Final ThoughtsToday, I conclude my exploration of the VimpelCom Foreign Corrupt Practices Act (FCPA) enforcement action. As I said yesterday, this case will be studied for some time as a textbook example of bribery schemes used intentionally by a company to defraud its shareholders and circumvent the law. Indeed with the conduct seemingly going high up into the senior management ranks both with VimpelCom and its Uzbeki subsidiary Unitel LLC (Unitel) one might rightly ask how the company was able to secure such a favorable deal and why no individuals were prosecuted?

It would certainly seem that if Frederic Bourke was prosecuted and went to jail for conscious avoidance, the Board of Directors of VimpelCom engaged in similarly serious conduct. I suppose you might argue that they were deceived just like everyone else by the bribery schemes but given the higher duty of a Board member, one might think that would lead to higher scrutiny of transactions the Board itself recognized as high risk. The same would be true for all the other individuals identified in the resolution documents. VimpelCom may well be thanking their lucky stars that this case did not arise after the implementation of the Yates Memo, when the company would have been required to turn over all investigative materials on all Board members, executives, senior managers and others who were involved in the various bribery schemes.

The next issue is the amount of the overall penalty assessed against the company. VimpelCom itself received a Deferred Prosecution Agreement (DPA). Its subsidiary Unitel did plead guilty to one criminal count and for both parties conduct. The DPA noted that VimpelCom “received full cooperation and remediation credit of 25% for its substantial cooperation with the [DOJ]” and “received additional credit of 20% for its prompt acknowledgement of wrongdoing by Company personnel after being informed by the Offices of their criminal investigation, and the Company’s willingness to resolve promptly its criminal liability on an expedited basis”. Finally, VimpelCom did engage in extensive remediation so perhaps the answer is simply staring us in the face that even if you do not self-report a FCPA violation, the Department of Justice (DOJ) will give a significant discount if you immediately accept your criminal guilt and aggressively move towards remediation. Here I can only say kudos to the counsel involved in both the investigation and remediation. Perhaps it should be double kudos.

In addition to the other systemic issues I have discussed in previous posts, there is the issue of opinion of counsel letter, which VimpelCom both strategically used internally to justify its bribery schemes and then tried to use with the government as a defense to its bribery scheme. Generally put, if you have an opinion of counsel letter saying something is not a violation of the law, it should help to defeat any claim of intent, as required for a criminal FCPA finding. However, if your company hides facts it knows from your counsel that is prima facie case of intent and indeed may actually be proof of your criminal intent.

Even if you are not concerned about the criminal intent element, if you seek an opinion of counsel letter to demonstrate you have engaged in requisite due diligence, this is also sadly lacking. The management of third parties, such as the agents and resellers used by Unitel in this case, requires a full five-step process. It begins with a business justification, then questionnaires accurately and fully completed by the third party. Further, it must specifically identify both owners and beneficial owners. Next you must engage in an appropriate level of due diligence for the risk ranking and this due diligence must be evaluated. Thereafter a contract must be put in place with full compliance terms and conditions, specifically including audit rights. Finally, you have to manage the contract after it is executed. That means you must wed the contract requirements to the services delivered. None of these five steps were present in Unitel’s relationship with the foreign official

The other thing about an opinion of counsel letter is that it is no good if it is just plain wrong. BNP Paribas tried to rely on an opinion counsel letter to defend its money laundering operations in negotiation with the government. The company paid a $8.9 bn fine for its illegal acts which had been blessed in an opinion of counsel letter. Simply put, if the outside counsel gets it wrong; either because you failed to provide the facts known to your company or if the lawyers are simply negligent in rendering an opinion, the opinion of counsel letter is not worth the price of the paper it is written on.

Finally, for any outside counsel who might be reading this blog post, your obligation is to do more than simply take the facts presented by you as the gospel truth. If you do accept the facts presented, such as there are no government officials as owners or beneficial owners of a proposed third party partner, without performing some modicum of appropriate level of due diligence, you may open yourself up to a malpractice claim.

