Earlier this week, Polycom (up until 2016 an issuer which was then acquired by a private equity firm and is now a wholly-owned subsidiary of Plantronics) resolved a $36.6 million Foreign Corrupt Practices Act enforcement action ($16.3 million pursuant to an SEC administrative order and $20.3 million pursuant to a so-called DOJ declination with disgorgement letter).
The conduct at issue concerned a Chinese subsidiary which created “a separate, parallel sales management system outside of Polycom’s company-approved systems, which was orchestrated by Polycom’s Vice President of China” and whose employees used “non-Polycom e-mail addresses when discussing deals with Polycom’s distributor.” According to the SEC, “Polycom personnel outside China were unaware of the existence of this parallel system.”
Yet, in another example of the SEC believing that the FCPA is a strict liability statute, the SEC found that Polycom violated the FCPA’s books and records and internal controls provisions. Moreover, without highlighting any additional substantive information the DOJ “declined prosecution … despite the bribery committed by employees of the Company’s subsidiaries in China, and these subsidiaries’ knowing and willful causing of false books and records at Polycom.” However, based on the information in the public domain (that is the SEC’s order) it remains an open question just what viable criminal charges the DOJ actually declined.
SEC
In summary fashion, this administrative order states:
“This matter concerns violations of the books and records and internal accounting controls provisions of the FCPA by San Jose, California-based communications solutions provider, Polycom, Inc. From 2006 through at least July 2014, Polycom’s Vice President of China at Polycom’s China subsidiary, along with senior managers, provided significant discounts to Polycom’s distributors and/or resellers, knowing and intending that the distributors and/or resellers would use the discounts to make payments to officials at Chinese government agencies and government-owned enterprises in exchange for those officials’ assistance in obtaining orders for Polycom’s products. Employees and managers at the China subsidiary recorded the payments in a parallel deal-tracking and email system located in China, outside of Polycom’s company-approved systems. These senior managers at Polycom’s Chinese subsidiary also instructed their sales personnel not to use their Polycom email addresses when discussing sales opportunities with Polycom’s distributors. Throughout this period, Polycom failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program with regard to its Chinese sales operations. During the period of September 27, 2012 through July 2014, the efforts to make, and conceal, improper payments to Chinese government officials carried out by Polycom’s Chinese subsidiary ultimately netted Polycom approximately $10.7 million.”
The conduct at issue concerned Polycom Communications Solutions (Beijing) Co., Ltd. (China) (“Polycom China”). During the relevant time period Polycom China, through a chain of holding companies, was a wholly-owned subsidiary of Polycom that sold Polycom’s products and services into the China Market. According to the order, “Polycom China engaged distributors to facilitate the sale of Polycom products throughout China and maintained its own sales and marketing staff to promote Polycom products.”
In pertinent part, the order finds:
“From 2006 through at least July 2014, Polycom’s Vice President of China devised and implemented a scheme to obtain additional business from public-sector customers by facilitating improper payments to government officials through Polycom’s distributors.
According to Polycom’s policies and procedures, Polycom sales personnel worldwide were required to enter details concerning sales opportunities and deals into a single, centralized customer relations management (“CRM”) database. However, Polycom China’s senior managers directed Polycom China’s sales personnel to enter details concerning sales opportunities into a separate, parallel sales management system outside of Polycom’s company-approved systems, which was orchestrated by Polycom’s Vice President of China. Polycom personnel outside China were unaware of the existence of this parallel system. Polycom China’s senior managers also directed Polycom China’s sales personnel to use non-Polycom email addresses when discussing deals with Polycom’s distributors.
On numerous occasions during years leading up to July 2014, Polycom China’s distributors obtained business from public-sector customers in China by offering and making cash payments to government officials who exercised influence over those customers’ purchasing decisions. When a distributor sought to make such a payment, it requested that Polycom provide it with a discount on the equipment that was to be sold to the public-sector customer. As senior management at Polycom China knew, these discounts were not passed on to the end customer, but instead were intended to cover the cost of the payments the distributors made to the Chinese government officials.
Polycom China sales employees entered the requested discounts into the non-Polycom sales management system for approval by senior managers at Polycom China, and recorded information about the reason for the payments in the same off-line system. Polycom China’s senior managers routinely approved these discounts, knowing that they would be used to make improper payments to Chinese government officials. Polycom’s Vice President of China recorded information regarding these improper payments in excel spreadsheets he maintained.
