It was a “two for Tuesday” yesterday as the DOJ announced a Foreign Corrupt Practices Act (and related) enforcement action against Olympus Latin America Inc. and related entities and the SEC announced an FCPA enforcement action against Qualcomm.
This post highlights the Qualcomm action and a future post will highlight the Olympus action.
FCPA Professor has been following Qualcomm’s FCPA scrutiny since it was announced in January 2012 (see here).
Qualcomm maintained then that it “believes that it is in compliance with the requirements of the FCPA.” As highlighted in this prior post, things escalated in March 2014 when Qualcomm disclosed that it had received a Wells Notice from the SEC. As noted in the prior post, Wells Notices are rare in the the FCPA context for the simple reason that few issuers actually publicly push back against the SEC. Shortly after receiving the Wells Notice, Qualcomm disclosed that it responded to the SEC “explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.”
As highlighted in this prior post, Qualcomm disclosed in November 2015 that “the DOJ notified the Company that it was terminating its [related] investigation and would not pursue charges in this matter.” As to the SEC investigation, Qualcomm continued to maintain that it had not violated the FCPA and that an enforcement action was not warranted.
However, when push came to shove the party holding the stick prevailed and Qualcomm caved by agreeing to pay a $7.5 million civil penalty via an SEC administrative order in which the company neither admitted nor denied the SEC’s findings.
As the Second Circuit recognized in a recent high-profile SEC matter, “trials are primarily about truth” whereas SEC settlements are “primarily about pragmatism.” (see here for the prior post). As Stanford Law Professor and former SEC Commissioner Joseph Grundfest has noted: “it can be imprudent for regulated entities to engage in protracted litigation with their regulators.”
Yesterday, the SEC released this administrative action finding that Qualcomm Inc. violated the FCPA’s anti-bribery, books and records and internal controls provisions.
In summary fashion, the order states:
“This matter concerns Qualcomm’s violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. From 2002 through 2012, Qualcomm provided things of value to foreign officials – including highranking employees of state owned enterprises (“SOEs”) and government ministers – to try to influence these decision makers to favor and/or promote Qualcomm-developed technology in an evolving international telecommunications market, thereby providing Qualcomm with a business advantage.
Qualcomm’s extensive international operations accounted for more than 90% of the company’s revenue. Even so, Qualcomm’s internal controls were insufficient to prevent or detect improper payments to foreign officials. In several areas of its business operations, including hiring, hospitality planning, and business development, Qualcomm lacked an adequate oversight process to determine whether things of value that it provided to foreign officials were made with the intent to induce those officials to provide a business benefit to Qualcomm.
Qualcomm’s insufficient internal controls resulted in books and records violations. Qualcomm misrepresented in its books and records that things of value provided to foreign officials were legitimate business expenses.
In sum, Qualcomm, through its agents and subsidiaries, violated [the anti-bribery provisions] by providing things of value to foreign officials to obtain and retain business in China. Qualcomm also violated [the internal control provisions] by failing to devise and maintain internal accounting controls sufficient to provide reasonable assurance of preventing or detecting the authorization or payment of improper payments. Qualcomm violated [the books and records provisions] by having recorded improper payments to foreign officials in its books and records in a manner that failed to accurately and fairly reflect the provision of things of value to foreign officials.”
Under the heading, “Qualcomm Provided Things of Value to Foreign Officials Who Were Considering Whether to Adopt Qualcomm-Developed Technology,” the order states:
“From at least 2002 until 2012, Qualcomm provided things of value to try to influence: (1) foreign officials from a Chinese government agency (“Agency”) to make regulatory decisions that would expand the use of Qualcomm-developed technology in China; and (2) executives at SOE 1 and SOE 2 to adopt Qualcomm-developed technology and expedite deployment of their CDMA [Code Division Multiple Access] and WCDMA [Wideband CDMA] networks once the licenses were issued, thereby increasing Qualcomm’s revenue from the use of this technology.
Qualcomm urged the two telecom companies to rapidly deploy their respective networks, which would spur faster growth in the use of Qualcomm-developed technology by Chinese mobile subscribers, thus increasing Qualcomm’s revenue from licensing and the sale of chips. Similarly, even after one telecom company (SOE 2) was awarded a CDMA license, Qualcomm worked to convince it to upgrade its network to the next generation of CDMA technology. Had that occurred, Qualcomm believed the upgrade would extend the life and continued usage of Qualcomm’s CDMA technology in China.
Qualcomm also worked to try to influence the two telecom companies to use the company’s products and services such as its application platform and push-to-talk service, with the goal of increasing and perpetuating use of the technologies.”
Under the heading “Qualcomm Hired Relatives of Chinese Officials,” the order states:
“Qualcomm provided or offered full-time employment and paid internships to family members and other referrals of foreign officials at SOE 1, SOE 2 and Agency – often at the request of these foreign officials. Qualcomm referred to some of these individuals as “must place” or “special” hires.