While I am on the subject of lawyers, a word about the VimpelCom in-house counsel who most likely committed criminal acts by limiting the information presented to outside counsel to fraudulently obtain a favorable opinion of counsel that the transaction passed FCPA muster. This is one of very few FCPA enforcement actions where company counsel was an active part of the bribery scheme. Assuming this lawyer is not located in the United States does not in any way ameliorate this conduct. I hope the appropriate bar organization or legal society where that lawyer practices is looking quite closely at his or her conduct.

Having questioned the final resolution and bashed the lawyers involved; let me end with a few words about how the system worked. This case was a stunning development in the area of multi-jurisdictional cooperation and investigation. The DOJ Press Release publicly thanked, “law enforcement colleagues within the PPS [Public Prosecution Service of the Netherlands], the Swedish Prosecution Authority, the Office of the Attorney General in Switzerland and the Corruption Prevention and Combating Bureau in Latvia, as well as Belgium, France, Ireland, Luxembourg, Norway and the United Kingdom.”

There are still other companies, which may be prosecuted for the corruption in Uzbekistan telecom industry. Further, the ill-gotten gains for the foreign officials involved in the corruption is being sought out as well. The DOJ Press Release also noted, “seeking forfeiture of $550 million held in Swiss bank accounts which represent proceeds of illegal bribes paid, or property involved in the laundering of those payments, to the Uzbek official by VimpelCom and two other telecommunications companies operating in Uzbekistan.  A previous complaint filed by DOJ seeks $300 million in proceeds of illegal bribes paid, or property involved in the laundering of those payments, by these companies to the same Uzbek official.”

Both the DOJ and Securities and Exchange Commission (SEC) are to be commended for concluding this matter. There were several other US government agencies involved, including the Inland Revenue Service – Criminal Investigation (IRS-CI), the IRS Global Illicit Financial Team, and Homeland Security Investigations (HIS), who assisted in the investigation.

The ramification of what began in 2005 in Uzbekistan may be with us all for some time.

 

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

CorruptionToday, I continue my exploration of the lessons to be learned from the VimpelCom Ltd. (VimpelCom) Foreign Corrupt Practices Act (FCPA) enforcement action. While it is clear that the company and its Uzbeki subsidiary, Unitel LLC (Unitel), engaged in an intentional bribery scheme and probably not even a best practices compliance program would have helped prevent the corrupt acts admitted by the company, there remain significant education to be mined from both VimpelCom’s and Unitel corrupt acts. Yesterday, I explored the role of VimpelCom’s Board of Directors and senior management in the failure, together with the fraudulent stock transfer. Today I want to look at the more mundane bribery schemes to instruct the Chief Compliance Officer (CCO) or compliance practitioner regarding what to look for going forward.

It must be emphasized, and even re-emphasized, that VimpelCom knew exactly what it was doing, worked very hard to hide it and lied internally about what it was doing. Of course it lied publicly as well via fraudulent books and records.

For review, Unitel funded its bribes to the Uzbeki government official through a variety of mechanism. The summary is as follows:

Bribery Scheme Amount of Bribe Paid Time Frame
Fraudulent Buy-Out $37.5MM March, 2007
Outright Cash bribe for 3G network $25MM November, 2011
False Consulting Invoices for 4G Network $2MM

$30MM

2008

2011

Corrupt Reseller Payments $10MM

$10MM

2011

2013

Total $114.5MM

Bribes Paid for 3G and 4G Networks

According to the Unitel Deferred Prosecution Agreement (DPA), the company paid bribes related to the acquisition of 3G frequencies in 2007. They were falsely recorded in VimpelCom’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses. In 2008 another bribe was falsely recorded in the consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services. Finally, the 2011 bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in their consolidated books and recorded as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies.

All of these bribes were paid to a shell company that was controlled by a daughter of a foreign official. The $2MM bribe paid, according to the DPA, was an additional obligation incurred “from the moment of payment for the acquisition of Unitel.” There was a vague attempt to hide this bribe for services but the in-house counsel involved noted that the “payout term of the amount was not specified” and the in-house attorney did “not know if all the services listed in the presentation [had] to be fulfilled as a condition for the payment.” There was a later attempt to create a sham contract for these services and backdate the contract to cover this bribe payment.