Senior managers at Polycom China recorded information about each deal in Polycom’s centralized CRM database. Entries in the centralized CRM database did not reflect that Polycom was providing discounts to its distributors in China in order to fund improper payments to Chinese government officials. Rather, the entries in the CRM database falsely attributed the discounts to purportedly legitimate purposes. For example:
a. In connection with a project with a state-owned entity, Polycom China authorized an improper payment of 60,000 RMB to a government official through a discount given to one of Polycom China’s channel partners. The Polycom China distributor made the improper payment in exchange for the official’s assistance in securing an agreement to purchase Polycom products. In an excel spreadsheet maintained by Polycom’s Vice President of China, the purpose of the discount was described as “in order to thank [the official] for help, we promised to give him 60,000 RMB.” However, the information entered into the centralized CRM database cited “competition” with another communications products provider as the reason for the discount that funded this improper payment.
b. In connection with a transaction with a state-owned entity, Polycom China authorized an improper payment of 170,000 RMB to a government official through a discount given to one of Polycom China’s channel partners. The payment was made in exchange for the official’s assistance in causing the entity to issue a tender that specifically called for Polycom products. However, the information entered into the centralized CRM database cited “competition” with two other communication products providers as the reason for the discount that funded this improper payment.
c. In connection with a deal with a public institution, Polycom China authorized a payment of an 850,000 RMB “end-user fee” through a discount given to one of Polycom China’s channel partners. However, the information entered into the centralized CRM database cited only competition and the customer’s refusal to pay a higher price as the reason for the discount that funded this fee. According to Polycom China employees, “end-user fees” at times represented kickbacks to Chinese government officials.
d. In connection with a sale of Polycom products to a government entity, Polycom China authorized payments of 20,000 RMB, 70,000 RMB, and 200,000 RMB through a discount to one of Polycom China’s channel partners to three separate officials who worked at the entity. However, the information entered into the centralized CRM database cited only “competition” with two other communications products providers as the reason for the discount that funded these payments.
Product discounts up to a certain threshold could be approved unilaterally by Polycom China’s senior managers. However, discounts above this threshold had to be approved by Singapore-based personnel who worked for another wholly-owned Polycom subsidiary. When these Singapore-based personnel sought information regarding the reasons for particular discounts, Polycom China’s senior managers always cited legitimate concerns such as competition with other communications products providers or end-user budget constraints. Polycom China’s senior managers never told the Singapore-based personnel that certain discounts were being used to fund improper payments to government officials.
During the relevant period, Polycom failed to devise and maintain adequate controls to detect whether any reasons for discounts entered in the centralized CRM database, or given to Polycom’s Singapore-based personnel, were accurate. Accordingly, Polycom failed to devise and maintain sufficient accounting controls to detect whether Polycom China was using product discounts as a vehicle for funding improper payments to government officials.
Polycom also failed to translate certain anticorruption training materials into the Polycom China employees’ local language, Mandarin, and frequently did not follow up if Polycom China personnel did not attend anticorruption trainings. Moreover, as part of a 2013 due diligence procedure, Polycom became aware of allegations that one of Polycom China’s distributors had, years prior on a deal unrelated to Polycom, made an improper payment to a Chinese government official. Polycom never finished its due diligence review of the relevant distributor. Polycom nonetheless allowed Polycom China to continue using this distributor to sell its products to public sector customers.”
Based on the above, the SEC found that Polycom violated the books and records and internal controls provisions “by falsely recording improper payments by Polycom China’s employees and agents as legitimate business expenses, whose results were then consolidated and reported by Polycom on its books and records” and “by failing to devise and maintain a sufficient system of internal accounting controls to detect and prevent the making of improper payments by Polycom China to foreign government officials. As a result, Polycom generated profits of approximately $10.7 million.”
Without admitting or denying the SEC’s findings, Polycom agreed to pay approximately $16.3 million (disgorgement of $10,672,926, prejudgment interest of $1,833,410, and a civil penalty of $3,800,000).
