The DOJ and the SEC resolved another FCPA action centered on inaccurate books and records and inadequate internal controls. Panasonic Corporation and Panasonic Avionics Corporation or PAC, a wholly owned subsidiary, agreed to pay over $280 million to resolve FCPA charges with the DOJ and the SEC. The firm did not self-report but did cooperate after receiving a subpoena from the SEC and terminated several employees involved in the conduct. The firm also took remedial steps which included installing new procedures. A corporate monitor was installed because the procedures are untested. U.S. v. Panasonic Avionics Corp., No. 1:18-cr-00118 (D.D.C. Filed April 30, 2018); In the Matter of Panasonic Corporation, Adm. Proc. File No. 3-18459 (April 30, 2018).
Panasonic’s ADRs were traded on the NYSE until mid-2016. PAC is a U.S. based, wholly owned subsidiary that designs, engineers, manufactures and sells in-flight entertainment systems and global communications services to airlines and others.
The actions here trace to 1986 when PAC retained Sales Rep to assist with contract negotiations. Although Sales Rep had no qualifications for the job he served over the years as the exclusive representative for all PAC sales to over 50 airlines in the Middle East, Africa and Central and South Asia. Many of the firms were state owned. After a period his sons assisted hm. Sales Rep was an employee but payments to him were made through his British Virgins Islands entity. From 2007 through 2016 Sales Rep was paid over $184 million in commissions.
Government Airlines was one of PAC’s most significant customers. In 2004 PAC and Government Airlines executed a 10 year Master Product Supply Agreement which ultimately grossed over a billion dollars for the firm. Sales Rep helped negotiate the deal. Government Airlines appointed its employee – Government Official – to serve as the primary point of contact. Government Official had substantial authority regarding the purchases of Government Airlines.
In 2006 Sales Rep and Government Official began negotiating Amendment One to the master agreement. During the negotiations Sales Rep provided assistance to Government Official in obtaining clients for a private consulting firm. By 2007 the two men were also negotiating a Second Amendment. Both Amendments were executed in 2007. The two Amendments brought over $353 million in additional business to PAC.
During the negotiations of the two deals Government Official sought and obtained personal benefits from Sales Rep. For example, Government Official requested and obtained a position with the firm at an annual salary of £150,000 and other benefits. While a PAC executive cautioned about the arrangement, it was done. The negotiations were, however, concealed from Government Airline. The payments were channeled through an unrelated third-party vendor that prepared product manuals for PAC.
Government Official not only wielded significant influence, he furnished Sales Rep with valuable information. For example, he furnished confidential internal information on negotiating additional business, advising Sale Rep on how to break up the cost of a particular item into components to conceal the true cost. This permitted PAC to obtain higher profit margins. Government Official was ultimately paid about $875,000 for little to no work.
While PAC’s internal audit group flagged the payments to Government Official as high risk, they continued. PAC continued to engage Sales Rep until 2016 despite the fact that the firm learned in 2015 that he had destroyed electronic data on devices provided to him by the firm. This included communications and negotiations with Government Airline and Government Official that took place after the firm received a subpoena from the SEC.
From 2007 through January 2014 the firm also engaged various consultants. They were paid through the Office of the President which had a budget controlled by PAC Executive One. Consultant One, retained through this process, provided confidential information to the firm. Consultant Two was retained to prevent the person from working for a competitor. All of these expenses were falsely recorded as legitimate business expenses for a vendor. These practices continued during the period despite warnings from the internal auditors. The firm also used sales agents during the period without conducting any meaningful due diligence. PAC ultimately paid about $1.76 million to purported consultants, including Government Official, who provided few if any legitimate consulting services.
Finally, in the first quarter of 2012 the firm prematurely recorded $82 million from Amendment Six to the master agreement. The negotiations for that amendment were not completed until after the close of the second quarter. The auditors had told the firm that to recognize the revenue in the first quarter under GAAP the deal had to be done by quarter end. Despite a lack of documents the firm told the auditors it was in fact completed by the end of the quarter. The revenue was improperly recorded. This resulted in the firm overstating pre-tax income by about 9% or $38.5 million.
The SEC’s Order alleged violations of Exchange Act sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 30A. The section 10(b) charge was added in view of the premature revenue recognition. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Respondent also agreed to pay disgorgement of $126,900,000 and prejudgment interest of $16,299,018.93.
PAC resolved the proceedings with the DOJ by agreeing to pay a criminal penalty of $137 million, about 20% below the bottom of the sentencing guidelines. The firm entered into a deferred prosecution agreement. It was charged with one count of causing the books and records of its parent to be falsified. A monitor will serve for two years, followed by a third year of self-reporting.