The payment of $30MM in 2011 was equally fraudulent on the company’s books and records. While it was allegedly for help in procuring some 4G licenses from the Uzbeki government, the company neither needed nor wanted these 4G licenses. The whole deal smelled so bad that one witness said, “I cannot see how I can be able to sign off on this…unless the legal FCPA analysis can clarify this and settle my concerns.”

So VimpelCom moved forward to obtain an opinion from an outside counsel. However it did so without providing outside counsel its own knowledge that a foreign official owned the shell company, through which the payments were directed, and did not provide information on the nature of the transaction or its high dollar value. It was so bad that the same witness cited above asked if “VimpelCom had received any official ‘ok’ from US Governmental body/SEC”? Unfortunately VimpelCom’s in-house counsel did not bother to provide accurate information for outside counsel to review and opine upon; coupled with an outside counsel who did not appear to know to ask the basic questions about the ownership structure or to investigate on its own. Finally, VimpelCom’s in-house counsel viewed its sham due diligence report as a legal defense if a FCPA allegation arose.

False Reseller Payments

After the previously noted payments, the corrupt foreign official was paid another $20MM in 2011 and 2013. This is far past conduct in 2005 and is much nearer in time to the present. This clearly demonstrates a company’s commitment to continued bribery and corruption. However, “Because of significant currency conversion restrictions in Uzbekistan and the inability to use Uzbek som (the Uzbek unit of currency) to obtain necessary foreign goods, UNITEL frequently entered into non-transparent transactions with purported “reseller” companies to pay foreign vendors in hard currency for the provision of goods in Uzbekistan. Typically, UNITEL would contract with a local Uzbek company in Uzbek som, and that Uzbek company’s related companies located outside of Uzbekistan would agree to pay an end supplier using the hard currency (usually, U.S. dollars).”

To pay these bribes Unitel entered into contracts for services with certain resellers that were neither necessary or where payments were made at highly inflated prices. Additionally, these contracts were made through contravention of the company’s internal controls as they “were approved without sufficient justification and bypassed the normal competitive tender processes. How fraudulent were these resellers? It was noted, “the office was “located in an old run-down house [building], without any signage” and “[t]here were no specialists [or technicians] there.” The employee recommended against using the reseller company as a contractor for UNITEL, as it was “not qualified and there are big risks . . . .” The employee who reported this was forced to “voluntarily resign”. Finally, when there was an attempt to audit these fake resellers, executives at Unitel stalled their own internal auditors and, when finally forced to present them for audit, claimed the “transaction was “not a reselling operation,” which resulted in the purported reseller company contract being removed from the audit.”

Failures

The failures up and down the VimpelCom and Unitel chain are simply mindboggling. Even when confronted with an employee who clearly understood and articulated that the transactions at issue were potential FCPA violations, senior management engaged in conscious avoidance to the violation. VimpelCom’s in-house counsel most likely committed criminal acts by limiting the information presented to outside counsel to fraudulently obtain a favorable opinion of counsel that the transaction passed muster. Basic internal controls were lacking or were completely over-ridden in selecting and using the resellers for services the company did not need or want.

Further, the company did not have any system for conducting, recording or verifying due diligence on third parties. The company did not require that consulting agreements or other contracts with third parties be for actual services or have any way to verify services were performed. There was a lack of appropriate controls around payments to single sourced vendors and a failure to audit third parties.

The VimpelCom case will be studied for some time for the failure of an entire compliance system.

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

FCPA InvestigationsIn what can only be termed a stunning resolution, last week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced a resolution of a long-standing Foreign Corrupt Practices Act (FCPA) probe into the Dutch telecom giant VimpelCom Ltd. (VimpelCom) for a spectacular, long-standing bribery scheme for the company to garner the rights to the mobile communications business in Uzbekistan. The multiple bribery schemes used appear to have been approved at the highest levels of the company and should provide a wealth of case studies on bribery schemes for the compliance professional going forward.

