As the nattering nabobs of negativism continued to claim that FCPA enforcement was on the decline, the Justice Department and the SEC settled a major FCPA enforcement action with Panasonic Avionics (PAC), a subsidiary of Panasonic which provides in-flight entertainment systems (“IFEs”) to airlines.
Panasonic Avionics agreed to pay a criminal fine of $137 million and $143 million in disgorgement. As part of the settlement, Panasonic Avionics agreed to a compliance monitor for a two-year period.
PAC received no credit for voluntary disclosure because it received a subpoena from the SEC and then subsequently notified the Justice Department. PAC received credit for cooperation and remediation, although DOJ noted its concern in the delay in terminating PAC’s President and other executives.
The DOJ and SEC settlements involved books and records violations. The underlying conduct, however, clearly involved bribery payments make to foreign officials associated with state-owned airlines. The SEC settlement includes anti-bribery, accounting and internal controls violations.
PAC sells IFEs to airlines around the world, including a number of state-owned airlines in the Middle East and Asia.
As described in the factual statements, the illegal scheme involved the President and other senior executives at PAC. The President maintained a specific budget fund assigned to his office over which he had complete control and discretion. The President’s Fund’s annual budget was set by the President and a senior finance executive. The President’s Fund was not subjected to review nor approval by any other person at PAC. The annual budget was usually in the hundreds of thousands. Payments from the President’s Fund was booked as legitimate consulting, travel and payroll expenses. As explained below, the President’s Fund was used to make payments to consultants who did little to no work. The payments were arranged through an existing service provider to PAC, which served as a pass through entity.
Starting in 2007, PAC executives began to negotiate a consulting agreement with a foreign official at a state-owned airline, while the foreign official was providing important input on an amendment to PAC’s existing contract with the airline. PAC signed a contract with the foreign official consultant while the foreign official was still working at the airline.
Over the next six years, the foreign official was paid a total of $875,000 for little to no work, while before departing the airline, the foreign official weighed in and supported PAC’s proposal that was ultimately agreed to by the airline. The $875,000 was recorded in PAC’s books and records as legitimate consulting services.
In another consulting arrangement, PAC retained a domestic airline consultant, and used the consultant to obtain confidential information about the airlines and the airline’s negotiations with competitors. The domestic airline consultant was paid $825,000, which was falsely recorded as legitimate consulting services.
Beyond the conduct of PAC senior executives, PAC employees also circumvented PAC’s third-party sales agent controls in Asia. Specifically, a number of sales agents used in China were terminated because they could not pass PAC’s due diligence review for corruption risks. PAC employees had an existing agent in Malaysia secretly re-hire a number of these sales agents as sub-agents of the Malaysian agent. PAC employees paid approximately $7 million in payments to at least thirteen sub-agents. Eventually, a PAC executive was notified of this situation but did nothing to correct it.
In 2010, PAC’s CFO requested that PAC’s internal audit review PAC’s vendor selection, payment processing and contract execution. PAC’s internal audit department issued a report that identified problems associated with the use of the service provider connected to the President’s Fund, including lack of supervision over consultants and the absence of any deliverables from the service provider and several consultants. The internal audit report identified these arrangements as a “critical risk” and a “high risk,” and noted that these risks should be reviewed in light of the FCPA.
Senior executives as PAC eventually received this report. An edited version of the report was circulated to employees and other executives which omitted the FCPA reference. Despite the circulation of the report, PAC took no actions to correct any of the deficiencies.
