Another SEC FCPA Case – And A Strong Message For Issuers
Last week, the Commission filed a settled administrative proceeding based on alleged violations of the FCPA. It named Faro Technologies, Inc. as a Respondent. In the Matter of Faro Technologies, Inc., Adm. File No. 3-13059 (June 5, 2008). One more settled FCPA bribery case might seem relatively routine at a time when the SEC and DOJ are focusing on enforcement in this area. There is more to this case however, than might first appear.
The facts are straightforward. According to the Order, Faro Technologies is a software development and manufacturing company based in Florida. In early 2003, the company established Faro-China, a wholly owned subsidiary, to sell its products in China. Previously, the company had sold products in China through a distributor. Sales in the subsidiary were directed by the Sales Director. The Sales Director hired a former employee of the company’s Chinese distributor as the Country Sales Manager.
Subsequently, the Country Sales Manager communicated to three Faro officers, including the Sales Director, a request to do business the “Chinese way,” that is, to pay kickbacks to potential customers. The Faro officers consulted with their Chinese counsel who informed them that such payments may well violate China’s anti-bribery laws. Accordingly, the Faro officers told the Sales Director and Country Manager not to make the payments.
Nevertheless, between 2004 and 2005, the Sales Director authorized the Country manager to make the illegal payments. The Sales Director also instructed Faro’s China sub staff to alter account entries in an effort to cover up the payments.
In February 2005, a new Faro officer e-mailed a news article to all of the international business units. The article described the prosecution of another U.S. company for paying bribes in China. The e-mail noted that they should take appropriate precautions to comply with U.S. law. The clipping was specifically directed to the Sales Director with instructions to have it translated and distributed to the staff at the Chinese subsidiary. After the dissemination of the article, the Sales Director reiterated his authorization for the payments.
Based on these facts, the SEC filed a cease and desist proceeding against the company. That action was resolved with the entry of an order directing that the company cease and desist from violations of the anti-bribery sections and requiring the payment of disgorgement, prejudgment interest and compliance with its undertakings regarding retention of a monitor.
Clearly Faro initially took the right steps. They obtained a legal opinion from local counsel and, when it appeared the payments were illegal under local law, directed that they not be made. Later, the company reinforced its instruction with the circulation of the news clip.
Nevertheless, the Commission exercised its discretion to charge the company, concluding that its agents had in fact paid the bribes and that the company had inadequate internal controls and books and records. No doubt the bribes were paid, although one might question the prosecutorial decision here.
Even more suspect is the internal controls conclusion. The company had rogue agents that disregarded repeated directives and concealed the bookkeeping entries. The Commission’s conclusion here seems like little more than fraud by hindsight, which is no fraud at all. See, e.g., Denny v. Barber, 575 F.2d 465, 470 (2nd Cir. 1978) (classic statement of Judge Friendly rejecting fraud by hindsight); see also Higginbotham v. Baxter International, Inc., 495 F.3d 753, 760 (7th Cir. 2007) (“That’s no news [that the controls cannot prevent fraud]; by definition, all fraud demonstrate the ‘inadequacy’ of existing controls, just as all bank robberies demonstrate the failure of bank security and all burglaries demonstrate the failure of locks and alarm systems”). So too, the payment of the bribes at the China sub – covered by phony entries – standing alone says little about the adequacy of the internal controls and the books and records.
There is more, however. The SEC also concluded that Faro simply had not done enough to prevent FCPA violations: “During the period of the improper payments described above, Faro provided no training or education to any of its employees, agents, or subsidiaries regarding the requirements of the FCPA. Faro also failed to establish a program to monitor its employees, agents, and subsidiaries for compliance with the FCPA.” This finding can only be viewed as critical to the prosecutorial decision making process here. This is particularly true in view of the fact that the company was doing business in a high risk country such as China and its employees had raised the issue of doing business “the Chinese way.” See also SEC v. Lucent Technologies, Civil Action No. 07-092301 (D.D.C. Dec. 21, 2007) (settled FCPA action in which SEC noted lack of training).
Any issuer reading this opinion should look beyond the booking findings and focus on the clear message: FCPA training and compliance programs are essential for those doing business overseas, particularly in areas of high risk.