We write to advise you as to why the declination issued last week to Harris Corporation by the U.S. Securities and Exchange Commission ("SEC") is important to your company. Put simply, Harris' declination from the SEC -- following on the declination Harris received from the U.S. Department of Justice ("DOJ") in November 2015 -- represents the first time in a "pure" FCPA investigation that a multinational corporation has avoided prosecution entirely while one of its former employees was sanctioned for FCPA violations that created clear potential FCPA liability for the company. Morgan Stanley received a declination while its former employee was prosecuted for FCPA violations, but that case involved self dealing by the employee, a factor not present in the Harris case. By issuing a declination to Harris while charging its former employee with having paid $1 million in bribes, the enforcement authorities have matched their rhetoric with deeds, and have demonstrated the real benefit to companies of an effective compliance program, voluntary disclosure, and substantial cooperation. In addition, the Harris declination shows how the acquisition of a company, even one that represents a small portion of an acquirer's total revenue, can expose the acquirer to potential substantial FCPA liability -- and how effective anti-corruption due diligence and post-closing integration can significantly mitigate that risk.
Summary: Harris Receives Declinations, But Its Employee is Sanctioned
Harris, which was represented by Baker McKenzie in this matter, is a global communications and information technology company based in Melbourne, Florida. The investigation arose out of Harris' acquisition of CareFx Corporation in April 2011. CareFx had a wholly-owned subsidiary in China ("CareFx China") that was in the business of developing and selling electronic patient medical records software to Chinese health agencies and hospitals. CareFx China was a small operation - the consolidated revenue of CareFx China in fiscal year 2012 was approximately $1.4 million, which was less than 0.1 % of Harris' total consolidated revenue.
The chairman and CEO of CareFx China was Jun Ping Zhang ("Ping"). The SEC alleged that, after the acquisition, Ping (who was also a Harris employee) caused CareFx China to provide between $200,000 and $1 million in improper gifts to Chinese health officials, who awarded $9.6 million in contracts to CareFx China. Ping allegedly concealed the gift giving scheme from Harris by causing CareFx China's employees to describe the gift expenses in CareFx China's accounting records as "entertainment," "office supplies," and "transportation."
Harris discovered the scheme as a result of its post-acquisition integration efforts, conducted an internal investigation, and voluntarily disclosed the investigation to the DOJ and the SEC in August 2012. After making its voluntary disclosure, Harris closed all of CareFx China's sales operations in September 2012.
On November 30, 2015, the DOJ advised Harris that it had decided to decline prosecution of the company. On September 12, 2016, the SEC announced its declination as to Harris in an Administrative Proceeding release found here. On the same day, the SEC published an Administrative Order against Ping (found here), in which Ping consented to findings that he had violated the anti-bribery provisions of the FCPA, had caused Harris' books and records to be inaccurate, and had knowingly circumvented Harris' internal controls. Ping agreed to pay a civil monetary penalty in the amount of $46,000.
What the Harris Declination Means to You and Your Compliance Program
The SEC stated that Harris earned a declination as a result of its due diligence in advance of acquiring CareFx China, its integration of CareFx China after the closing, and its voluntary disclosure, remediation and cooperation. In particular, the SEC stated that:
- Although Harris was limited in its ability to conduct pre-acquisition due diligence, Harris' attorneys did interview Ping about gift giving at CareFx China, and Ping "did not disclose" the gift misconduct.
- "Harris took immediate and significant steps after the acquisition to train staff in China and integrate the subsidiary into Harris’ system of internal accounting controls. As a result of Harris’ post-acquisition measures, including the implementation of an anonymous complaint hotline, Harris discovered the misconduct at the subsidiary within five months of the acquisition."
- Harris engaged in "prompt self-reporting" and "thorough remediation," and provided "exemplary cooperation," which among other things resulted in the enforcement action against Ping.
The Harris FCPA declination is significant for several reasons:
- First of Its Kind. FCPA commentators have justifiably been suspicious of the claims from the DOJ and the SEC that they will reward companies who have a strong compliance program and who respond to allegations of misconduct by voluntarily disclosing and cooperating. With the Harris declination, the enforcement authorities have finally supported their claims with real action. Ping, while a Harris employee, engaged in a scheme to provide up to $1 million in improper gifts to Chinese health officials in order to gain $9.6 million in contracts. In previous years, that sort of conduct would have resulted in a costly enforcement action against Harris, regardless of whether the scheme had been actively concealed. The fact that Harris was able to obtain a declination in this situation - without any allegation that Ping had also stolen from Harris - is a significant development that changes the voluntary disclosure calculus.
- Clear Value of an Effective Compliance Program. The central message of the Harris declination is that an effective compliance program has real value. Harris had a robust program that, despite its strength, did not prevent a $1 million bribery scheme from occurring. The fact that the authorities were able to understand that significant misconduct can occur even when a company has a strong compliance program, and issue a declination based on that compliance program and the company's response to the misconduct, is heartening news for all compliance practitioners.
- Elements of an Effective Compliance Program. In issuing its declination, the SEC highlighted the ways that Harris' compliance program enabled it to obtain this result, including:
- Harris conducted as much due diligence as possible prior to closing on the acquisition, including conducting interviews of the relevant principals, even though CareFx China represented less than 0.1 % of Harris' total revenue;
- Harris quickly and vigorously pursued integration after the closing, including conducting training and implementing Harris' internal controls, compliance program and complaint hotline;
- Harris maintained a robust set of anti-corruption policies, procedures and controls that, at the least, caused Ping to take substantial steps in order to conceal the gift giving scheme from the company;
- When the misconduct was discovered, Harris conducted an appropriate internal investigation;
- Harris promptly and voluntarily disclosed the investigation to the government authorities;
- Harris engaged in substantial remediation, which in Harris' case included enhancing its internal controls, conducting additional training, and terminating Ping and other responsible employees for cause; and
- Harris provided substantial cooperation to the authorities, including helping the SEC build its case against Ping.
The most noteworthy of the above items are Harris' pre-acquisition due diligence and post-closing integration. CareFx China was a tiny part of the transaction, but Harris nonetheless pursued substantial due diligence, including interviewing Ping, and after closing promptly conducted training and integrated CareFx China into its systems. These efforts surely contributed to the decisions of the DOJ and the SEC to issue declinations to Harris.
Harris' FCPA declination is good news for compliance practitioners and for those who have been asking for more clarity from the enforcement authorities about the benefits of compliance and cooperation. Time will tell whether the Harris resolution is part of a trend or is an outlier.