Last week a major Securities and Exchange Commission (SEC) whistleblower award of $28 million was announced (SEC Award). Although the names of the parties were redacted, the law firm which represented the whistleblower confirmed to the Wall Street Journal (WSJ) that the award was in connection with the Panasonic Avionics (PAC) Foreign Corrupt Practices Act (FCPA) settlement from 2018. This whistleblower award had several notable aspects, not the least of which was that it involved a FCPA enforcement action. We rarely get whistleblower awards in the FCPA arena so that makes this award significant.
Also significant was the corrupt conduct it revealed at PAC and its parent. According to the WSJ, “the tipster, who isn’t a Panasonic employee, notified the SEC about alleged wrongdoing at the company in countries in Asia and Europe, prompting the regulator to open the investigation.” In April 2018, PAC and Panasonic Corp. itself, the Japanese parent, paid $280 million for FCPA violations. The penalty was broken down into a $137 million payment by the company’s US unit PAC in criminal penalties to the Department of Justice (DOJ). Panasonic paid disgorgement of $126,900,000 and prejudgment interest of $16.3 for a total payment of $143.3 to the SEC. “Under the SEC program, whistleblowers are entitled to between 10% and 30% of monetary penalties when their tips result in a successful enforcement action and when the penalties total more than $1 million.” This means the whistleblower received approximately 20% of the SEC total penalties.
The whistleblower’s information eventually led to a finding that PAC intentionally caused Panasonic to falsify its books and records with respect to PAC’s retention of third-party consultants for improper purposes. The third-party consultants, who largely did zero actual consulting work for PAC, were retained through a third-party service provider and were paid for out of a budget over which a senior PAC executive had complete control and discretion, without meaningful oversight by anyone at PAC or Panasonic.
One of these third-party consultants was offered a consulting position by PAC at the time that he was employed by a state-owned airline and involved in negotiating a lucrative contract amendment on behalf of the airline with PAC. PAC admitted that it mischaracterized these payments as “consultant payments” on its general ledger, which it knew caused Panasonic to incorrectly designate those payments as “selling and general administrative expenses” on Panasonic’s books, records, and accounts. PAC also admitted that employees in its Asia region concealed PAC’s use of certain sales agents, which did not pass the Company’s internal diligence requirements. According to admissions and court documents, PAC formally terminated its relationship with these sales agents, as required by its compliance policies, but then PAC employees secretly continued to use the agents by having them rehired as sub-agents of another company, which had passed PAC’s due diligence checks.
Another interesting twist in the PAC enforcement action were references to a domestic third-party agent who was representing a domestic purchase of PAC’s products. This domestic third-party agent provided inside information to PAC about the domestic airline, during which time he was member of domestic airline’s bid review committee. As a member of the bid review committee, he steered some $23 million worth of business to PAC and was compensated by PAC to the tune of $825,000. The whistleblower did not receive credit for fines and penalties generated by this issue, as the SEC award stated, “the record supports that the Covered Action company reported similar improprieties in a different geographical region because of the ongoing Commission and Other Agency investigations, and (3) the Covered Action’s and the Related Action’s charges involved misconduct in geographical regions that were not the subject of the Claimant’s information.”
The egregious nature of PAC’s corrupt conduct was illustrated by the use of the “President’s Fund”; a discretionary fund which was controlled by the President. This money was solely and totally at the President’s discretion and was characterized in PAC’s general ledger as various categories, including travel, payroll, and consultant payments. The President’s Fund was used to make payments to multiple individuals, including consultants that performed limited or no work for PAC, with little to no supervision by anyone at PAC. The finance chief handled the transactions.
In the SEC Award, two C-Suite executives also settled FCPA allegations arising out of the matter, (the “Related Action”). In December 2018, two executives from PAC, Paul Margis, the former President, and Takeshi Uonaga, former finance chief, settled with the SEC for actions around these FCPA violations. According to Sam Rubenfeld, then reporting in the WSJ, “Margis used a third party to pay more than $1.76 million to consultants, including a government official who was offered a position to assist the company in obtaining and retaining a business relationship with a state-owned airline.” Margis also made misleading statements to the Panasonic Avionics auditor regarding its accounting controls and the accuracy of the books. Margis was ordered to pay a $75,000 penalty and Uonaga was ordered to pay $50,000. Uonaga was barred from participating in the financial auditing or reporting of public companies.
What are the key takeaways from this SEC Award for the compliance professional? I recently interviewed Greg Keating, partner at Epstein Becker & Green PC, and well-known whistleblower defense-side lawyer for an upcoming episode of the FCPA Compliance Report. Keating said that a key lesson from the SEC whistleblower award program is for companies to be proactive when a report comes in through a whistleblower line or other means. Companies must take such reporting seriously, triage the claim and then investigate it. If there is merit to the report, the condition must be remediated and, if severe enough, reported to the appropriate authorities.
The SEC Award also demonstrates the need to take findings of internal audits seriously as the information which led to the award did not come from a PAC employee. As early as two years into the use of the President’s Fund, PAC’s internal audit department flagged that service providers were (1) hired without following procurement department processes; (2) contracted with no oversight; and (3) paid without delivering anything tangible to PAC. The initial internal audit report stated, “consultant payments should be carefully reviewed in light of FCPA regulation [sic] due to lack of clarity in deliverables” and was circulated to PAC senior management.
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