In its first enforcement action of 2016, the U.S. Department of Justice ("DOJ") has announced that two Chinese subsidiaries of PTC Inc. ("PTC"), a Massachusetts-based software company, agreed to pay $14.54 million as part of a non-prosecution agreement to resolve allegations that the companies violated the U.S. Foreign Corrupt Practices Act ("FCPA") by unlawfully providing recreational travel to Chinese government officials. In a related proceeding, PTC agreed to pay the U.S. Securities and Exchange Commission ("SEC") $11.86 million in disgorgement for the failure to keep accurate books and records and maintain adequate controls to detect and prevent the improper payments during several years. This is the SEC's fourth FCPA resolution of 2016 and the second involving conduct in China.
According to the DOJ, the two Chinese subsidiaries arranged and paid for employees of various Chinese state-owned enterprises to travel to the United States "ostensibly for training at PTC's headquarters in Massachusetts, but primarily for recreational travel to other parts of the United States, including New York, Los Angeles, Las Vegas and Hawaii." The two companies allegedly paid more than $1 million through its business partners to fund these trips during a timeframe when the companies entered into contracts worth more than $13 million with the Chinese state-owned entities. The Chinese subsidiaries apparently admitted that the cost of the largely recreational trips was routinely hidden in invoices for software sales to the state-owned companies whose employees went on the trips.
We have routinely cautioned clients about the need to maintain adequate controls over travel and entertainment expenses. While the FCPA allows companies to pay for reasonable and bona fide travel expenses for a foreign official, such expenses are permitted only if they relate to the promotion, demonstration or explanation of a company's products or services, or to the performance of a contract with a foreign government or agency. Trips that are not primarily for business purposes are viewed by the DOJ as potential violations of the FCPA's anti-bribery provisions. Just what the DOJ considers to be reasonable expenses for this affirmative defense can be gleaned from the DOJ and SEC's Resource Guide to the FCPA, which is available here.
There are several key takeaways from the PTC case:
- Companies should have clear policies that require any travel and entertainment for foreign officials to be (i) reasonable, i.e. not first class, and (ii) primarily related to the promotion, demonstration or explanation of goods or services or to the performance of a contract. Proper approval mechanisms should be in place to approve and monitor any such travel or entertainment. Expenses that are too lavish or for trips that are largely recreational, could violate the FCPA's anti-bribery provisions.
- Companies should maintain adequate controls to monitor and prevent any violations. The SEC alleged that the books and records of the two subsidiaries "were consolidated into PTC's books and records, thereby causing PTC's books and records to be inaccurate."
- In addition to the corporate resolution, the SEC entered into a Deferred Prosecution Agreement ("DPA") with former employee Yu Kai Yuan. The DPA postpones possible civil bribery charges against Mr. Yuan for three years in recognition of his cooperation with the agency's investigation. This is the first-ever individual DPA entered into by the SEC in an FCPA matter. In September 2015, the DOJ made clear its intent to pursue charges against individuals for FCPA violations through the issuance of the Yates Memorandum, our take on which can be found here. This resolution – perhaps – signals the SEC's intent to follow in the Yates Memorandum's proclamation of individual accountability while simultaneously providing cooperation credit through use of the DPA vehicle.
- The DOJ continues to stress voluntary disclosure and full cooperation. As part of the non-prosecution agreement, PTC agreed to pay the criminal penalty, to continue to cooperate with the DOJ, to enhance its compliance program and to report to the DOJ on the enhanced program. The DOJ cited a number of factors in entering into the PTC resolution, including, among other factors that the two subsidiaries "did not receive voluntary disclosure or full cooperation credit because, at the time of its initial disclosure, it failed to disclose relevant facts that it had learned in connection with a prior internal investigation" and only disclosed those facts after the DOJ "uncovered additional information independently" and brought them to the attention of the subsidiaries. Once a company decides to make a voluntary disclosure, the DOJ will expect a full report of all relevant facts known by the disclosing party. Failure to do so will cut against credit that might otherwise be earned for a voluntary disclosure.