Those bemoaning the lack of Foreign Corrupt Practices Act (FCPA) enforcement activity can cease. With the Dun & Bradstreet Inc. (D&B) declination last week and this week’s enforcement action involving Panasonic Avionics Corporation (PAC) and its parent Panasonic Corporation (Panasonic); US regulators at the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have roared back with not only significant enforcement actions but more importantly for the compliance practitioner, important information about how the DOJ will consider enforcement actions under the new FCPA Corporate Enforcement Policy, announced last November. Today, I consider the background of the Panasonic FCPA enforcement action.

As usual, Dick Cassin at the FCPA Blogwas the first to break the news to the compliance community. The DOJ resolution documents included a Deferred Prosecution Agreement(DPA) and a Criminal Information(the Information). The SEC issued a Cease and Desist Order(the SEC Order). Both the DOJand SECalso issued Press Releases. Over the next several blog posts I will be exploring the Panasonic enforcement action in some detail.

PAC is a US subsidiary of Panasonic, the Japanese electronics giant. PAC manufactures and markets in-flight entertainment and communication systems for airlines. In many parts of the world, airlines are state owned enterprises and PAC found itself in FCPA hot water for issues around bribery and corruption with some of these foreign state-owned enterprises. Interestingly, PAC’s corruption also extended to the US domestic market and while some of its fraudulent conduct occurring in the US domestic market was detailed in the resolution documents, it is not clear how it may have worked its way into the FCPA enforcement action, other than contributing to the accounting provisions violations.

The penalty assessed was stiff, $280 million but not one to make the Top Ten list of FCPA resolutions. The amount was broken down into a $137 million payment by the company’s US  unit PAC, in criminal penalties to the DOJ. The Japanese parent, Panasonic will pay disgorgement of $126,900,000 and prejudgment interest of $16,299,018.93, for a total payment of $143,199,018.93 to the SEC. These amounts were based on not only egregious conduct in the underlying bribery and corruption but also the fact the company did not self-disclose the conduct to regulators.

The amount of profit generated to the company is simply stunning and one number that is not often reported by either the DOJ or SEC. However, the SEC Order reported by keeping fraudulent books and records, Panasonic increased its pre-tax income by at least $38.5 million or 9% of the company’s total and net income by at least $22.4 million or 16% of the company’s total in this category, for the quarter ending June 30, 2012. Anytime you increase your total corporate income between 9% to 16% it is certainly material and it speaks to a broader problem of culture.

According to the DOJ Press Release, PAC knowingly and willfully caused Panasonic to falsify its books and records with respect to PAC’s retention of third-party consultants for improper purposes.  The third-party consultants, who largely did zero actual consulting work for PAC, were retained through a third-party service provider and were paid for out of a budget over which a senior PAC executive had complete control and discretion, without meaningful oversight by anyone at PAC or Panasonic.

One of these third-part consultants was offered a consulting position by PAC at the time that he was employed by a state-owned airline and involved in negotiating a lucrative contract amendment on behalf of the airline with PAC. At the time it orchestrated the bribery scheme, PAC was negotiating two agreements with the airline valued at more than $700 million. That third-party consultant was subsequently paid $875,000 by PAC, after he left the employ of the state-owned enterprise and was retained as a consultant by PAC, even though the company’s internal audit function could find no work product delivered to PAC. Over a six-year period PAC earned over $92 million in profits from portions of the contract over which the consultant had some involvement or influence while employed with the airline. PAC admitted that it mischaracterized these payments as “consultant payments” on its general ledger, which it knew caused Panasonic to incorrectly designate those payments as “selling and general administrative expenses” on Panasonic’s books, records, and accounts.

PAC also admitted that employees in its Asia region concealed PAC’s use of certain sales agents, which did not pass the Company’s internal diligence requirements. According to admissions and court documents, PAC formally terminated its relationship with these sales agents, as required by its compliance policies, but then PAC employees then secretly continued to use the agents by having them rehired as sub-agents of another company, which had passed PAC’s due diligence checks. Through this fraudulent process, PAC employees hid more than $7 million in payments to at least 13 sub-agents. Of course, neither PAC nor Panasonic had any mechanism to uncover this subterfuge, such as effective internal controls over the agent approval, recertification or payment process.

The SEC Order also found that Panasonic fraudulently overstated pre-tax and net income by prematurely recognizing more than $82 million in revenue for the fiscal quarter ending June 30, 2012. The fraud was accomplished by PAC backdating an agreement with the airline and providing misleading information to PAC’s auditor. The SEC Order also noted that Panasonic lacked sufficient internal accounting controls and failed to make and keep accurate books and records in connection with purported consultants retained by PAC, as well as sales agents used to solicit business from state-owned airlines and other customers throughout the Middle East and Asia.

An interesting twist in the case was the DOJ’s discussion of false Sarbanes-Oxley (SOX) certification made by several of the un-named but known individuals identified in the resolution documents. The Complaint stated, one of these individuals “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.”” It is certainly not usual to see a false SOX discussed in a FCPA enforcement action. However, it is clear the certification acts as an internal control.

Another interesting twist were the references to a domestic third-party agent who was representing a domestic purchase of PAC’s products. This domestic third-party agent provided inside information to PAC about the domestic airline, during which time he was member of domestic airline’s bid review committee. As a member of the bid review committee, he steered some $23 million worth of business to PAC and was compensated by PAC to the tune of $825,000. While this is a clear conflict of interest, it is not clear how it relates to a FCPA violation.

The Panasonic FCPA enforcement action demonstrates that both the DOJ and SEC will robustly enforce the FCPA when there is senior management involvement in systemic bribery and corruption. It is a lesson still worth reminding those who try and cut the FCPA corners. Tomorrow I will detail the bribery schemes involved.

 

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, 2018

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