The Securities and Exchange Commission and the Department of Justice recently have sought to persuade companies to self-report violations of the Foreign Corrupt Practices Act. The SEC has announced non-prosecution agreements with two companies, Akamai Technologies and Nortek Inc., respecting bribes paid to Chinese officials by Chinese subsidiaries. Each U.S. company was required to disgorge hundreds of thousands of dollars in ill-gotten profits and interest. However, presumably because of their self-reporting and subsequent cooperation, neither was required to pay any penalties.
The DOJ too sent declination letters to Akamai and Nortek, stating that the decision not to prosecute each company was in accordance with the department’s new FCPA Pilot Program, which credits companies that cooperate with the government and agree to disgorge their ill-gotten profits. The treatment of Akamai and Nortek appears to signal a change in the government’s approach to self-reported FCPA violations.
Akamai: The Acknowledged Facts
Akamai is a provider of internet capacity and related services. The company’s Chinese subsidiary provides technical and sales support to Chinese channel partners for content delivery services, which are then re-sold in China by the channel partners.
From at least 2013 through 2015, a regional sales manager from the Chinese subsidiary schemed with a channel partner to bribe employees of three end-users, two of which were entities owned by the government in China, to persuade the end-users to purchase more network capacity than they needed. The regional manager paid over $155,000 to employees of the end-users, including approximately $38,500 in cash to Chinese government officials.
In addition, employees of the Chinese subsidiary regularly gave employees of end-users, including Chinese government officials, improper gifts and entertainment totaling approximately $32,000. The expenses were incorrectly recorded — including, ultimately, in Akamai’s books and records — as legitimate business expenses.
Akamai discovered the improper payments and gifts in late December 2014, when a sales representative in the Chinese subsidiary complained. Weeks later, Akamai voluntarily disclosed its investigation to the SEC and the DOJ.
In response to its findings, Akamai placed the regional sales manager involved in the misconduct on administrative leave after interviewing him, and he subsequently resigned. The company also terminated its relationship with the channel partner involved in the bribery. Akamai took steps to improve internal accounting controls, implementing a process for performing due diligence with respect to channel partners; strengthening anti-corruption policies; naming a Chief Compliance Officer and hiring compliance professionals globally; and enhancing expense-control requirements in China.
The agreement that Akamai reached with the SEC required the payment of $652,452 in disgorgement, plus $19,433 in interest.
Nortek: The Acknowledged Facts
Nortek is a manufacturer of products for construction and computer markets. Its indirect, wholly-owned Chinese subsidiary manufactures products for Nortek.
From at least 2009 through 2014, the managing director, accounting manager, customs liaisons officer, and other employees of the Nortek subsidiary made or approved improper payments and other gifts, including gift cards, meals, travel, accommodations, and entertainment, to Chinese officials in exchange for relaxed oversight and reduced duties, taxes, and fees. Between 2009 and 2014, the subsidiary made more than 400 payments, and at least one every month, to Chinese officials, totaling approximately $290,000. The subsidiary supported the payments with false or misleading documentation. The bribes were inaccurately recorded, first in the books of the subsidiary, and then ultimately in Nortek’s books.
Nortek discovered the improper payments in 2014, when it performed an internal audit of the subsidiary’s books and records. Identification of questionable payments led to an internal investigation that included forensic analysis of the records. The investigation confirmed the improper payments to Chinese officials. Nortek reported its preliminary findings to the SEC and the Department of Justice even before completing its internal investigation.
In response to its discovery of the improper payments, Nortek swiftly took steps to end the payments and implement remedial measures. Employees who were involved, including the managing director and chief financial officer, were terminated following their interviews. Nortek also revised its audit testing and protocols to facilitate discovery of potential FCPA violations, strengthened its policies concerning corruption, developed a compliance committee to supervise implementation of policies and training, mandated trainings on the FCPA and anti-corruption policies, and adjusted its audit schedules to prioritize areas more at risk for corruption.
The agreement that Nortek reached with the SEC required the payment of $291,403 in disgorgement, plus $290,000 in interest.
Both the SEC’s non-prosecution agreements, which the SEC has employed just once before in response to FCPA violations, and the DOJ’s publication of the declination letters are unusual. They appear to be part of a recent government effort to tout the benefits of self-reporting and cooperation. The Director of the SEC Enforcement Division, Andrew Ceresney, said, “When companies self-report and lay all their cards on the table, non-prosecution agreements are an effective way to get the money back and save the government substantial time and resources while crediting extensive cooperation.” The internal responses to the discovery of the improper payments and gifts also were critical. As the Chief of the SEC Enforcement Division’s FCPA Unit, Kara Brockmeyer, pointed out, both companies “promptly tightened their internal controls after discovering the bribes and took swift remedial measures to eliminate the problems.” Ms. Brockmeyer stated that each company got “expeditious resolutions” thanks to these efforts.
It was important for the government here to showcase the benefits of cooperation. At the same time, companies should factor the government pilot program into their business decisions as more information and test cases become available. While the Akamai and Nortek agreements may not be perfect test cases, as the violations were relatively small and self-contained, at the very least these matters serve as a reminder that companies should implement robust compliance training and protocols (including in local languages) and regular audit schedules, particularly in areas that are at high risk for corruption, and consider the possibility of self-reporting regulatory violations after consulting with counsel.