Travel, Entertainment, Gifts Yield DOJ, SEC FCPA Charges Again
Travel, entertainment and gifts tied to inadequate controls are recurrent themes in FCPA cases. Many of these cases involve the use of agents and center in China. Each of these recurrent items appear in the most recent FCPA actions brought by the DOJ and the SEC. Those center on PTC Inc. and its Hong Kong and Shanghai subsidiaries which acted as a unit (collectively the “China subsidiary”). In the Matter of PTC Inc., Adm. Proc. File No. 3-17118 (February 16, 2016).
PTC designs, manufactures and sells Product Lifecycle Management System software – software that manages a product from design through distribution. The firm is based in Massachusetts. The parent company exercised substantial control over its China subsidiary, including setting its financial goals and at times reviewing proposed transactions.
The China subsidiary routinely hired third parties it called business partners. Those firm were used to find deals. Many of those deals involved Chinese state owned enterprises. The partners were paid commissions. Despite the risk of these arrangements, PTC failed to conduct a “sufficient review of the business capabilities or ethics programs of these business partners,” according to the SEC’s Order.
During contract negotiations with SOEs, Chinese government officials and the business partner often requested that they be furnished with overseas “training.” Frequently that training involved a one day visit to the firm’s headquarters which was either preceded or followed by significant travel and entertainment of the officials by firm employees. That travel included items such as trips to New York City, Washington, D.C., Los Angeles and Honolulu. Leisure activities, sight seeing and other activities were included in the trips which at times lasted for several days.
The trips were frequently paid out of the commissions of the business partner. The China subsidiary was given documentation for the commissions by the business partner. The China subsidiary tracked the overseas travel payments made by business partners to or for the benefit of firm SOE customers on spreadsheets kept separate from its books and records.
From 2009 through 2011 the China subsidiary sales staff also provided at least $274,313 in gifts and entertainment directly to Chinese government officials. The value of the gifts ranged from $50 to $600 in violation of the firm’s corporate governance and internal controls policies. Frequently, the gifts were items such as small electronics, gift cards, wine and clothing. Overall from 2006 through 2011 the Chinese subsidiary provided improper payments totaling $1.5 million while earning about $11.85 million in profits from sales contracts with SOEs whose officials received the improper payments.
During the period PTC failed to devise and maintain an adequate internal accounting controls system. Specifically, in 2006, 2008 and 2010 the firm investigated compliance issues at the China subsidiary but failed to identify the issues. At the same time the firm failed to undertake periodic comprehensive risk assessments of the China subsidiary and did not have an independent compliance staff. The firm thus failed to properly vet business partners, police for corrupt payments and monitor and supervise the senior sales staff at the China subsidiary.
In 2011 the firm discovered the improper payments. It promptly conducted an internal investigation and, upon completion, self reported the results to the Commission. The firm also took a number of remedial steps including terminating the senior staff members at its China subsidiary who were involved in the improper conduct and other steps.
The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter with the SEC, the firm consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay disgorgement of $11,858,000 along with prejudgment interest. A penalty was not imposed in view of the terms of the settlement with the DOJ. At the same time an employee of the China subsidiary entered into the Commission’s first deferred prosecution agreement with an individual.
To resolve criminal charges with the DOJ, PTC entered into a non-prosecution agreement. The firm also agreed to pay a $14.54 million penalty.
Program: The Second Annual Dorsey Enforcement Forum will be held on Wednesday February 24, 2016 beginning at 1:00 p.m. Three panels of experts will discuss: 1) Trends in SEC enforcement; 2) FERC and CFTC market manipulation actions; and 3) Current developments in Financial Services Regulatory Enforcement. The program will be video cast, webcast and live in Washington, D.C. at the Willard Office building, 1455 Pennsylvania Ave. Lunch will be available beginning at noon; open bar at the conclusion of the program. No charge but registration is required (here) or if attending in person by emailing my assistant at Romadan.hanan@dorsey.com