Now that Trump has shut down the government, it may be sometime before there is another Foreign Corrupt Practices Act (FCPA) enforcement action announced. However, this past week we had two which were quite interesting and instructive for the compliance practitioner. Over the next couple of blog posts I will be considering these two enforcement actions. They both were announced on December 26th. The first involved Polycom, Inc. (Polycom) and it included a settlement with the Securities and Exchange Commission (SEC), via an Administrative Order(Order) where Polycom agreed to disgorge to the SEC about $10.7 million and pay prejudgment interest of $1.8 million, along with a penalty of $3.8 million.
Polycom also received a Declinationwith Disgorgement from the Department of Justice (DOJ). This Declination featured a disgorgement of $10.15 million to the U.S. Treasury Department and $10.15 million to the U.S. Postal Inspection Service Consumer Fraud Fund, in addition to the disgorgement to the SEC. Polycom disgorged some $31 million in total of ill-gotten gains. The second enforcement action involved the Brazilian electrical entity Centrais Elétricas Brasileiras S.A. (Eletrobras) who was charged by the SEC, via an Administrative Order(Order), with violating the books and records and the internal accounting controls provisions of the FCPA. We will consider Polycom in this blog post.
Polycom came to FCPA grief in China, as have many other US companies. The bribery scheme was long running, occurring from 2006-2014. The entity involved was Polycom Communications Solutions (Beijing) Co., Ltd. (“Polycom China”). The sales distribution method in China was distributors. As noted in the Order, “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.” From there, “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.”
There were multiple variations of this basic bribery scheme listed in the Order. They included the creation of an off-the books accounting and recordation system for corrupt payments made by or on behalf of Polycom China. While Polycom had a customer relations management (CRM) database, “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.”
The bribery schemes themselves were relatively straight-forward as the Chinese business unit obtained business by offering and making corrupt payments to “government officials who exercised influence over those customers’ purchasing decisions.” The money to fund these bribes came through variations of the basic bribery scheme. There would be a discount between the price reported to Polycom and that paid by the buyer. The Order stated, “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.” In other words, this discount would form the basis of the pot of money to pay the bribe.
But it got even worse from there as Polycom China actively worked to conceal the bribe payments as “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.” From there “Polycom’s Vice President of China recorded information regarding these improper payments in excel spreadsheets he maintained.” To further hide these illegal payments, the payments were incorrectly recorded in their CRM system so they did not reflect the discounts.
The Chinese business unit was equally creative with the reasons for the discounts, which were listed in the CRM. Polycom China usually cited competition with one or more vendors was required to give discounts on pricing. They also claimed that some end-using customers refused to pay full price. However these were all false excuses entered into the CRM to hide the truth from auditors and others charged with reviewing and approving the discounts.
Even with this clear conduct at the most senior levels of the Chinese business unit Polycom was able to obtain a Declination from the DOJ. Both the DOJ and SEC noted the company had self-disclosed the FCPA violations. The DOJ listed several other factors for the granting of the Declination, including:
- Polycom’s identification of the misconduct;
- Polycom’s prompt, voluntary self-disclosure of the misconduct;
- Polycom’s thorough investigation;
- 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; and
- 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.
The Order specified additional detail on the remediation including, “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.”
What does all of this mean for the compliance practitioner? First and foremost, you must channel your inner Woodward and Bernstein and follow the money. While many would exclaim “What an order, we cannot go through with it” as the Chinese business unit was obviously actively working to hide their crimes; you must be prepared to dig deeper to uncover bribery and corruption. China is a well-known high-risk jurisdiction and you must aggressively audit and monitor your organization in such well-known high-risk geographic areas.
The Order noted that when certain discount thresholds were reached, more senior company employees were required to approve the discounts. These higher-ranking employees were in Singapore and appear not to have looked behind the façade of reasons presented to them by the Chinese business unit of competition and pricing concerns of customers. This enforcement makes clear that simply because some type of compliance oversight is difficult or requires extra effort, it is no excuse not to monitor.
Finally, always remember that the money to fund a bribe must come from somewhere. Distributor discounts are an obvious mechanism and there have been several enforcement actions in 2018 involving distributors. If this is your sales model, you need to understand what discounts are given, why and how. Even if it takes some digging.
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© Thomas R. Fox, 2018