation that “[p]rocurement should be consulted prior to hiring any consultant or vendors.” No explanation was provided for omitting these additional comments from the Selected Vendor Audit Report.
Despite the repeated distribution of these two versions of the Selected Vendor Audit Report between 2010 and 2012 among several PAC employees, including PAC Executive 2, PAC Executive 3, and PAC Executive 4, PAC failed to conduct any significant follow up to address the issues raised by the report. Although, in response to a request from PAC, Service Provider began to seek activity reports from consultants as to the work they provided on behalf of PAC, such reports and other deliverables were provided only on an intermittent basis and typically provided very little detail as to the nature of the work performed.”
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DonateThereafter, the information alleges that the Foreign Official has the ability to take official action and exert official influence over certain contractual terms” concerning a contract with Middle East Airline. The information alleges that “Foreign Official primarily negotiated with PAC through PAC Sales Agent 1” and:
“Beginning in April 2007, PAC Sales Agent 1 and Foreign Official began discussing a potential consultancy position for Foreign Official with PAC, while Foreign Official was still employed by Middle East Airline and working on Amendment 2. In May 2007, PAC Sales Agent 1 began advocating for a position for Foreign Official with PAC executives, and in July 2007, substantive discussions among PAC senior personnel, including PAC Executive 1 and PAC Executive 2, regarding a consultant position for Foreign Official began in earnest. Contract negotiations between Foreign Official and PAC continued through the fall of 2007, with PAC ultimately making Foreign Official an offer of a consultant position with an annual salary of $200,000 in late October 2007, while Foreign Official was still employed by Middle East Airline.
The master agreement between Middle East Airline and PAC prohibited PAC from offering any consideration to employees of Middle East Airline. As a result, PAC Sales Agent 1 and PAC senior executives discussed the need to be circumspect about the negotiations surrounding the consultancy offer to Foreign Official and the “risk” that PAC was assuming in making a job offer to Foreign Official while he was still employed by Middle East Airline.
[…]
Foreign Official resigned from Middle East Airline in February 2008 and was formally retained as a consultant for PAC through Service Provider in April 2008. Foreign Official performed minimal work in his six years of service as a consultant for PAC. Significantly, the 2010 Selected Vendor Audit Report noted that PAC’s Internal Audit Department was unable to locate deliverables associated with Foreign Official’s consultancy. According to the report, after following up with PAC employees, representatives of the Internal Audit Department were told that deliverables for Foreign Official did not exist because PAC had requested no services of Foreign Official in the twelve months prior to the report, although PAC still paid Foreign Official’s invoices.
Foreign Official’s fees were paid out of the Office of the President Budget through Service Provider. These payments were made in the absence of effective internal accounting controls, including PAC’s failure to define the “consulting services” to be provided or obtain sufficient documentation to substantiate the nature and appropriate value of the “consulting services” provided by Foreign Official. Between 2008 and 2014, PAC paid Foreign Official through Service Provider a total of $875,000 in payments, which were mischaracterized as “consultant payments” on PAC’s general ledger, when in fact none, or very few, of the payments to Foreign Official was for actual consultant services. PAC then caused the payments made to Foreign Official through Service Provider ultimately to be incorrectly designated as “selling and general administrative expenses” on Panasonic’s books, records, and accounts.
Between April 2007, when negotiations began with Foreign Official concerning an offer of a consultant position at PAC, and March 2013, PAC earned $92,805,432 in profits from Middle East Airline attributable to twelve programs subsumed under [the contract] for which Foreign Official had some involvement or influence, including the IFE retrofit and reconfiguration contracts and contracts for which NRE and STC costs were included.”
Regarding the “Domestic Airline Consultant,” the information alleges in pertinent part:
“Domestic Airline Consultant worked as an account manager at PAC from 2000 until April 2007, when he left PAC to serve as a consultant for Domestic Airline, one of PAC’s largest customers at the time. In October 2007, while Domestic Airline Consultant was still working as a consultant to Domestic Airline, PAC Executive 1 arranged for Domestic Airline Consultant to be hired by Service Provider to serve as a consultant for PAC effective August 2007. At the time, Domestic Airline Consultant had the ability to take action and exert influence over the business relationship between Domestic Airline and PAC. Domestic Airline Consultant’s fees were paid out of the Office of the President Budget through Service Provider. Domestic Airline Consultant served in this dual consultancy role until December 2013 when he returned to PAC as an employee of the Company. Domestic Airline Consultant was separated from PAC in February of 2017. During the period of his dual consultancy, Domestic Airline Consultant reported to PAC Executive 1.