According to the DOJ Press Release, VimpelCom the world’s sixth-largest telecommunications company and its wholly owned Uzbek subsidiary, LLC Unitel (Unitel) conspired to violate the FCPA by paying more than $114 million in bribes to a government official in Uzbekistan. Unitel pled guilty today to one criminal count of conspiracy to violate the FCPA. The DOJ entered into a Deferred Prosecution Agreement (DPA) with VimpelCom, who agreed to pay a total criminal penalty of $230.1million, including $40 million in criminal forfeiture.  VimpelCom further agreed to implement rigorous internal controls, retain a compliance monitor for a term of three years, and cooperate fully with the Government.

The Press Release also stated, “In related proceedings, VimpelCom reached a settlement with the U.S. Securities and Exchange Commission (“SEC”) and the Public Prosecution Service of the Netherlands (“PPS”). Under the terms of its resolution with the SEC, VimpelCom agreed to pay $375 million in disgorgement of profits and prejudgment interest. VimpelCom agreed to pay the PPS a criminal penalty of $230,163,199.20, yielding a total criminal penalty of $460,326,398.40, and a global resolution amount of more than $835 million. SDNY and the DOJ agreed under the DPA to credit the criminal penalty paid to PPS, and the SEC separately agreed to credit the forfeiture amount paid to the United States. Thus, the total of U.S. criminal and regulatory penalties paid by VimpelCom is $795,326,398.40.”

In addition to the large fine and cooperation between multiple US government enforcement and investigatory bodies, there was significant involvement from overseas anti-corruption units, regulatory bodies and enforcement agencies. Preet Bharara, the US Attorney for the Southern District of New York (SDNY), and Leslie R. Caldwell, the Assistant Attorney General for the Criminal Division of the DOJ, both thanked the efforts of the US and International agencies for their assistance “in concluding the matter.”

The overall bribery scheme involved VimpelCom purchasing Unitel as an entrée into the Uzbekistan market. Contemporaneously with the acquisition of Unitel, which did have a legitimate business purpose, VimpelCom acquired another Uzbeki entitiy LLC Barkie Uzbekistan Telecom (Butzel) that was at least partially owned by an Uzbeki government official who had control or influence upon telecom regulation in the county. This foreign official hid their interest through a shell company that was known to VimpelCom. VimpelCom did not articulate a legitimate business reason for the Butzel deal.

After the acquisitions, Unitel funded its bribes to the Uzbeki government official through a variety of mechanisms, which I will explore more in upcoming blog posts. The Box Score summary (in honor of pitchers and catchers reporting to Spring Training last week) is as follows:

Bribery Scheme Amount of Bribe Paid Time Frame
Fraudulent Buy-Out $37.5MM March, 2007
Cash for 3G network $25MM November, 2011
Fake Consulting Invoices $2MM

$30MM

2008

2011

Fake Reseller Payments $10MM

$10MM

2011

2013

Total $114.5MM

Separately the SEC identified $38MM in charitable donations which had no adequate internal controls in place to determine if the donations were legitimate or violations of the FCPA.

Yet the company also engaged in an intentional program to falsify its books and records intended to conceal the bribe payments from its outside counsel which was asked to bless certain transactions as well as regulators who might ask difficult or troubling questions for some of the bribery schemes going forward. As set out in the VimpelCom Information these false books and records included, payments funneled through a shell corporation owned by the foreign officials and included the following bribery mechanisms:

  1. The bribe related to the partnership agreement in which Shell Company first purchased and then sold an indirect equity interest in Unitel was falsely recorded in VIMPELCOM’s consolidated books and records as the receipt of loan proceeds in 2007 to be repaid in 2009 and secured by shares in a VIMPELCOM subsidiary.
  2. The bribe related to the acquisition of 3G frequencies in 2007 was falsely recorded in VIMPELCOM’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses.
  3. The bribe in 2008 was falsely recorded in VIMPELCOM’s consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services.
  4. The bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in VIMPELCOM’s consolidated books and recorded as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies. Additionally bribes paid through a reseller “were falsely recorded in VIMPELCOM’S consolidated books and records as “professional services” expenses.

