On February 16, 2016, the US Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") announced their newest settlements regarding violations of the US Foreign Corrupt Practices Act ("FCPA"). The DOJ entered into a Non-Prosecution Agreement that included a USD $14.5 million penalty, and the SEC entered into an administrative order requiring disgorgement and pre-penalty interest of USD $13.7 million, with PTC, Inc. ("PTC"), a Massachusetts-based provider of technology services. PTC admitted to making improper payments in violation of the FCPA and violating its books and records requirements in activities ranging from China to the United States. In addition, the SEC entered into its first-ever Deferred Prosecution Agreement ("DPA") with an individual Chinese citizen and employee of PTC. The DPA is the most significant aspect of the PTC enforcement: (i) showing the increased risk to individual employees as both the DOJ and SEC emphasize a focus on individual culpability under the FCPA, and (ii) showing US authorities' intention to pressure low-level managers to provide evidence and cooperation in exchange for DPAs, an eforcement strategy outlined in the DOJ's Yates Memo. This represents a new tactic in FCPA investigations and may entail complications under foreign legal systems, as described below.
The SEC's settlement with PTC is in many ways routine for China-based FCPA enforcement actions. PTC admits to providing improper benefits to officials of Chinese state-owned enterprises ("SOE") to influence their award of business. For instance, PTC provided international trips to SOE officials with little to no business purpose and which were intended to influence the award of contracts by these officials. Additionally, PTC disguised these payments in its books and records by including the costs of travel in "success fees" or "service fees" paid to business partners that helped arrange meetings with SOE officials. PTC's admissions parallel earlier FCPA enforcement actions in China involving provision of international travel to government officials and highlight that this issue continues to present risks in China.
Of greater note is the SEC's simultaneous DPA with Yu Kai Yuan ("Yuan"), a Chinese citizen employed as a sales executive at PTC from 1996-2011. In his role at PTC, the SEC found that Yuan caused PTC to violate both the FCPA's (i) books and records requirements, failing to record payments in reasonable and accurate detail, and (ii) internal controls requirements, failing to ensure payments were made with management's specific authorization and in accordance with accepted accounting principles. Yuan is the first individual to receive a DPA from the SEC, in China or elsewhere. For a term of three years, Yuan agrees to cooperate "fully and truthfully" with the SEC's investigation of PTC, including the production of non-privileged documents, appearing for interviews, testifying at judicial proceedings, and complying with securities laws and regulations during the period of the DPA. If Yuan is found to have complied with the DPA at the conclusion of three years, the SEC agrees not to bring any enforcement action.
Yuan's DPA highlights the continued emphasis by US authorities on individual culpability in FCPA investigations. Both the DOJ and SEC have made numerous statements in recent years regarding their intent to seek enforcement actions against individual employees as well as companies for FCPA violations, a position emphasized in the DOJ's Yates Memo issued in September 2015. And true to this position, both the DOJ and SEC have markedly increased their enforcement actions against individuals over the past 7-8 years in the anti-bribery space.
Yuan's DPA also reflects a new strategy outlined in the Yates Memo: offering lenience to low-level management in exchange for evidence and cooperation, yet such cooperation may raise complications under foreign legal systems. The DPA requires that Yuan cooperate extensively with US authorities in ways that may be deemed unenforceable under Chinese law. Chinese authorities regard judicial matters and foreign investigations through a lens of national sovereignty: requests for information must normally be routed through diplomatic and judicial channels. For instance, foreign lawyers and foreign court officials are generally prohibited from carrying out depositions for foreign trial proceedings within China absent consent from Chinese authorities. In light of these burdens, Chinese nationals typically travel outside China for such depositions, a practice to which Chinese authorities have thus far not objected.
Additionally though, Yuan's cooperation under the DPA could raise concerns under other Chinese laws, such as China's State Secrets Law that impose sweeping restrictions on the transfer of information outside of China. At this stage, it is unclear how Chinese authorities will react to the requirements of Yuan's DPA. The SEC's DPA with Yuan may be a signal of a new trend in FCPA enforcement: offering DPAs to lower-level management in exchange for extensive cooperation and evidence. While a common tactic in US white collar criminal investigations, the Yates Memo marked a shift in applying such tactics globally for FCPA enforcements. Nonetheless, such tactics may raise complications when applied in foreign legal jurisdictions.