No Longer a Mirage: FCPA Compliance and Cooperation Has Its Benefits

by Orrick - Securities Litigation and Regulatory Enforcement Group
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On September 12, 2016, the SEC announced that it had reached a settlement with Jun Ping Zhang (“Ping”), a former executive of a Chinese subsidiary of Harris Corporation (“Harris”), regarding alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The settlement was unusual, in that the SEC declined to also bring charges against Harris, an international communications and information technology company.

The SEC’s investigation against Ping found that, as chairman and CEO of a Chinese subsidiary of Harris, he had authorized and facilitated a practice of giving gifts (between $200,000 and $1 million) to officials at state-owned hospitals in China that resulted in awarding $9.6 million in contracts to the subsidiary. In particular, with Ping’s knowledge and under his management and supervision, the subsidiary’s sales staff fabricated false expense claims to generate cash for the gifts.  These false expense reports were then improperly recorded in the subsidiary’s books and records as legitimate expenses or fees.  Harris was implicated in the FCPA allegations because the subsidiary’s financials were consolidated into Harris’s books and records, such that Ping caused Harris to keep inaccurate books, records, and accounts as required under the FCPA.  These allegations created clear potential FCPA liability for Harris.

However, the SEC declined to prosecute Harris due to the company’s due diligence and cooperation with the investigation. Harris took immediate and significant steps after its acquisition of the subsidiary to train staff in China and integrated the subsidiary into Harris’s system of internal accounting controls.  It also created an anonymous complaint hotline and discovered the misconduct within five months of the acquisition.  Upon that discovery, Harris self-reported this misconduct, remediated the problems, and cooperated with the SEC’s investigation.

This is the first time that an SEC investigation involving only FCPA misconduct fully declined to prosecute a large public multinational corporation where one of its former employees was sanctioned for FCPA violations. Both the SEC and DOJ have seen a skeptical reaction to their claims that they will reward companies that greatly cooperate with their investigations. But the SEC’s decision not to prosecute Harris shows this plan in action and holds promise for companies that have strong and robust procedures on due diligence, anti-corruption controls and self-reporting.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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