Although Domestic Airline Consultant’s agreement with Domestic Airline permitted him to undertake other consultant positions so long as they were not with other airlines, that agreement prohibited him from disclosing confidential information. Despite this prohibition, while Domestic Airline Consultant worked as a consultant for both PAC and Domestic Airline, he provided non-public, inside, or otherwise sensitive information to PAC Executive 1 and others at PAC, including forwarding internal communications among Domestic Airline’s employees about PAC, information about Domestic Airline’s negotiations with a PAC competitor, and pricing information of a PAC competitor. Domestic Airline Consultant typically marked communications in which he provided such information with phrases such as “CONFIDENTIAL,” “DO NOT FORWARD,” or similar statements suggesting the information was confidential or otherwise sensitive.
[…]
Beyond the provision of such inside or otherwise non-public information, Domestic Airline Consultant performed little additional work for PAC. Under the terms of his consultancy agreement with Domestic Airline, Domestic Airline Consultant was responsible for managing the relationship with PAC, including liaising with the engineering and marketing departments of both parties during the execution of IFE and GCS contracts. In addition, Domestic Airline Consultant served on Domestic Airline’s team that evaluated bids submitted by PAC and other vendors for contracts to be awarded by Domestic Airline. In particular, during the dual consultancy period, Domestic Airline Consultant served on two bid review teams for IFE contracts that Domestic Airline ultimately awarded to PAC. As such, although Domestic Airline Consultant was not the ultimate decision maker within Domestic Airline on awarding contracts, he had input into Domestic Airline’s decision-making process to award business to PAC.
Between October 2007 and December 2013, PAC paid Domestic Airline Consultant a total of $825,000 in consultancy payments through Service Provider, which were classified as “consultant payments” on PAC’s general ledger, despite the fact that these payments were made in the absence of effective internal accounting controls, including PAC’s failure to obtain sufficient documentation to substantiate the nature and appropriate value of the “consulting services” provided by Domestic Airline Consultant. The payments made to Domestic Airline Consultant through Service Provider were ultimately designated as “selling and general administrative expenses” on Panasonic’s books, records, and accounts.
Between April 2008 and March 2013, PAC earned $22,693,571 in profits attributable to business from Domestic Airline on three different programs for which Domestic Airline Consultant had some involvement or influence, including, for example, by serving as a member of Domestic Airline’s bid review committee.”
Under the heading, “Concealment of the Use of Sales Agents that Did Not Meet PAC’s Diligence Requirements,” the information alleges in pertinent part:
“Beginning in at least 1999 and continuing to at least 2016, PAC utilized the services of several third-party sales agents in its China and Asia regions (which PAC designated as separate sales regions between 2008 and 2013) to obtain and manage contracts with state-owned airlines. The commissions PAC paid to such sales agents typically ranged from six to ten percent.
PAC failed to put in place adequate controls over its use of sales agents in China and Asia and PAC employees disregarded red flags associated with these sales agents. For example, some of the sales agents were recommended by the state-owned airlines themselves, some sales agents were registered outside of the jurisdiction where they purportedly provided services, and other sales agents were paid outside of the territory where they purportedly provided services. In addition, historically, PAC performed only limited, informal due diligence before retaining third-party sales agents.
[…]
In total, between 2008 and April 22, 2013, financial records indicate that PAC Sales Agent 2 received at least $7,182,972 from PAC for the benefit of thirteen different sub-agents, including PAC Sales Agent 3. These payments were improperly booked as commission payments to PAC Sales Agent 2, when in fact they were payments to other sales agents who were otherwise ineligible to work with PAC. PAC then caused Panasonic likewise to falsify its books and records in connection with these payments. PAC terminated its relationship with PAC Sales Agent 2 in March of 2015.”