Interestingly there was no mention of how the case came to the DOJ or SEC. In Unitel’s criminal plea, there was no credit given for self-disclosure so it can only be assumed it came to the US government’s attention in some other manner. Apparently there were other telecom companies in on the bribery scheme in Uzbekistan as well. The DOJ Press Release noted, that it has “also filed a civil complaint today seeking forfeiture of $550 million held in Swiss bank accounts which represent proceeds of illegal bribes paid, or property involved in the laundering of those payments, to the Uzbek official by VimpelCom and two other telecommunications companies operating in Uzbekistan. A previous complaint filed by DOJ seeks $300 million in proceeds of illegal bribes paid, or property involved in the laundering of those payments, by these companies to the same Uzbek official. In that case, on January 11, 2016, United States District Judge Andrew L. Carter, Jr. entered a partial default judgment against all potential claimants other than the Republic of Uzbekistan. As alleged in the two complaints, the telecommunications companies paid $850 million in bribes to the Uzbek official to obtain and retain the ability to do business in Uzbekistan.”

Over the next few blogs posts, I will be exploring each of the bribery schemes and internal fraud engaged in by both Unitel and VimpelCom employees, managers, executives and board members which allowed this corruption to flourish for so long. The last word is probably best said by VimpelCom’s parent, the Norwegian company Telenor Group, who in turn is owned 54% by the government of Norway. Telenor is reportedly trying to divest its interest in VimpelCom. Indeed.

 

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

7K0A0032I have been exploring the PTC Inc. Foreign Corrupt Practices Act (FCPA) settlement this week. It included a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) with two Chinese subsidiaries and a Cease and Desist Order (Order) from the Securities and Exchange Commission (SEC). Today I want to review some of the lessons a Chief Compliance Officer (CCO) or compliance practitioner might apply to a FCPA compliance program.

PTC sustained both books and records and internal controls violations. The books and records violations occurred because the Chinese subsidiaries improperly recorded bribes on their books and records disguised as legitimate commissions and business expenses. These were then rolled up into the corporate parent’s books and records.

Further, PTC either did not have appropriate internal controls or if they did have them they were clearly inadequate. While a CCO should expect (or at least hope) that internal controls at locations outside the US are of the same effectiveness as internal controls within US business units and at the US corporate office; unfortunately, that might not always be the case. It is often the case that corporate level internal controls are stronger than those in foreign business units. That would certainly appear to be the case with PTC.

For each of the bribery schemes in place there was a failure of internal controls. In the scheme where the commission was decided after the sales was concluded, so as to know how much money to bake into the commission rate for the bribe payment, the Chinese subsidiary “sales staff reported to a PTC employee who had authority over the commission approval process.” So there was at least a control in place, yet that control was not effective because the PTC oversight did not work at all.

This also speaks to an internal control weakness that allows one corporate employee to have oversight over an approval process. This is simply not a sufficient control. First, and foremost, there should be multiple levels of controls for the commissions of third party representatives as they are the highest risk under the FCPA. Compound that with the known high risk of doing business in China and you can immediately spot the internal controls failure.

The breadth and scope of the Chinese subsidiaries bribery schemes also points up to an issue that Scott Lane, Executive Chairman of the Red Flag Group, has articulated. Lane talked about the line of sight for a CCO or compliance practitioner into the life cycle of a transaction to review it from the compliance perspective. Lane simply drew an imaginary line from his eyes forward to demonstrate the straightforward nature of his concept.

Why is such straight-line visibility lacking in the PTC case? It was because the ongoing nature of the transactions, literally across several years. As noted in the Order, “PTC-China employees spread the overseas travel payments over several contracts, each with its own COD budget. Because many deals with SOEs involved long term contracts that took several years to complete, the actual sightseeing trip sometimes occurred up to two to three years after the deal was negotiated.” Without such a line of sight, there may well be no manner for the CCO to ascertain if bribe payments were made later or somehow charged to different contracts.