Qualcomm offered employment to certain foreign officials’ family members and referrals despite concerns, in some cases, that the individuals did not satisfy Qualcomm’s hiring standards. Certain hires also had previously failed to obtain employment with Qualcomm through the standard hiring process. And in some cases, new positions were created for these hires.
Qualcomm provided or offered full-time employment and paid internships to family members and other referrals of foreign officials with the purpose of trying to influence those officials to take actions that would assist Qualcomm in obtaining or retaining business in China.
In one case, the Deputy General Manager of a subsidiary of SOE 2 asked Qualcomm employees in 2010 to find an internship at Qualcomm for her daughter. As one Qualcomm employee noted, “We received a request from the GM of [the telecom company’s subsidiary] to help find an internship position for her daughter (currently studying in the U.S.) within QC. I discussed this with [high level official] and determined that it would be important for us to support given our cooperation with [the subsidiary].” Qualcomm employees understood that the daughter’s “parents are [SOE 2 subsidiary] Dept. GM level and gave us great help for Q.C. new business development.” Because “[the regional branch] is our strategic partner in China and plays an important role in leading all [the telecom company] adopting Qualcomm’s technologies,” Qualcomm employees believed that the internship “would be important for us to support given our cooperation with [the subsidiary].” Specifically, the internship “would be good because we are doing quite a bit with [the subsidiary], e.g., QChat and Rev. B.”
In another case, between 2006 and 2010, Qualcomm provided the son of an executive responsible for network planning, construction, and maintenance at SOE 1, with: (1) support from a $75,000 research grant to an American university where he was studying, allowing him to retain his position in a PhD program and renew his student visa; (2) a Qualcomm internship; (3) subsequent permanent employment despite interviewers concluding that he did not meet Qualcomm’s hiring standards for the position; and (4) a business trip to China followed by leave to visit his parents over the Chinese New Year, despite other employees expressing concern regarding his qualifications for the assignment. The EVP also personally provided this employee with a $70,000 loan to buy a home.
In fact, the initial interview decision was “No hire” because the son of the telecom company executive was not “a skills match,” didn’t “meet the minimum requirements for moving forward with an offer,” and among those who interviewed him, “there was an agreement that he would be a drain (not even neutral) on teams he would join.” Despite these assessments a director in Human Resources advocated for the son’s hire at the direction of EVP, summarizing, “I know this is a pain, but I think we’re operating under a different paradigm here than a normal “hire”/”no hire” decision tree. We’re telling this kid (and in effect, [the telecom company]) that we don’t want to waste time or extend any extra effort in this favor [the telecom company] has asked of Qualcomm, and then turn around and ask the same person we just rejected to do us a special favor.”
Qualcomm also offered employment to at least one individual at the request of high-level Agency executives. An intern hired by Qualcomm in 2010 was referred by a director general of the Agency. An HR employee described the intern as “a MUST PLACE since he was refererd [sic] by [the director general of the Agency] and has influence in China as per [the high level official].” When asked “How cirtical [sic] is the hiring of the [director general’s referral] for Qualcomm’s business?”, the high level official replied, “[Q]uite important from a customer relationship perspective.”
FCPA compliance, however, was not considered in Qualcomm’s hiring process. Indeed, for years, most Qualcomm employees who worked in Human Resources did not receive FCPA training. As a result, when Qualcomm offered paid internships or full-time employment to family members or referrals of Chinese foreign officials, it did not evaluate or attempt to mitigate the potential FCPA risks associated with such hires.”
Under the heading “Qualcomm Provided Frequent Meals, Gifts and Entertainment to Foreign Officials,” the order states:
“From at least 2002, Qualcomm, EVP and other Qualcomm employees provided meals, gifts and entertainment to foreign officials and their family members in order to try to influence these foreign officials to adopt and retain Qualcomm-developed technology.
Many gifts – airplane tickets for children of government officials, event tickets for spouses of foreign officials and luxury goods– had no valid business purpose. Similarly, Qualcomm paid for sightseeing for spouses and children of foreign officials and arranged golf outings.
Qualcomm repeatedly provided certain foreign officials at telecom companies and the Agency with gifts, travel and entertainment. In certain cases, Qualcomm also provided the family members of these foreign officials with employment at Qualcomm.
Qualcomm also offered foreign officials hospitality packages to world-class sporting events. These foreign officials included employees of government-controlled communications companies that were customers of Qualcomm, and sometimes their spouses. The Qualcomm employees involved in planning hospitality events for foreign officials had not received FCPA training. In addition, Qualcomm lacked processes for vetting hospitality event invitations and for determining whether events had an adequate business component.”
Under the heading “Qualcomm Failed to Devise and Maintain Adequate Internal Controls,” the order states:
“[Qualcomm’s] failures were widespread and involved Qualcomm’s headquarters in San Diego and its international subsidiaries. These internal controls weaknesses were intensified by the absence of someone whose full-time responsibility was to act as a company-wide chief compliance officer and the absence of an FCPA compliance officer in China.