Under the heading “Causing Panasonic to Falsify Its Books, Records, and Accounts,” the information alleges:
“During the relevant time period, PAC caused Panasonic to falsify its books, records, and accounts in connection with the improper retention of consultants through the Office of the President Budget, the payment of such consultants through Service Provider, and the concealment of the continued use of certain sales agents in China and Asia. Specifically, as noted above, the $875,000 in consulting payments made to Foreign Official through Service Provider were falsely classified as “consultant payments” on PAC’s general ledger and ultimately as “selling and general administrative expenses” on Panasonic’s books, records, and accounts. In addition, the $7,182,972 in payments PAC paid to PAC Sales Agent 2 for the benefit of at least thirteen different sub-agents were improperly booked by PAC as commission payments to PAC Sales Agent 2, when in fact they were payments to other sales agents who were otherwise ineligible to work with PAC. PAC then caused these payments to likewise be falsely recorded in Panasonic’s books, records, and accounts.
Furthermore, as a wholly-owned subsidiary of Panasonic, PAC was required to provide representations and certifications to Panasonic about PAC’s financials and financial controls. Specifically, PAC was required to provide certifications of PAC’s financial statements for Sarbanes-Oxley consolidation purposes (the “subcertifications”) at the end of each fiscal year. In relevant part, the subcertifications required PAC Executive 1 to certify that “no deficiencies have been identified and the internal control[s] over financial reporting have effectively functioned in [the] company.” For each of the fiscal years ending on March 31st between 2010 and 2013, PAC Executive 1 signed the subcertifications but failed to report PAC’s improper retention of Foreign Official and Domestic Airline Consultant and the payments to those consultants made through Service Provider, despite PAC Executive 1’s knowledge of PAC’s relationship with, and payments to, Foreign Official and Domestic Airline Consultant in the absence of such internal controls.
In each of the fiscal years ending on March 31st between 2010 and 2012, PAC Executive 2 signed the subcertifications on behalf of his department despite (a) PAC Executive 2’s knowledge of PAC’s consulting relationship with Foreign Official; (b) PAC Executive 2’s receipt of the Selected Vendor Audit Report in 2010, which made him aware of PAC’s improper retention of consultants through the Office of the President Budget, including Foreign Official, and the payments to those consultants made through Service Provider; and (c) PAC Executive 2’s receipt of an email highlighting the excessive number of airlines represented by PAC Sales Agent 2.
Finally, for each of the fiscal years ending on March 31st in 2011 and 2012, PAC Executive 3 signed the subcertifications on behalf of PAC’s finance department, and, similarly, for the fiscal year ending March 31, 2013, PAC Executive 4 signed the subcertification on behalf of PAC’s finance department. Both PAC Executive 3 and PAC Executive 4 signed these subcertifications despite PAC Executive 3’s receipt of the Selected Vendor Audit Report in 2010 and 2011 and PAC Executive 4’s receipt of the Selected Vendor Audit Report in 2012, which made them both aware of PAC’s improper retention of consultants through the Office of the President Budget, including Foreign Official, and the payments to those consultants made through Service Provider.”
Based on the above, the information charges PAC with knowingly and willfully causing “Panasonic to falsify its books, records, and accounts and caused Panasonic to not, in reasonable detail, accurately and fairly reflect its transactions and dispositions.” Specifically:
“(i) knowingly providing false or incomplete representations and certifications to Panasonic about PAC’s financials and financial controls; and (ii) falsifying records relating to the retention of consultants through the Office of the President Budget, the payment of such consultants through Service Provider, and the continued use of certain sales agents in China and Asia.”