One anomalous fact about this case was how long it seemed to linger around. Some of the conduct at issue began as far back as 2005. Apparently the corporate office in the US did discover the illegal conduct until, according to the Order, “PTC only discovered the improper payments to or for the benefit of Chinese government officials, while investigating complaints concerning a senior PTC-China salesperson.” It would certainly appear that multiple parties were asleep at the wheel for such corruption to go on for so long, even if PTC-China was actively working to hide and disguise its illegal acts.

Yet, it is the next part that is really a head scratcher. The Order notes, “PTC voluntarily self-reported the results of its internal investigation to the Commission and responded to information requests from the Commission staff. PTC did not, however, uncover or disclose the full scope and extent of PTC-China’s FCPA issues until 2014.” The NPA was even more detailed about the company’s lack of full disclosure when it said, “the Companies did not receive voluntary credit disclosure because, although the Companies, through their parent corporation PTC Inc., reported to the Office [DOJ] in 2011 certain misconduct identified through a then-ongoing internal investigation, they did not voluntarily disclose relevant facts known to PTC Inc. at the time of the initial disclosure until the Office uncovered salient facts regarding the companies responsibility for improper travel and entertainment expenses at issue independently and brought them to the Companies attention, after which the Companies disclosed information that they had learned as part of an earlier investigation.”

It cannot be determined from the resolution documents whether PTC got some incredibly bad legal advice or made a costly decision. However, for any CCO the clear message is that if you do self-disclose, you must not hide back any facts. This does not mean you have to waive privilege and turn over your entire investigation file, including opinions from your outside counsel. But you do have to turn over facts you uncover. For this lack of forthrightness, it cost the company in the range of seven figures in its settlement with the DOJ.

Yet, PTC did receive a partial credit of 15% “off the bottom of the Sentencing Guidelines fine range for their cooperation in “collecting, analyzing and organizing voluminous evidence and information for”” the DOJ. Moreover, the company also took significant remedial steps during the pendency of the investigation. According to the Order, PTC, “also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies worldwide, and implemented additional specific enhancements in China. These steps included: (1) reviewing and enhancing its anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer and a new compliance director in China; (3) expanding its other compliance resources in China, including hiring a new vice president of finance for Asia and adding additional legal staff in China; (4) hiring a new management team in China, including a new China President; (5) enhancing its FCPA training for employees; (6) severing its relationships with the business partners that were implicated in the FCPA violations and discontinuing the use of COD partners or business referral partners generally; (7) implementing a comprehensive due diligence program for all other business partners that includes a risk-scoring system operated by a third party vendor and that includes FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption certifications from sales staff; and (9) undertaking periodic compliance audits.”

I wanted to highlight three of these remedial steps that stand out. The first was the clean sweep of management form PTC-China and bringing in dedicated legal and compliance staff for the Chinese subsidiaries. The second was a risk-based scoring system for evaluating third parties and FCPA training as a part of the third party onboarding process. Many companies perform due diligence on third parties but this solution points to using that information to risk rank third parties for evaluation and management purposes. Finally, there were the quarterly anti-corruption certifications from the sales staff. This last point might be a very powerful and cost effective ‘stop and think’ control, particularly if they have to make the certification for any third parties which have assisted them in their sales efforts.

The PTC-FCPA enforcement action had much material for consideration by the CCO or compliance professional. Even if the events at issue are over 10 years old, it is an important reminder that everything old is new again and that revisiting your gifts, travel and entertainment, policies, procedures and internal controls would be a good exercise to engage in from time-to-time. It also reminds us all that having a compliance program, including appropriate internal controls, is only the starting point. A company must also do compliance for those policies, procedures and internal controls to be effective. As a final note, a company cannot hide facts from the government after they self-disclose. If you are not prepared to present all facts, you will only put yourself and your company in a worse position.

 

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

7K0A0116Yesterday I began a (now) three-part series on the Foreign Corrupt Practices Act (FCPA) 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 PTC-China).

