A recent case illustrates both the ongoing corruption risks for U.S. companies doing business in developing countries such as China and the Government’s tougher stance on settling white collar crime cases.  In this case, the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) alleged that two subsidiaries of PTC Inc. (PTC), a Massachusetts-based business software company, had bribed Chinese company officials with vacations to the United States and gifts and then actively concealed such illicit payments with elaborate false records, in violation of the Foreign Corrupt Practices Act (FCPA).  PTC recently agreed to pay to the SEC and DOJ a combined $28.1 million to settle these alleged FCPA violations.

The DOJ investigation resulted in a deferred prosecution agreement (DPA) between DOJ and two of PTC’s subsidiaries – Parametric Technology (Shanghai) Software Company Ltd. and Parametric Technology (Hong Kong) Ltd. – in exchange for PTC paying $14.5 million in criminal fines and improving its compliance program.  PTC also agreed to pay $13.6 million in disgorgement of profits and interest in its separate civil settlement with the SEC.

The two federal agencies claimed that, between 2006 and 2011, PTC’s two Chinese subsidiaries provided nearly $1.5 million in travel and hospitality expenses and extravagant gifts while bringing officials of several Chinese state-owned enterprises (SOEs) to the United States.  Although PTC claimed the officials were training at its Massachusetts headquarters, the visits were actually disguised pleasure trips to destinations such as New York, Hawaii, Las Vegas, and California, according to the SEC and DOJ.  During the trips, the Chinese officials typically spent only one day at PTC’s headquarters but all the rest of their time in the United States touring and playing golf.  PTC’s subsidiaries in Shanghai and Hong Kong then reimbursed those officials for all their entertainment and travel expenses via third-party business partners and actively sought to conceal those payments as bona fide business expenses or sales commissions.

“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,” said Kara Brockmeyer, who heads the SEC Enforcement Division’s FCPA Unit, in a statement on the settlement.  The alleged bribes allowed PTC to obtain $13 million in contracts with Chinese SOEs, according to the agency announcements.

The SEC also announced its first DPA with an individual accused of FCPA violations.  The agency said it will keep allegations against Yu Kai Yuan, a former employee at one of PTC’s Chinese subsidiaries, on hold for three years for his assistance with the federal investigations.

This case reveals the unfortunate characteristic in many developing economies that many company officials are susceptible to (and even openly encouraging of) bribery in exchange for their favors in making business decisions.  Moreover, in China, approximately fifty percent of that nation’s huge economy is still operated through SOEs.  SEC and DOJ enforcement staff have long considered that SOEs are government instrumentalities under the FCPA, making nominally “company” officials the legal equivalent of government agency employees.  Consequently, bribing such corporate officials who might otherwise appear to be in the private sector and then concealing the bribes by false bookkeeping entries will bring such activity squarely within the FCPA. 

Consistent with the DOJ’s policy announced in last fall’s Yates Memorandum, PTC did not receive voluntary disclosure credit or full cooperation credit because, at the time of its initial disclosure to the Government, it failed to disclose relevant facts that it had learned in connection with a prior internal investigation and did not disclose those facts until DOJ uncovered additional information independently and brought them to PTC’s attention. (DOJ Press Release).  Thus, the approximately $28.1 million in combined penalties, disgorgement, and interest paid by PTC was well over double the $13 million in contracts in China obtained by the two PTC subsidiaries through the improper payments and gifts.

Corporate management, especially financial officers, audit staff, compliance directors, and corporate counsel, should thus draw at least five key lessons from this PTC case:

  • The FCPA will be applied forcefully to bribery cases involving bribes to “company” officials where, in mixed economies such as China, they are officials in SOEs and thus will be treated as if they were directly employed as government officials;
  • The FCPA penalizes payment of “anything of value” to obtain foreign business and, although the officials did not receive outright cash payments, they did receive lavish paid trips that were virtual vacations, thinly disguised as business trips, as well as extravagant gifts;
  • The FCPA can reach illicit conduct that occurs through foreign subsidiaries of U.S. companies as well as directly within the U.S. parent entity;
  • A company can essentially declare its criminal intent under the FCPA to Government enforcement staff when it engages in elaborate ruses and false bookkeeping entries in a conscious and widespread effort to conceal its misconduct; and
  • Even when a company’s compliance staff uncovers misconduct and seeks to make a voluntary disclosure thereof to the Government, they must do so with complete candor and thus not hold back material information that the Government may later discover, causing the company to lose much of the credit it might otherwise have gained from such a disclosure under the Yates Memorandum standards, and resulting in harsher financial penalties when the company wants to enter into a DPA or other settlement of the case.

The administrative proceeding before the SEC is In the Matter of PTC Inc., file number 3-17118.