Deferred Prosecution Agreement
The above charge against PAC was resolved through a three-year DPA. The DPA lists the following “relevant considerations.”
a. The Company did not receive voluntary disclosure credit because the Company’s disclosures occurred only after the Securities and Exchange Commission (“SEC”) requested documents from Panasonic related to possible violations of anti-corruption laws and several years after the Company and Panasonic first became aware of the allegations of bribery through a whistleblower complaint and civil lawsuit, which the Company took steps to investigate internally but chose not to voluntarily report to the relevant authorities;
b. The Company received credit for its cooperation with the Fraud Section’s investigation, including conducting a thorough internal investigation; making factual presentations to the Fraud Section; providing facts learned during witness interviews conducted by the Company; voluntarily making U.S. and foreign employees available for interviews in the United States with the Fraud Section and the SEC; in one instance, proactively alerting the Fraud Section to material information relevant to the investigation; collecting, analyzing, and organizing voluminous evidence from multiple jurisdictions; and disclosing to the Fraud Section conduct in the Middle East of which the Fraud Section was previously unaware.
c. By the conclusion of the investigation, the Company provided to the Fraud Section all relevant facts known to it, including information about the individuals involved in the conduct described in the Statement of Facts … and conduct disclosed to the Fraud Section prior to the Agreement;
d. The Company engaged in significant, although in some respects untimely, remedial measures, including causing several senior executives who were either involved in or aware of the misconduct to be separated from the Company;
e. The Company has enhanced and has committed to continuing to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement (Corporate Compliance Program), but to date has not fully implemented or tested its enhanced compliance program, and thus the imposition of an independent compliance monitor for a term of two years … is necessary to prevent the reoccurrence of misconduct;
f. The nature and seriousness of the offense conduct, including knowing and willful falsification of books and records that lasted for at least six years and spanned multiple countries, and participation in the scheme by high-level executives of the Company;
g. The Company has no prior criminal history;
h. The Company has agreed to continue to cooperate with the Fraud Section in any ongoing investigation of the conduct of the Company, its parent company or its affiliates, or any of its present or former officers, directors, employees, agents, business partners, distributors, and consultants relating to violations of the FCPA;
i. Panasonic has agreed to disgorge $126,900,000 in profits and $16,299,018.93 in prejudgment interest to the SEC in connection with overlapping conduct;
j. Accordingly, after considering (a) through (i) above, the Fraud Section has determined that a Deferred Prosecution Agreement, an aggregate discount of 20% off of the bottom of the otherwise-applicable U.S. Sentencing Guidelines fine range, and the imposition of a two-year independent compliance monitor is sufficient but not greater than necessary to achieve the purposes described in 18 U.S.C. § 3553.”
The DPA sets forth in advisory guidelines range of approximately $172 million – $344 million and states that a monetary penalty in the amount of $137.4 million “is appropriate given the facts and circumstances of this case, including the Relevant Considerations …”.
In this release, Acting Assistant Attorney General John Cronan stated:
“When Panasonic Avionics Corporation caused its publicly-traded parent company to falsify its books and records, it distorted the information available to legitimate investors. The Criminal Division will take all appropriate action to ensure that the investing public is able to trust the accuracy of the financial statements of companies that avail themselves of American securities exchanges.”
SEC
The SEC action was based on the same core conduct alleged in the DOJ action. This administrative order states in summary fashion:
“This matter concerns violations of the anti-bribery, anti-fraud, books and records, and internal accounting controls provisions of the federal securities laws by Panasonic, a global electronics corporation headquartered in Osaka, Japan.
The anti-bribery violation is the result of a 2007 bribery scheme involving senior management of one of Panasonic’s U.S. subsidiaries, Panasonic Avionics Corporation (“PAC”), whereby a lucrative consulting position was provided to a government official (“Government Official”) who assisted PAC in obtaining and retaining business from a state-owned airline (“Government Airline”). While PAC was negotiating two agreements valued at over $700 million with the Government Airline, PAC offered the Government Official a $200,000 a year postretirement consulting position in order to induce him to assist PAC. Ultimately, PAC retained the Government Official and paid approximately $875,000 for his purported consulting position, which required little to no work. The payments to the Government Official were made through a third-party vendor that provided unrelated services to PAC. In addition, the engagement of the Government Official violated Panasonic’s policies and procedures, and the payments were not accurately reflected in its books and records.
The anti-fraud violation is a result of Panasonic materially overstating its pre-tax income by at least $38.5 million or 9%, and net income by at least $22.4 million or 16%, for the quarter ending June 30, 2012. PAC backdated an agreement with the Government Airline and provided misleading information about the agreement to PAC’s auditor in order to include the revenue in that quarter. Thereafter, Panasonic knowingly and intentionally prematurely recognized this revenue in violation of generally accepted accounting principles.
