Sometimes you have to wonder just how long it will take before US companies realize (1) there is a Foreign Corrupt Practices Act (FCPA) and (2) it applies in China as yesterday both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) concluded enforcement actions involving PTC Inc. (PTC), Parametric Technology (Shanghai) Software Co. Ltd. and Parametric Technology (Hong Kong) Limited. PTC was previously known as Parametric Technology Corporation, and the two other companies were wholly owned subsidiaries (collectively the Chinese entities).
What makes these enforcement actions rather amazing were the blatant corruption schemes involved of paying for travel, entertainment and gifts so beyond the pale of not only anything legal under the FCPA but indeed anything reasonable. This is tempered by the fact the conduct began back in 2008 and after an internal investigation began, it took the company three years to fully disclose to US authorities the scope of the FCPA violations and that full disclosure only came after being confronted by the DOJ with “salient facts regarding the Companies responsibility for improper travel and entertainment expenditures”.
This blog post will begin a two-part series where I will consider the Non-Prosecution Agreement (NPA) provided to the Chinese entities and the Cease and Desist Order (the Order) entered into with PTC. Today I will review the underlying facts and tomorrow I will present some of the lessons to be learned along with questions raised by the enforcement actions.
The fines and penalties were not to be scoffed at for PTC or its Chinese subsidiaries. The Chinese subsidiaries agreed to a penalty of $14,540,000 and the NPA had a three-year tail for reporting on remediation and “implementation of the compliance program and internal controls, policies and procedures described”. PTC submitted an Offer of Settlement to the SEC, which formed the basis of a Cease and Desist Order. PTC agreed to profit disgorgement of $11,858,000 and prejudgment interest of $1,764,000.
According to the Order, the company “designs, manufactures, and sells Product Lifecycle Management Systems software (i.e., software that manages a company’s products from design through manufacturing and distribution) and maintains operations in the Americas, Europe, and Asia Pacific, including China.” PTC exercise “substantial control over” the Chinese subsidiaries, with direct reporting lines back up to PTC for sales, operations and global service functions. This included reviews of contracts, pricing discounts, financial goals and budget allocations. In other words, there was clear control by the parent of the Chinese subsidiaries.
The bribery schemes were conducted through Chinese third parties called “business partners.” These business partners hid the costs of the bribes in fraudulent billing descriptions back to the Chinese subsidiaries when the need arose. The commission rates paid to the business partners varied with an “agreed to a price range for the business partners’ commission – from as low as 15% to as high as 30% of the contract price” Finally, and perhaps most troubling, the final commission rate was not set until after the deal was completed.
The primary bribery scheme involved payment of travel and entertainment expenses that were hidden as training expenses. These expenses were kept off-books, on spreadsheets. Moreover, the Chinese entities would then “gross up” the contract price to pay for the illegal travel and entertainment but when it came time to execute the final contract the Chinese subsidiaries “removed the line item for overseas travel from the final contract documents that were signed by PTC and the SOEs. Instead, the funds budgeted for the overseas travel were disguised by PTC-China personnel as COD expenses related to success fees or subcontracting payments for business partners.”
The travel and entertainment was a veritable travelogue through the United States, including visits to “New York, Las Vegas, San Diego, Los Angeles, and Honolulu, and involved guided tours, golfing, and other leisure activities. PTC-China sales staff usually accompanied the Chinese government officials on these trips. The Chinese government officials who went on the trips in turn were often signatories on the purchase agreements with PTC.”
Travel and Entertainment Box Score
|2007||Unspecified overseas travel||$84K|
|2007||Unspecified overseas travel||$104K|
|2008||NYC, Boston, LA, Hawaii, Las Vegas, Grand Canyon||$51K|
|2010||Las Vegas, Los Angeles, Grand Canyon||Not listed|
|2010||CT, NYC, Boston, DC, Las Vegas, San Diego, Los Angeles||Not listed|
|Total||Spent – $1,179,912||Profit – $11,858, 000|
These travel and entertainment expenses were made all the more amazing by the fact that, according to the NPA, PTC had a policy that it “should not pay for customer travel to its headquarters for training.” As noted above, initially the costs of these trips were written into the contract approved at the local level but then removed into an outside line item acronymed CODs for “completely outsourced deals.” At some point PTC discovered this discrepancy and the Chinese subsidiaries simply moved to having their business partners pay for the travel and entertainment expenses and then provide the Chinese subsidiaries with “false documents indicating they have performed subcontracted services, even though no such services were contemplated or performed.”
Yet the Chinese subsidiaries did not stop at violating both internal company rules and the FCPA with their travel and entertainment. They doubled down through their gift expenditure. PTC policies around gifts included, “$50 monetary limits on the provision of gifts and business entertainment to government officials; requiring PTC-China sales staff to obtain preapprovals for business expenses over $500; and requiring that PTC-China sales staff document the date, place, attendees, and purpose of business entertainment and the recipient.”
The Order also noted, “From 2009 through 2011, PTC-China sales staff corruptly provided at least $274,313 in improper gifts and entertainment directly to Chinese government officials. The value of the gifts and entertainment generally ranged from $50 to $600, and often included small electronics (e.g., cell phones, iPods, and GPS systems), gift cards, wine, and clothing. PTC-China sales staff’s long standing practice of providing the gifts to Chinese government officials was done at least in part to obtain or retain SOE business.”
Yet another US company has come to FCPA grief from its gifts, travel and entertainment of Chinese state-owned enterprise officials. Tomorrow, we will draw upon the lessons that can be learned from these enforcement actions.
Sometimes you have to wonder just how long it will take before US companies realize there is a FCPA.Click to tweet
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© Thomas R. Fox, 2016