Get out of jailIt certainly did not take long for companies to see the benefit of the Department of Justice (DOJ) Foreign Corrupt Practices Act (FCPA) Pilot Program around FCPA enforcement as this week there where two public declinations granted by the DOJ for companies that admitted FCPA violations. New Deputy Chief of the DOJ Criminal Division Fraud Section and head of the FCPA Unit, Daniel Kahn, issued letters to both Akamai Technologies, Inc. (Akamai) and Nortek Inc. (Nortek) this week, declining to prosecute both companies for their admitted FCPA violations. Today, I will begin a three-part series on how the companies sustained these results. Today, I will look at the underlying facts and tomorrow I what actions engaged in by the respondents achieved this result under the new Pilot Program. In Part III, I will conclude with lessons to be learned from these two FCPA enforcement actions.

Also, most interestingly, both parties received Non Prosecution Agreements (NPAs) from the Securities and Exchange Commission (SEC). Akamai agreed to profit disgorgement of in the amount of $652,452, together with prejudgment interest thereon in the amount of $19,433 within 15 days of the signing of the NPA. Nortek agreed to profit disgorgement in the amount of $291,403, together with prejudgment interest thereon in the amount of $30,655 within 15 days.

Akamai

What were the underlying facts involving each entity? As set out in the SEC’s NPA Akamai is a US stock listed company which provides cloud services for delivering, optimizing and seeming online content and business applications over the internet (“internet capacity and services”) and maintains operations in North America, Europe, and China. Akamai (Beijing) Technologies, Co. Ltd (“Akamai-China”) is a wholly owned subsidiary of Akamai located in Beijing, China. Akamai-China provides technical and sales support to its local Chinese channel partners for content delivery services, which are resold by Channel Partners in China.

Akamai-China was required to contract with third-party Channel Partners to deliver its services to end customers. From at least 2013 through 2015, a Regional Sales Manager for Akamai-China (the “Regional Sales Manager”) concocted a scheme with a channel party “to bribe employees of three end customers, two of which were Chinese state owned entities, to obtain and retain business. The bribes were paid to induce the end customers’ employees, including the employees of the Chinese state owned entities (hereinafter the “Chinese government officials”), to contract to purchase up to 100 times more network capacity from the Channel Partner than each company actually needed.” To top it off, the Channel Partner would then purchase this capacity from Akamai-China, add its own markup, and sell the capacity to the end customers. It was a very neat way to fund a bribery scheme.

To induce the end user to contract with Akamai-China, the Channel Partner would pay monies from these bogus sales to the Regional Sales Manager’s accounts. As noted in the NPA, “The Regional Sales Manager then paid a portion of these funds, and also provided expensive gifts, to employees of the three end customers. Overall, the Regional Sales Manager paid approximately $155,500 to employees of end customers, including approximately $38,500 in cash to Chinese government officials.”

Yet the bribery scheme did not stop there as employees of “Akamai-China routinely provided improper gifts and entertainment to employees of its end customers, some of whom were Chinese government officials, to obtain or retain business. The gifts and entertainment given to Chinese government officials totaled approximately $32,000 and were provided in violation of Akamai’s corporate governance and internal accounting controls policies. Akamai-China improperly recorded the gifts and entertainment to Chinese government officials as legitimate business expenses.”

As you might opine from such a systemic failure around its anti-corruption program, there were FCPA Accounting Provisions failures in both internal controls and books and records. There were multiple internal controls failures that allowed the Akamai-China bribery scheme to go undetected. The NPA listed the following, including failure “to provide reasonable assurances, among other things, that transactions were executed in accordance with management’s general or specific authorization and transactions were recorded as necessary to maintain accountability for assets. Akamai’s internal accounting control failures included: the lack of formalized due diligence of China-based channel partners; the failure to proactively exercise audit rights to ensure compliance with anti-bribery policies; failure to monitor or review customer usage in high-risk regions; failure to translate anti-bribery and anti-corruption policies into Mandarin; inadequate employee training on compliance and anti-bribery policies; and the lack of effective procedures for reviewing and approving business entertainment.”

Both Akamai-China’s and the parent company’s books and records were inaccurate because Akamai-China had made improper payments, in the form of gifts and entertainment, which were inaccurately recorded as legitimate business expenses. Akamai-China’s books and records. These inaccurate subsidiary financials were subsequently consolidated with Akamai’s books and records, rendering Akamai’s books and records inaccurate.

Nortek

As set out in its NPA, Nortek is a US stock exchange listed company which manufactures and sells a wide variety of products for residential and commercial constructions and remodeling and the personal and enterprise computer markets, including heaters, range hoods, heating, ventilation and air conditioning systems, and garage door and security systems. Nortek had an indirect subsidiary, Linear Electronics (Shenzhen) Co. Ltd. (“Linear China”), which provided manufacturing services for Nortek in China. Both companies had operations in China where they violated the FCPA.

According to its NPA, from at least 2009 to 2014, the Managing Director of Nortek’s Chinese subsidiary, together with the “accounting manager, customs liaison officer, and other employees made or approved improper payments and gifts to local Chinese officials in order to receive preferential treatment, relaxed regulatory oversight, and/or reduced customs duties, taxes, and fees.” There were over 400 illegal payments made and the totaled approximately $290,000. The payments and gifts “to local Chinese officials included cash payments, gift cards, meals, travel, accommodations, and entertainment. Linear China made the illicit payments to local officials from multiple different governmental departments, including customs, tax, fire, police, labor, health inspection, environmental protection, and telecommunications.”

Further, Nortek had a systemic failure in its internal controls that led to these FCPA violations. Its NPA stated, “Nortek failed to devise and maintain a system of internal accounting controls at Linear China sufficient to provide reasonable assurances that, among other things, transactions were executed in accordance with management’s general or specific authorization, and transactions were recorded as necessary to maintain accountability for assets. Linear China made improper payments from multiple accounts, which Nortek failed to review or test. Nortek failed to notice obvious red flags in Linear China’s financial records, including the number and size of Linear China’s meals and entertainment expenses.” Belying the recent criticism of training, “Nortek failed to establish procedures to ensure its Linear China employees were trained in anti-corruption compliance.” Nortek also failed to accurately record these payments on its books and records.

There was no information presented on the size of any specific or particular payment made by either Akamai or Nortek. While it is not clear from the Nortek NPA whether some of the payments made might fall under the facilitation payment exemption to the FCPA, it was clear that the company did not correctly record the payments in its books and records.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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