Today I want to consider some of the lessons to be learned from these enforcement actions. The Chinese subsidiaries settled with the Department of Justice (DOJ) via a Non-Prosecution Agreement (NPA) and PTC settled with the Securities and Exchange Commission (SEC) via an agreed Cease and Desist Order (Order), through a SEC Administrative Proceeding. These two settlement mechanisms mean there was no judicial involvement as nothing was filed in federal court.

Funding the Bribery Schemes

The bribery schemes utilized by the Chinese subsidiaries provide some excellent lessons for any compliance practitioner. The foremost thing to understand is that any bribery scheme is fraud and that means the perpetrators are going to try and hide it. No current bribery scheme is done in the open, even if top management is in on the act, as with Jack Stanley at KBR in the Nigerian bribery scheme. Someone, somewhere is going to try and hide what he or she is doing. That is why there are three parts to any best practices compliance program: prevent, detect and remediate. Just as the employees out in the field have a legal obligation not to violate the FCPA, a corporation sitting back home in America has the obligation to work to detect any bribery its employees might be engaging in.

The Chinese subsidiaries used at least three separate schemes to finance the bribe payments. The first was through an inflated commission scheme where the commission rate for their third party business partners, who facilitated the transactions, was between 15% to 30%. The problem was that the commission rate was not fixed until at or near the time the transaction was completed. Although PTC-China reported up the chain to the US parent, there was nothing in the record that would suggest PTC did anything other than approve the commission rate.

A second bribe funding mechanism was through fraudulent billing of third party business partners. Here the scheme was more sophisticated as the Chinese state-owned entity representative would sign off that the third party business partner had delivered certain services and then the PTC-China would make payment to these corrupt third party business partners. Of course there was no independent verification these services were actually delivered by the third party business representative.

Finally, abandoning all pretense of a valid transaction, PTC-China moved to a model called “Completely Outsourced Deals or CODs” where the monies used to pay bribes or later the illegal gifts, travel and entertainment were disguised as COD expenses related to success fees or subcontracting payment for business partners. It was through the use of these CODs that PTC-China was able to bury the $1MM+ they spent on gifts, travel and entertainment.

The inflated commission or “success fee” paid to third party business representatives coupled with the fraudulent accounting scheme, exemplified by the CODs, were then used to fund the illegal gifts, travel and entertainment. As was stated in the NPA, “If the business partner was to provide subcontracted services such as information technology services, those services might either be included in the total commission or itemized separately using a line item”; both mechanisms were used to fund and pay bribes.

Gifts, Travel and Entertainment Under the FCPA

Bribing Chinese government officials and representatives of state-owned enterprises is a well known bribery scheme. The number of cases prosecuted for such actions is long in both time and the number of companies. The problem is that payment for such travel, lodging and expenses may run afoul of the prohibition against corrupt payments (or promises of them) made to obtain or retain business. The FCPA allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).

This affirmative defense, however, is notoriously hard to use because the travel and entertainment must be both reasonable and bona fide. Whatever you might think those two terms might mean; they cannot be defined as sightseeing tours across the US. In the NPA it specified, “Generally, the trips included one or two days of business activities at PTC headquarters in order to justify the trips, proceeded or followed by several days of sightseeing that lacked any business purpose and that was in fact the primary reason for the trip.”

There were a wide variety of illegal gifts provided by PTC-China as well. Gift giving is well known in China and certainly appropriate in some circumstances. Indeed PTC seemed to appreciate this as it had written policies and procedures requiring the following: “$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 problem, as noted in the SEC Order, was “These gifts were improperly recorded as legitimate business expenses.”

Tomorrow, I will review the accounting records violations, including both the internal controls and the books and records failures. I will also have some thoughts on the internal investigation and your conduct with the DOJ after you have self-disclosed a potential FCPA violation. Finally, I will consider the Deferred Prosecution Agreement (DPA) the SEC executed with former PTC-China employee, Yu Kai Yuan, in conjunction with settlement.

 

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© Thomas R. Fox, 2016