On February 16, 2016, the SEC announced its first ever deferred prosecution agreement (“DPA”) with an individual in a Foreign Corrupt Practices Act (“FCPA”) case. As part of a settlement in which a Massachusetts-based software company, PTC Inc., and two of its Chinese subsidiaries (collectively “PTC”) agreed to pay more than $28 million to settle civil and criminal actions relating to violations of the FCPA, the SEC also agreed to defer FCPA charges against a former employee of one of the Chinese subsidiaries in return for the “significant cooperation” he provided during the government’s investigation.
It is somewhat curious that the SEC gave a DPA to the individual here, a sales agent. DPAs are formal written agreements in which the government agrees to forego an enforcement action against an individual or company. Such agreements typically involve the potential defendant’s cooperation in the investigation and subsequent proceedings, payment of compensation to the alleged victims and evidence of remorse. As part of the cooperation agreement, potential defendants also often agree to comply with express prohibitions laid out by the government and to take steps to create internal monitoring procedures to prevent future violations.
While criminal prosecutors have long used DPAs to encourage individuals to cooperate in investigations, the SEC first used a DPA as a means to settle an enforcement action against a company in 2011 in an FCPA case. At that time, the SEC announced that the availability of DPAs was part of a broader program to encourage and reward prompt investigation, reporting and “extraordinary cooperation” by corporations and individuals. Encouraging such cooperation in FCPA matters can be particularly important, as these cases typically involve the review of detailed financial records, e-mails and other documents in numerous jurisdictions, often in languages other than English, which can present substantial challenges to government investigators. Given that, the SEC may have handed out the DPA here to reward particular information that this sales agent could give against the company that could not otherwise be obtained. In this case, the individual signed his DPA several months before the settlement with the company was announced.
As to the actual settlements between PTC and the SEC and DOJ, the government alleged that PTC’s subsidiaries routinely relied on local third-party “business partners” in China to identify prospective customers, including state-owned entities (“SOEs”), assist in making sales and provide additional services, including information technology services. Between at least 2006 to 2011, these business partners arranged more than $1 million in improper travel for Chinese government officials working for SOEs, including tourist and sightseeing visits to New York, Las Vegas, San Diego, Los Angeles and Honolulu. In addition, employees of PTC’s subsidiaries provided more than $270,000 in improper gifts and entertainment to Chinese government officials working for SOEs, including small electronics, gift cards, wine and clothing. PTC improperly recorded these payments as legitimate business expenses or commissions. The SEC estimated that PTC gained approximately $11.8 million in profits from contracts with SOEs whose officials received the improper travel, gifts and entertainment.
In addition, the SEC faulted PTC for failing to identify and stop the illicit payments to Chinese government officials and failing to take effective remedial measuresdespite conducting compliance reviews in its Chinese subsidiaries during 2006, 2008 and 2010 that included investigating possible corruption involving its business partners. Specifically, the SEC alleged that PTC and its subsidiaries failed to conduct adequate due diligence on its business partners, failed to enact and enforce an adequate compliance policy and program and failed to maintain adequate internal accounting controls.
This recent settlement demonstrates the SEC’s continued focus both on FCPA violations and on the importance of companies’ anti-corruption compliance programs. (See our previous alert.) Given this continued focus, particularly in light of the SEC’s continually expanding Whistleblower Program, it is vital for companies to ensure that they have vigorous compliance programs, including anti-corruption measures in place to prevent and detect potential violations and to respond immediately in order to mitigate penalties that may result from inadvertent violations.
Finally, we note that PTC Inc. first disclosed the suspected FCPA violations in its August 2011 quarterly report, in which it also stated that the company had voluntarily disclosed the matter to the SEC and DOJ. While the defendants in this case were ultimately able to avoid both civil charges and criminal prosecution by entering into non-prosecution agreements and DPAs with the government and paying $28 million, the hidden costs of these settlements were the money, time and resources spent on attorneys, forensic experts and remedial measures in the five years before inking the final deal.