In addition, Panasonic lacked appropriate internal accounting controls with respect to the use of consultants and sales agents at PAC. PAC paid over $1.76 million to purported consultants, including the Government Official, who provided few if any legitimate consulting services. As with the payments to the Government Official, these payments were made through a third-party vendor and Panasonic’s books and records did not accurately reflect the true nature of the payments. Additionally, because certain sales agents could not meet PAC’s internal due diligence requirements, PAC devised a scheme to retain those sales agents in the Asia, and China regions by paying them through a separate sales agent.”
The SEC’s order adds the following regarding certain third parties. For instance, the SEC finds that a Sales Rep “lacked an education or background in avionics” and additionally that the company “knew that the Sales Rep employed his sons to assist him, even though they had no relevant qualifications to sell [certain products].” It is also worth noting that the SEC found that the Sales Rep “gave cash and luxury items valued at more than $60,000” to the PAC executive to whom he reported.
Under the heading “Retention of Sales Agents,” the order states:
“PAC’s practice of using sales agents, who solicited business for PAC from stateowned airlines and other customers, varied depending upon the sales region. For example, in Europe, Oceania, and the United States, PAC did not use sales agents. By contrast, in its Middle East, Asia, and China sales regions, PAC routinely engaged sales agents to obtain business from state-owned airlines and other customers and typically paid them between six and ten percent of the net contract amount. Between 2007 and 2017, PAC paid its sales agents in the Middle East, Asia, and China sales regions, including the Sales Rep, over $275 million.
By 2004, PAC had established regional field offices in the Middle East, Asia, and China. Moreover, by 2008 PAC’s primary regional office in Asia was staffed with numerous marketing and sales personnel versed and trained in PAC’s products, as well as field engineers. Nonetheless, PAC continued to use sales agents in connection with state-owned airlines and other customers in this region.
Prospective sales agents would contact PAC sales and marketing employees in the Asia and China regions and offer their services in connection with requests for proposals issued by airlines for IFE products. Vetting of the sales agents typically consisted of PAC having the agent arrange a phone call or meeting between PAC and high level executives or procurement staff of a potential customer. In addition, PAC told at least one agent that he was expected to obtain confidential, non-public bids of PAC’s competitors. This sales agent used sales commissions received from PAC to provide gifts, entertainment, and hospitality to government officials and their families as part of his efforts on behalf of PAC.
While PAC historically conducted no meaningful due diligence on its sales agents, beginning in at least 1996, PAC started including audit rights in its contracts with sales agents. However, PAC did not exercise its audit rights in order to avoid upsetting relationships with the agents. In early 2007, PAC began to put in place due diligence procedures for screening sales agents, including those agents with established relationships with PAC. For sales agents that could not pass the new procedures, PAC made arrangements for the sales agents to enter into subagreements with a Malaysia-based sales agent. That agent ultimately served as a stand-in for at least thirteen sales agents, some of which refused or failed the vetting process. In this way, PAC could continue to use sales agents who did not pass the screening requirements by concealing their use and payment through the Malaysia-based sales agent. PAC paid a one or two percent fee to the Malaysian representative who acted as the conduit for payments to the other agents, despite the fact that PAC policies explicitly prohibited the use of unapproved sales agents. PAC falsely recorded the payments to the sub-agents in its books and records as legitimate payments to the Malaysia based sales agent.
Beginning in February 2009, PAC instituted a formal process to hire sales agents. The new procedure set out a number of different requirements, including determining the need for the agent, internal due diligence documentation, preliminary background checks, interviews, and analysis of any red flags, before requesting that the prospective sales agent undergo a third-party due diligence vetting process. In addition, PAC regional sales and marketing staff would submit a “Sales Representative Agreement Request” for review by PAC’s Legal Affairs Department. Finally, all requests were to be routed to PAC’s Internal Review Committee (the “IRC”), staffed by PAC executives, including PAC Executive One and another senior executive.