Qualcomm employees directly offered various benefits to foreign officials who were making decisions regarding the use of Qualcomm-developed technology without an adequate process of oversight to determine whether the offers were intended to induce the foreign officials to provide a benefit to the company.
For example, Qualcomm offered at least 15 foreign officials lavish hospitality packages worth approximately $95,000 per couple for the 2008 Beijing Olympics. Then, in mid to late-July 2008, a member of Qualcomm’s finance department raised FCPA issues related to the Olympics with Qualcomm counsel. In August 2008, just days before the Olympics began, Qualcomm rescinded the five hospitality invitations that had been accepted due to Qualcomm’s FCPA-related concerns. The disinvited guests were from three Chinese state-owned enterprises.
Neither Qualcomm’s executive management team nor its local management in China adequately identified the potential FCPA risk in offering the lavish Olympics hospitality packages to employees at SOEs at which Qualcomm was soliciting and conducting business, until July 2008.
Moreover, Qualcomm’s internal audit reports found that employees repeatedly failed to request pre-approvals prior to providing things of value to foreign officials and failed to record when things of value had been provided to foreign officials. These failures violated Qualcomm’s FCPA policy.
Qualcomm further failed to provide regular substantive training or information to employees of its subsidiaries regarding the requirements of the FCPA.
In addition, several important business functions such as human resources and hospitality planning were not considered in Qualcomm’s FCPA compliance program.”
Under the heading “Qualcomm Failed to Maintain Accurate Books and Records,” the order states:
“Qualcomm provided things of value for the purpose of obtaining or retaining business yet recorded these transactions in a generic and non-descript manner that obscured their purpose. Many things of value consisted of questionable inducements to further Qualcomm’s business interests. For example, travel and hospitality events offered or provided to foreign officials were booked as generic sales and marketing or industry relations expenses.
In addition, meals, gifts and entertainment were repeatedly noted as missing from Qualcomm’s gift logs. Throughout this time period, there were also incorrect inputs into Qualcomm’s expense report system because employees stated that nothing of value had been provided to a foreign official or failed to obtain the proper approvals in advance of the expenditure. Year after year these gift log and expense report deficiencies were raised in internal audit reports.”
Based on the above, under the heading “Legal Standards and FCPA Violations,” the order states:
“Qualcomm violated [the anti-bribery provisions] by providing employment and internships to relatives of foreign officials in order to assist Qualcomm in retaining and obtaining business. Qualcomm also violated [the internal controls provisions] by failing to devise and maintain a sufficient system of internal accounting controls to prevent the provision of travel, gifts, and entertainment to foreign officials without prior pre-approval and to ensure all things of value given to foreign officials were properly recorded. As a result of this same conduct, Qualcomm failed to make and keep accurate books and records.”
In the SEC’s release, Michele Wein Layne (Director of the SEC’s Los Angeles Regional Office) stated:
“Companies must effectively design and implement internal controls across all business operations to prevent FCPA violations, including its hiring practices. For more than a decade, Qualcomm went to extraordinary lengths to gain a business advantage with foreign officials deciding between Qualcomm’s technology and its competitors.”
Without admitting or denying the SEC’s findings, Qualcomm agreed to pay a $7.5 million civil monetary penalty and “self-report to the SEC for the next two years with annual reports and certifications of its FCPA compliance.”
In this release, Qualcomm stated:
“This is not a criminal action, and the U.S. Department of Justice recently closed its investigation on these matters without taking any action. The SEC’s order detailing this settlement relates to conduct prior to 2012 and completely resolves the investigation previously disclosed by the Company in its public filings.
The SEC order states that on certain occasions Qualcomm gave employees of state-owned entities or government agencies in China event tickets and gifts or paid for travel, and on certain occasions hired children or friends of employees of state-owned entities or ministries in China.
Qualcomm has always strived to comply with FCPA requirements. As a result of this experience, Qualcomm has taken additional steps to enhance its existing internal controls and procedures. For example, although like most organizations Qualcomm appreciates referrals of job candidates by those who know the candidates well, the Company now closely monitors to determine if a candidate has any relationship with an employee of a government agency or state-owned entity, and applies a stricter standard of scrutiny in an effort to avoid potential FCPA risks in the future.
Pursuant to the terms of the settlement, Qualcomm will report periodically to the SEC on its efforts to maintain and enhance effective FCPA controls.
“Qualcomm is pleased to have put this matter behind us. We remain committed to ethical conduct and compliance with all laws and regulations, and will continue to be vigilant about FCPA compliance,” said Don Rosenberg, Executive Vice President and General Counsel of Qualcomm.”
David Stuart (Cravath) represented Qualcomm.
Yesterday, Qualcomm’s stock closed up 2.6%.
