The United States Securities and Exchange Commission (SEC) announced last week that Massachusetts-based technology company PTC Inc. (PTC) and its Chinese subsidiaries will be required to pay more than $28 million in fines to settle parallel civil and criminal actions involving violations of the Foreign Corrupt Practices Act (FCPA). PTC is the second technology company this month to be found to have violated the FCPA for, among other reasons, failing to have effective internal controls and maintain accurate books and records, in this case connected with improper gifts and entertainment as well as excursions to tourist destinations unrelated to the business purpose of the travel.
The SEC’s investigation revealed that two of PTC’s Chinese subsidiaries provided non-business related travel and other improper payments to a number of Chinese government officials in an effort to win business. Chinese officials were compensated directly and through third-party agents for sightseeing and tourist activities in places such as New York, Las Vegas, San Diego and Honolulu. Employees of the Chinese subsidiaries also provided improper gifts and entertainment to government officials, including electronics such as cell phones.
The improper payments were disguised as legitimate commissions or business expenses in the company’s books and records. According to the SEC, “PTC failed to stop illicit payments despite indications of potential corruption by agents working with its Chinese subsidiaries, and the misconduct continued unabated for several years.”
The SEC’s order states that PTC violated the anti-bribery, internal controls, and books and records provisions of the FCPA and the Securities Exchange Act of 1934 (Securities Exchange Act). PTC agreed to pay $11.858 million in disgorgement and $1.764 million in prejudgment interest to settle the charges. PTC’s two Chinese subsidiaries agreed to pay a $14.54-million fine in a non-prosecution agreement.
In the settlement, the SEC took into account PTC’s self-reporting of its misconduct and the significant remedial activities that the company has since undertaken.
Deferred Prosecution Agreement
As part of the enforcement action, the SEC entered into its first deferred prosecution agreement (DPA) with an individual, extending this practice beyond corporations accused of violating the FCPA. A DPA is an agreement available under U.S. law and practice which rewards cooperation in a SEC investigation by deferring further enforcement action provided there is a commitment by the accused to undertake the necessary remedial steps and to cooperate with the enforcement authorities throughout the period of the deferred prosecution.
Here, the deferral period is for three years based on the significant cooperation provided during the investigation by Yu Kai Yuan, the former employee of PTC’s Chinese subsidiary.
Relevance to Canadian companies
Provisions similar to those in the FCPA prohibiting travel excursions unrelated to business and the giving of extravagant gifts and providing lavish entertainment are also found in the Corruption of Foreign Public Officials Act (CFPOA), the legislation that governs Canadian companies and their officers and employees. The CFPOA also has a requirement for maintaining books and records applicable not only to publicly listed companies but also private companies. Canadian public companies listed on a U.S. stock exchange are potentially subject to both the FCPA and the CFPOA.
This enforcement action under the FCPA offers the following key lessons for the interpretation and application of the CFPOA:
- Gifts and Entertainment Expenses Must be Reasonable – While gifts and entertainment are not prohibited in an outright manner under either the FCPA or the CFPOA, they must be reasonable in the circumstances, and travel expenses in particular should relate to legitimate business purposes. Whether gifts or entertainment cross the line is not always obvious. Internal policies, controls and mechanisms which provide clear guidance to company employees as well as agents that may conduct business on the company’s behalf can help minimize the risk of violating the applicable anti-bribery provisions of both foreign anti-corruption statutes.
- Continued Enforcement of the Books and Records and Internal Controls Provisions – The PTC settlement is yet another indication of the SEC’s continued enforcement of the books and records and internal controls provisions. These provisions require a reporting issuer to: (a) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer; and (b) maintain internal accounting controls sufficient to assure management’s control, authority and responsibility over the issuer’s assets. In an earlier case, the SEC required SAP SE to pay $3.7 million in disgorgement of profits plus interest to settle charges relating to bribes paid to a Panamanian government official based on failure to maintain accurate books and records and internal controls (refer to our post). In the case of PTC, the improper payments were disguised as legitimate commissions or business expenses in the Chinese subsidiaries’ books and records which were consolidated into PTC’s books and records, thereby causing them to be inaccurate. Significantly, while the books and records and internal controls provisions of the FCPA apply only to reporting issuers under the Securities Exchange Act, the books and records offence under the CFPOA is broader as it applies to both issuers and Canadian privately held companies.
- Deferred Prosecution Agreement – In addition, it is important to highlight that unlike the United States, Canada does not currently provide for DPAs. Many observers cite this as a significant shortcoming in the Canadian process, leading to calls for the federal government to consider DPAs in the settlement of foreign bribery offences under the CFPOA or domestic bribery offences under the Criminal Code. In November 2015, the first DPA in relation to charges under the Bribery Act 2010 was approved in the United Kingdom (refer to our earlier Update). It is not yet clear whether Canada will adopt this practice.
- Protecting Companies in High Risk Jurisdictions – The PTC allegations and settlement are also indicative of a continued increase in detecting corruption in China. In July 2015, the SEC found that employees of Mead Johnson in China violated the FCPA by funding improper payments to health care professionals at government-owned hospitals in China (refer to our earlier post). Companies with operations in China face high anti-corruption risks, and the slightest indication of wrongdoing should necessarily lead to a thorough investigation. The heightened risk and aggressive enforcement action highlight the need to routinely assess potential corruption risks for companies when doing business overseas, particularly in those countries prone to corrupt business practices. A robust and effective compliance program specifically designed to address the unique circumstances of a company is critical to mitigate corruption risk.