Under the heading “Polycom’s Self-Disclosure, Cooperation, and Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered Polycom’s self-disclosure, cooperation, and remedial efforts. Polycom hired outside counsel to conduct an independent investigation to determine the scope of potential issues related to payments made by Polycom China’s distributors. Polycom then voluntarily disclosed this misconduct to the Commission staff and provided cooperation to the Commission during the entire course of its investigation. Polycom shared facts that it discovered during the course of its internal investigation into the matters described above. Polycom also cooperated by voluntarily producing all documents requested by Commission staff, translating a large volume of documents into English, and making certain employees available for interviews.
Polycom also undertook remedial actions in response to the matters it identified in its internal investigation. These remedial measures included terminating the employment of eight employees involved in the matters described above, disciplining 18 other employees, terminating the Company’s relationship with one of its channel partners and requiring personnel changes at several others, improving the anticorruption and other related trainings Polycom provides to its China-based employees, hiring additional personnel, including in China, to enhance oversight, supplementing existing third party policies and trainings and third party due diligence procedures, and enhancing existing, as well as adopting additional, policies, procedures and controls designed to detect and prevent improper payments.”
With the enforcement action, Polycom is now a repeat offender of the FCPA’s books and records and internal controls provisions. As stated in the Order:
“On March 31, 2015, the Commission entered an Order (the “2015 Order”) finding that Polycom, Inc. had violated [among other things the books and records and internal controls provisions]. According to the 2015 Order, from May 2010 to July 2013, Polycom paid for approximately $190,000 worth of its then CEO’s personal expenses. Polycom failed to disclose these perquisites, falsely recorded many of these personal expenses as business expenses, and failed to implement adequate internal accounting controls related to company purchasing cards and air travel booking.”
DOJ
In this December 20th so-called declination with disgorgement letter to Polycom’s counsel Caz Hashemi (Wilson Sonsini) and Rohan Virginkar (Foley & Lardner), the DOJ states in full:
“We write regarding the investigation by the Department of Justice, Criminal Division, Fraud Section (the “Department”) into your client Polycom, Inc. (“Polycom” or the “Company”) concerning violations of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, et seq. Based upon the information known to the Department at this time, we have declined prosecution consistent with the FCPA Corporate Enforcement Policy. We have reached this conclusion despite the bribery committed by employees of the Company’s subsidiaries in China, and these subsidiaries’ knowing and willful causing of false books and records at Polycom. We based this decision on a number of factors, including: (1) Polycom’s identification of the misconduct; (2) Polycom’s prompt, voluntary self-disclosure of the misconduct; (3) Polycom’s thorough investigation; (4) Polycom’s full cooperation in this matter, including providing the Department all facts relating to that misconduct, making employees available for interviews and assisting the Department’s efforts to interview a former employee, translating foreign language documents to English, and identifying unrelated misconduct to the Department for investigation and potential prosecution, and its agreement to continue to cooperate in the Department’s ongoing investigations and/or prosecutions; (5) Polycom’s remediation, including the steps that Polycom took to enhance its compliance program and its internal accounting controls, terminating the employment of 8 individuals involved in the misconduct, disciplining 18 other employees, and terminating the Company’s relationship with one of its channel partners.
Pursuant to this letter agreement, the Company agrees to disgorge $30,978,000 (the “Disgorgement Amount”), which represents the profit to the Company from the illegally obtained contracts in China. The Company will pay $10,672,926 in disgorgement of profits earned within the,time limits prescribed by 28 U.S.C. § 2462 to the U.S. Securities and Exchange Commission, $10,152,537 to the United States Treasury Department, and $10,152,537 to the United States Postal Inspection Service Consumer Fraud Fund. The payments to the Treasury Department and to the United States Postal Inspection Service Consumer Fraud Fund shall be made within ten (10) business days of the execution of this letter. The Company acknowledges that no tax deduction may be sought in connection with any part of its payment of the Disgorgement Amount. The Company further agrees that it will not seek or accept directly or indirectly reimbursement or indemnification from any source with regard to the Disgorgement Amount other than from an escrow account set up by Polycom’s previous ownership.
This letter agreement does not provide any protection against prosecution of any individuals, regardless of their affiliation with Polycom. If the Department learns infothiation that changes its assessment of any of the factors outlined above, it may reopen its inquiry.”
Based on the information in the public domain (that is the SEC’s order) it is an open question just what viable criminal charges the DOJ actually declined.
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