Why it matters: Over the last month, the government announced significant resolutions with U.S. companies Qualcomm Incorporated and PTC Inc., respectively, under the Foreign Corrupt Practices Act (FCPA) involving improper "gifts" (e.g., paid internships, jobs, travel, lavish meals and entertainment) bestowed on Chinese state government officials and their families in order to curry favor and as a quid pro quo for securing lucrative government contracts. The SEC's civil resolution with Qualcomm Incorporated centered on the improper hiring of relatives of Chinese government officials for paid internships and full-time jobs (part of the so-called "princelings" investigation), while the DOJ and the SEC concluded parallel criminal and civil investigations into PTC's (and its Chinese subsidiaries') largess with employees of state-run enterprises in China that resulted in resolutions with both agencies and the first DPA with an individual in an FCPA context. Coming so soon after the SEC's FCPA resolution with SciClone Pharmaceuticals (reported on in our February 2016 newsletter), which involved similar alleged improper gifts being bestowed on healthcare professionals at Chinese state-run hospitals in order to increase prescription drug sales, the government's continuing focus on China as a hotspot for potentially improper FCPA activity is coming through loud and clear.
Detailed discussion: Here, we recap the recent SEC resolution with California-based Qualcomm Incorporated (Qualcomm) and the twin DOJ and SEC resolutions with Massachusetts-based PTC Inc. (PTC) and its China-based subsidiaries that are indicative of the government's continued focus on China as a hotbed of alleged improper activity by U.S. companies:
Qualcomm: On March 1, 2016, the SEC announced that Qualcomm agreed to pay $7.5 million to settle charges that it violated the FCPA by hiring relatives of Chinese government officials who had decision-making power over "whether to select the company's mobile technology products amid increasing competition in the international telecommunications market." In addition, the SEC's investigation found that Qualcomm "also provided gifts, travel, and entertainment to try to influence officials at government-owned telecom companies in China."
The Qualcomm resolution arises out of the "princelings" FCPA investigations that the government has been conducting in recent years into the recruitment and hiring by U.S. companies—with a focus on those in the financial services sector—of relatives of government officials in China as well as other Asian and Middle-Eastern countries in order to curry favor and secure business. We reported about a similar $14.8 million FCPA resolution in our September 2015 newsletter between the SEC and an investment bank in connection with the bank providing "valuable internships" to family members of foreign government officials connected to a Middle Eastern sovereign wealth fund. In addition, the press and companies have reported the ongoing "princelings" investigation into the hiring practices of 2 international banks involving family members of Chinese government officials. Most recently, an international investment bank announced on March 9, 2016 that an internal investigation had revealed that the firm had hired the daughter of a Malaysian official close to that country's prime minister at the same time that the firm was attempting to secure business with Malaysia's 1MDB sovereign wealth fund.
Qualcomm neither admitted nor denied the findings in the SEC's order, which detailed instances where Qualcomm improperly provided full-time employment and paid internships to Chinese officials' family members, referred to internally as "must place" or "special" hires, in order to "obtain or retain business in China." Qualcomm provided a $75,000 research grant to a U.S. university so that one Chinese official's son could retain his position in the university's Ph.D program (he was later given an internship followed by full-time employment at Qualcomm). The SEC's findings also detailed the "frequent meals, gifts, and entertainment with no valid business purpose" to Chinese officials and their families in order to influence their decisions, "such as airplane tickets for their children, event tickets and sightseeing for their spouses, and luxury goods." Further, the SEC's order noted that a Qualcomm executive was found to have provided a $70,000 personal loan to one Chinese official's son for the purchase of a home; an executive's personal actions involving his own money, being deemed actions by the company.
The SEC's order found that Qualcomm violated the anti-bribery, internal controls, and books-and-records provisions of the FCPA because, "with insufficient internal controls to detect improper payments, Qualcomm misrepresented in its books and records that the things of value provided to foreign officials were legitimate business expenses." In addition to paying the $7.5 million civil penalty, Qualcomm agreed to self-report and certify to the SEC for a two-year period about its FCPA compliance efforts.
PTC: On February 16, 2016, the DOJ and the SEC each issued a press release in connection with their parallel FCPA investigations into the activities of PTC's two China-based subsidiaries, Parametric Technology (Shanghai) Software Company Ltd. and Parametric Technology (Hong Kong) Ltd. (collectively, the PTC China Subs), that together resulted in criminal and civil penalties and fines aggregating approximately $28 million, a non-prosecution agreement (NPA) between the DOJ and the PTC China Subs, and the first ever deferred-prosecution agreement (DPA) between the SEC and an individual in an FCPA context.
The factual findings under both investigations are not in dispute. As detailed in the resolution documents, from 2006 through 2011 the PTC China Subs admitted to working through local business partners to arrange and pay more than $1 million for employees of Chinese state-owned entities to travel to the U.S., purportedly for training at PTC's Massachusetts headquarters, but primarily for recreational travel to New York, Los Angeles, Las Vegas and Hawaii. Such recreational travel—which was found to have "no legitimate business purpose"—included leisure activities such as sightseeing, guided tours and golfing, and improper gifts such as "cell phones, iPods, and GPS systems as well as gift cards, wine, and clothing." The PTC China Subs further admitted that, during the same time period, they entered into approximately $11-$13 million in software sales contracts with such Chinese state-owned entities. PTC admitted that the improper gifts and payments were disguised as legitimate commissions and business expenses on the books and records of the PTC China Subs, which books and records were subsequently incorporated into the books and records of publicly-traded PTC.
Under the resolution between the PTC China Subs and the DOJ, the PTC China Subs agreed to pay a $14.54 million criminal penalty for the FCPA violations and enter into a three-year NPA under which they agreed to, among other things, enhance their FCPA compliance program and periodically report to the DOJ on its implementation. The DOJ noted in its press release that the PTC China Subs did not receive any voluntary disclosure credit or full cooperation credit in the resolution because, at the outset of the investigation, they failed to disclose relevant facts that they had learned in a prior internal investigation and continued to withhold them until the DOJ uncovered the information independently and raised it with the PTC China Subs. The DOJ recognized, however, that by the investigation's end, the PTC China Subs had fully cooperated and provided "all relevant facts known to them, including information about individuals involved in the FCPA misconduct."
In the settlement between parent company PTC and the SEC, PTC was found to have violated the civil internal controls, and books and records provisions of the FCPA and agreed to pay approximately $11.85 million in disgorgement as well as $1.76 million in prejudgment interest. In arriving at the settlement, the SEC said that it considered "PTC's self-reporting of its misconduct as well as the significant remedial acts the company has since undertaken." In addition, the SEC announced its first ever DPA with an individual in an FCPA case, emphasizing that it entered into the three-year DPA with a former employee at one of the PTC China Subs as a result of the "significant cooperation he has provided during the SEC's investigation."
See here to read the DOJ's 2/16/16 press release entitled "PTC Inc. Subsidiaries Agree to Pay More Than $14 Million to Resolve Foreign Bribery Charges."
See here to read the SEC's 2/16/16 press release entitled "SEC: Tech Company Bribed Chinese Officials."
See here to read the SEC's 3/1/16 press release entitled "SEC: Qualcomm Hired Relatives of Chinese Officials to Obtain Business."
For more on the topic of the government's increased FCPA focus on China, see the FCPA Blog's 3/18/16 article entitled "The FCPA Corporate Investigations List—China Edition."