On April 30, 2018, multinational electronics company Panasonic Corporation (“Panasonic”) and its US subsidiary Panasonic Avionics Corporation (“PAC”) agreed to pay the US Department of Justice (“DOJ”) and the US Securities and Exchange Commission (“SEC”) over $280 million in penalties, disgorgement, and pre-judgment interest to resolve Foreign Corrupt Practices Act (“FCPA”) and accounting fraud violations, making this the largest FCPA settlement so far this year. Specifically, PAC entered a deferred prosecution agreement (“DPA”) with DOJ to resolve violations of the FCPA’s books and records provisions; separately, Panasonic agreed to an SEC cease-and-desist order finding violations of the FCPA’s anti-bribery, books and records, and internal controls provisions, as well as securities reporting requirements. The violations arose out of schemes by PAC to retain consultants for improper purposes, conceal payments to sales agents, and improperly recognize revenue.
PAC, headquartered in California, designs and distributes in-flight entertainment systems and global communications services for airlines and airplane manufacturers.
- According to the agreed-upon statement of facts that accompanied PAC’s DPA with DOJ, PAC: (1) made substantial payments to foreign and domestic consultants who provided little to no actual consulting services; and (2) used a middleman to pay foreign sales agents who had failed PAC’s internal due diligence requirements. Some of these payments were made from a corporate fund controlled solely by a single executive.
- The SEC’s cease-and-desist order against Panasonic relied on the same conduct set forth in the DOJ statement of facts and further found that Panasonic had improperly recognized revenue related to a PAC contract.
PAC first admitted that it offered a consulting position to an individual who was then employed as a contracting manager at a state-owned commercial airline based in the Middle East (the “Middle East airline”) and involved in negotiating a lucrative airline contract amendment with PAC. After the contract amendment was entered – ultimately resulting in $92 million in profit to PAC – the individual resigned from the Middle East airline and accepted the position as a PAC consultant. PAC subsequently paid the individual $875,000 over a six-year period, in exchange for few if any consulting services.
PAC also admitted that it hired a US airline consultant (the “US airline consultant”) as a dual-consultant. While working as both a PAC and airline consultant, the US airline consultant: (1) provided PAC with non-public, inside, or otherwise sensitive information through his position at the US airline; and (2) served as part of the airline team that evaluated bids from PAC and other vendors. In total, PAC earned over $22.5 million in profits from contracts in which the US airline consultant had some involvement. PAC paid the US airline consultant $825,000 over a six-year period.
To make the payments to both the former Middle East airline employee and the US airline consultant, a PAC executive used a corporate fund that was within the executive’s sole control. The PAC executive then sent the payments from the corporate fund to one of PAC’s US-based vendors, who in turn paid the foreign official and US airline consultant. PAC admitted that it mischaracterized these payments as consulting payments, thus causing Panasonic to incorrectly designate the payments on its books, records, and accounts.
PAC further admitted that it concealed payments to sales agents in its Asia region who did not pass PAC’s internal diligence requirements. Specifically, PAC began strengthening its controls related to third-party agents in 2007 and formally terminated a number of agents who did not comply with PAC’s new due diligence requirements. Despite having been formally terminated, PAC secretly continued to use some of those terminated agents by having an agent that had passed PAC’s due diligence requirements (the “verified agent”) hire the terminated agents as sub-agents. The statement of facts notes that PAC paid 13 such terminated agents a total of over $7 million through the verified agent by increasing the commission rates paid by PAC to the verified agent by 1 to 2%.
Audit and Sarbanes-Oxley Certifications
The statement of facts also indicates that PAC had been warned about the risks associated with its relationships with the consultants and sales agents. In 2010, an internal audit identified a number of compliance risks, including FCPA risks, associated with both the payments made through the PAC vendor and the lack of identifiable deliverables from the foreign official and US airline consultant.
Moreover, the statement of facts further identifies a number of PAC executives who provided Sarbanes-Oxley certifications of PAC’s financial statements, wherein they stated that no deficiencies in internal controls over financial reporting has been identified at PAC.
Simultaneously with the release of the DPA between DOJ and PAC, the SEC announced its cease-and-desist order against Panasonic. The SEC order sets forth the same conduct identified in the DOJ statement of facts and finds that these actions violated the FCPA’s anti-bribery, books and records, and internal controls provisions. The order further describes accounting violations that stemmed from the improper recognition of revenue related to a separate amendment to the PAC contract with the Middle East airline. According to the SEC order, the contract was not signed in time for PAC and Panasonic to recognize its revenue in a specific quarter, and Panasonic failed to maintain internal accounting controls sufficient to provide reasonable assurance that its transactions were properly recorded.
PAC entered into the DPA on April 30, 2018, admitting that, through the conduct identified above, it knowingly and willfully caused Panasonic to falsify its books, records, and accounts, in violation of the FCPA. Pursuant to the DPA, PAC agreed to:
- Pay $137.4 million in criminal penalties;
- Cooperate with the government’s investigation;
- Enhance its compliance program and improve its internal controls;
- Retain an independent corporate compliance monitor for at least two years; and
- Periodically report on its FCPA compliance after the termination of the independent corporate monitor.
As noted above, the SEC simultaneously ordered Panasonic to pay $143 million in disgorgement based on the FCPA and accounting violations. The SEC’s announcement of its order notes that it received cooperation from international regulatory agencies, namely the Swiss Financial Market Supervisory Authority, Ontario Securities Commission, Securities and Commodities Authority of the United Arab Emirates, Financial Services Agency of Japan, Monetary Authority of Singapore, Securities Commission of Malaysia, Australian Securities & Investments Commission, and the Securities and Exchange Commission of Pakistan.
The PAC and Panasonic resolutions offer guidance for companies who seek to avoid similar outcomes.
Internal Controls: The resolution reaffirms the importance of internal controls to identify the location of corporate funds, make clear who has access to those funds, and ensure sufficient checks are in place to identify and approve how those funds are allocated. In this case, the existence and use of a discretionary corporate bank account ultimately helped expose the corporation to significant criminal and civil liability.
Due Diligence: PAC’s use of the verified agent to conceal and continue its work with terminated sales agents highlights the limitations of initial due diligence. Due diligence review at the beginning of the relationship alone is insufficient to detect later improper activity. Rather, periodic due diligence and the implementation of procedures that detect and flag changes to agent payments are essential to preventing potential misconduct throughout the term of an agent’s engagement.
Warning Signs: Through its internal audit, PAC management was warned of the risks inherent in its consultant payments, but those warnings were not given sufficient attention. Internal audit can be a vital line of defense to detect impropriety, but only where its concerns are heard and heeded. Where internal audit identifies fraud or corruptions risks, companies are well-served to understand those risks and take reasonable steps to address them.
Cooperation: The DOJ resolution with PAC follows the structure set forth in the FCPA Enforcement Policy announced in November 2017. Specifically, because PAC did not self-disclose its misconduct prior to receiving a document request from the SEC, it did not qualify for anything more than 25% off of the low end of the Sentencing Guideline fine range to reflect its cooperation with the investigation. In fact, PAC ultimately received only 20% off that range, based on an array of factors including its cooperation and the seriousness of the offense.