The Vegas Sands FCPA Action: Good Controls are Good Business
FCPA cases typically center on the payment of bribes to obtain or retain business. The bribes paid are usually small in comparison to the profits achieved – the obvious motive for the wrongful conduct. The profits of course are lost in settling with the Commission which requires that they be disgorged. Yet in the SEC’s most recent FCPA case there was no disgorgement – there were no profits, only losses. The reason: An ineffective senior management combined with poor controls and a high risk environment spawned large losses. The lesson: Strong internal controls and FCPA policies are an asset which does more than avoid legal liability, they reflect good management and foster the effective use of assets while helping to avoid costly mistakes and waste. In the Matter of Las Vegas Sands Corp., Adm. Proc. File No. 3-17204 (April 7, 2016).
Respondent Las Vegas Sands owns and operates resorts and casinos in the U.S. and Asia through a number of subsidiaries. The firm’s holdings include Sands China Ltd. whose shares are listed on the Hong Kong exchange, Venetian Macao Ltd. which operates in Macao, Venetian Hotel Co. Ltd. which is in the construction business, and Venetian Hotel Marketing Co., Ltd. which provides hotel management and related services.
Over a period of five years beginning in 2006 Las Vegas Sands transferred in excess of $62 million to its China and Macao based operations in addition to other payments made for entertainment and similar items. Generally the transfers were made without proper authorizations and/or documentation. Overall there were significant losses.
Vegas Sands operated in Macao through its partially publically traded subsidiary, Sands China. It extended its operations into the PRC. Since Vegas Sands was in the casino business its operations were restricted in China. In 2006 the Vegas Sands President of Asian Development established a relationship with a Consultant who claimed to be a former Chinese government official who could assist with operations in the PRC. The Consultant established a number of business entities in that country which were used interchangeably.
In 2007 the Vegas Sands President sought to acquire a professional basketball team in China. The Consultant established an entity to acquire a team which played in the Chinese Basketball Association or CBA, an organization under the PRC State General Administration of Sports. The organization which would not permit a gaming entity to own a team. Over $6 million was transferred to the newly created entity. When the Vegas Sands Senior Director of Finance questioned the transaction and attempted to investigate he was in effect blocked by the Consultant.
Later an international accounting firm attempted to investigate the transaction. Before its inquiry was halted, the firm determined that over $700,000 was unaccounted for the funds had been transferred to the Consultant. Nevertheless, over $5 million in additional payments were transferred to the Consultant, supposedly for the team. The funds were booked as a consultancy fee.
The Vegas Sands president also sought to develop a non-gaming resort in a new resort district in China. Arrangements were made to participate in a joint venture with an SOE whose Chairman was believed to be influential. The Chairman of the joint venture was introduced by the Consultant. When the joint venture did not move forward the Vegas Sands President authorized using the Consultant as “beard” to purchase a building in Beijing from the SOE – it would not do business with a gaming company. Virtually no due diligence was done on the proposed property acquisition. Nevertheless, between July 2007 and February 2009 about $43 million was transferred to one of the Consultant’s entities to acquire the real estate. The payments were not approved by a Vegas Sands employee with sufficient authority.
When a portion of the building was not acquired the Consultant made arrangements to obtain title despite concerns that improper payments were made to acquire it. In early 2008 about $3.6 million was wired to an entity affiliated with the Consultant to lease the property. The Beijing building was managed by a property manager affiliated with the SOE. A fee of $900,000 was paid to an entity affiliated with the Consultant.
In July 2008 the Consultant transferred control of the entity which owned the real estate to the Vegas Sands under a series of contracts. Later those agreements were effectively rescinded in exchange for a promissory note valued at about $43 million. The project was then shuttered. In total the company had transferred about $61 million in connection with the deal and received about $43 million in settlement.
The Macao operations suffered from similar control deficiencies. In 2007, for example, Vegas Sands set up a high-speed ferry business to transport customers from China and Hong Kong to Macao. An arrangement was made with a recently formed Ferry Company that was partially owned by an older state owned firm. The arrangement included business entertainment. In 2010 the internal audit department concluded that most of the budget went to government officials. That included “red envelops” – envelops of cash distributed at Chinese New Year.
While there were policies and procedures in place regarding the retention and use of professional services they were ignored. In 2009, for example, an outside attorney submitted a bill for Expenses in Beijing in the amount of $25,000. No documentation was furnished. The bill was paid. Later the attorney stated the funds were for an unpaid consultant to the Vegas Sands.
The comp policies of the Vegas Sands were also either ignored or ineffective. The Vegas Sands provided complimentary items and services such as restaurant meals and hotel stays to actual and potential gaming customers and business contacts. Employees had set limits for what they could authorize. Non-gaming comps required approval from a vice president and the identification of the recipient. Frequently employees failed to record the comp recipient’s name as required which resulted in an inability of the firm to track them. This precluded the identification of comps that went to government officials or Politically Exposed Persons. The Order alleged violations of Exchange Act Section 13(b)(2)(A) and 13(b)(2)(B).
In resolving he case the Commission considered the cooperation and remedial acts of the Respondent. The firm’s audit committee provided significant cooperation to the staff by sharing in real-time the facts discovered during the course of its internal investigation and furnishing information that otherwise would not have been available. Translations of certain documents were also made available as well as a large volume of business, financial and accounting documents. Remedial measure included terminating those involved and retaining a new general counsel and heads of internal audit and compliance. The company also established a new Board of Directors Compliance Committee and increased the compliance and accounting budgets while updating its Code of Business Conduct, Anti-Corruption policy and other polices and procedures.
The firm consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $9 million. In addition, it agreed to implement a series of undertakings which include the retention of an independent consultant for a period of two years. The consultant will review and evaluate the internal controls and financial reporting policies of the firm. The consultant will also issue a written report within six months that will be furnished to the staff. The company will adopt the consultant’s recommendations.