Notwithstanding the implementation of these procedures, the IRC never rejected a request for use of a sales agent. Prior to voting to approve sales agent contracts, the IRC typically received a single-page form providing cursory information regarding the agent and contract. The due diligence information and red flags identified in the third-party reports were not communicated to the IRC, and the IRC never questioned the need for the extensive use of sales agents or requested to review due diligence reports. Similarly, the IRC did not question the decrease in the number of agents after third-party due diligence requirements were instituted, or the fact that a little-known Malaysian company had the capacity to perform work for approximately fifty programs with nearly twenty airlines. Between 2008 and 2015, PAC paid over $10 million to the Malaysian sales agent for the benefit of at least thirteen different unapproved sub-agents. The IRC approved all of the contracts with the Malaysian agent after February 2009.
Moreover, PAC’s compliance personnel lacked appropriate qualifications and training, and as a result failed to act on numerous red flags in connection with the retention of sales agents. For example, they raised no questions or concerns about the retention of sales agents that internal forms clearly disclosed were hired after “being recommended by airline.” Nearly all of the airlines internally described as recommending these sales agents were state-owned airlines in the Asia and China Regions.
PAC’s compliance personnel failed to act on other red flags, including those that were specifically identified in PAC’s own policies and procedures such as: (a) payment of large commissions to sales agents in relation to services rendered; (b) payments to bank accounts in countries other than where services were being provided; (c) the retention of sales agents recommended by state-owned airlines; and (d) lack of adequate educational, business, and technical qualifications. Examples of ignored red flags include payments of approximately $4 million to a sales agent whose primary work experience was as a Hong Kong department store clerk, and nearly $10 million to an agent who had served as the head of an Asian equestrian league, but had no relevant avionics experience.
Similarly, after a third-party vetting service discovered that one sales agent had forged references, and another was flagged as potentially being a “foreign official” under the FCPA, they were nevertheless engaged by PAC and simply paid as sub-agents through the Malaysian agent.
As a result, Panasonic failed to devise and maintain a sufficient system of internal accounting controls in connection with the retention of sales agents and failed to accurately record the payments to the sales agents on its books and records.”
Based on the above, the SEC found that Panasonic violated the FCPA’s anti-bribery, books and records, and internal controls provisions. In addition, based on the underlying conduct that SEC also found that Panasonic fraudulently reported revenue and found violations of Section 10(b) and Rule 10b-5 as well as other reporting violations.
The order requires Panasonic to pay approximately $143.2 million ($126.0 million in disgorgement and $16.3 million in prejudgment interest).
Under the heading “Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered remedial efforts undertaken by [Panasonic] and cooperation afforded the Commission staff in the later stages of the staff’s investigation. [Panasonic] has replaced the senior PAC executives involved in the violations, established an Office of Compliance and Ethics led by a new Chief Compliance Officer, implemented new compliance and accounting procedures, and enhanced internal accounting controls to prevent and detect the type of misconduct described in the Order.”
In this release, Antonia Chion (Associate Director of the SEC’s Enforcement Division) stated:
“Investors rightfully expect that the companies they invest in will not engage in bribery or fraud. Issuers must implement effective controls for the selection and engagement of consultants and agents to ensure compliance with anti-bribery statutes.”
Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“Issuers need to ensure that their rules and controls address the specific bribery and corruption risks they face when operating in global markets with customers that are state-owned entities. It is not enough for a company merely to set up policies and procedures that are not enforced or are easily circumvented by employees.”
In this release, Hideo Nakano (CEO of Panasonic Avionics) stated:
“We are pleased to have resolved these investigations; we have taken extensive steps over the past few years to strengthen Panasonic Avionics’ compliance programs and internal controls, and we welcome an independent compliance monitor to assess our progress.
Remedial actions taken include:
• Installing a new executive management team, including a new Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Compliance Officer
• Strengthening internal financial controls
• Developing an enhanced compliance program under the leadership of the new Chief Compliance Officer
• Hiring a global team of compliance, finance and audit experts
• Substantially reducing, and enhancing the controls around, the use of third-party agents and consultants“This is an ongoing effort and the company will continue to strengthen its compliance programs and internal controls. With these investigations behind us, we are confident that Panasonic Avionics is well-positioned for long-term success under our new management team.”
Ronald Machen, Matthew Jones, Kimberly Parker and Erin Sloane (Wilmer Cutler) represented PAC.
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