It certainly did not take long for companies to see the benefit of the Department of Justice (DOJ) Foreign Corrupt Practices Act (FCPA) Pilot Program as there were two public declinations granted by the DOJ for companies that admitted FCPA violations. Deputy Chief of the DOJ Criminal Division Fraud Section and head of the FCPA Unit, Daniel Kahn, issued letters to both Akamai Technologies, Inc. (Akamai) and Nortek Inc. (Nortek) in the summer of 2016, declining to prosecute both companies for their admitted FCPA violations. In this paper, I will look at the underlying facts; then review what actions engaged in by the respondents achieved this result under the Pilot Program and the lessons be learned by the compliance practitioner and conclude with my observations on how the calculus in self-disclosure may well have changed.
I. Background Facts
Also, most interestingly, both parties received Non Prosecution Agreements (NPAs) from the Securities and Exchange Commission (SEC). Akamai agreed to profit disgorgement of in the amount of $652,452, together with prejudgment interest thereon in the amount of $19,433 within 15 days of the signing of the NPA. Nortek agreed to profit disgorgement in the amount of $291,403, together with prejudgment interest thereon in the amount of $30,655 within 15 days.
A. Akamai
What were the underlying facts involving each entity? As set out in the SEC’s NPA Akamai is a US stock listed company which provides cloud services for delivering, optimizing and seeming online content and business applications over the internet (“internet capacity and services”) and maintains operations in North America, Europe, and China. Akamai (Beijing) Technologies, Co. Ltd (“Akamai-China”) is a wholly owned subsidiary of Akamai located in Beijing, China. Akamai-China provides technical and sales support to its local Chinese channel partners for content delivery services, which are resold by Channel Partners in China.
Akamai-China was required to contract with third-party Channel Partners to deliver its services to end customers. From at least 2013 through 2015, a Regional Sales Manager for Akamai-China (the “Regional Sales Manager”) concocted a scheme with a channel party “to bribe employees of three end customers, two of which were Chinese state owned entities, to obtain and retain business. The bribes were paid to induce the end customers’ employees, including the employees of the Chinese state owned entities (hereinafter the “Chinese government officials”), to contract to purchase up to 100 times more network capacity from the Channel Partner than each company actually needed.” To top it off, the Channel Partner would then purchase this capacity from Akamai-China, add its own markup, and sell the capacity to the end customers. It was a very neat way to fund a bribery scheme.
To induce the end user to contract with Akamai-China, the Channel Partner would pay monies from these bogus sales to the Regional Sales Manager’s accounts. As noted in the NPA, “The Regional Sales Manager then paid a portion of these funds, and also provided expensive gifts, to employees of the three end customers. Overall, the Regional Sales Manager paid approximately $155,500 to employees of end customers, including approximately $38,500 in cash to Chinese government officials.”
Yet the bribery scheme did not stop there as employees of “Akamai-China routinely provided improper gifts and entertainment to employees of its end customers, some of whom were Chinese government officials, to obtain or retain business. The gifts and entertainment given to Chinese government officials totaled approximately $32,000 and were provided in violation of Akamai’s corporate governance and internal accounting controls policies. Akamai-China improperly recorded the gifts and entertainment to Chinese government officials as legitimate business expenses.”
As you might opine from such a systemic failure around its anti-corruption program, there were FCPA Accounting Provisions failures in both internal controls and books and records. There were multiple internal controls failures that allowed the Akamai-China bribery scheme to go undetected. The NPA listed the following, including failure “to provide reasonable assurances, among other things, that transactions were executed in accordance with management’s general or specific authorization and transactions were recorded as necessary to maintain accountability for assets. Akamai’s internal accounting control failures included: the lack of formalized due diligence of China-based channel partners; the failure to proactively exercise audit rights to ensure compliance with anti-bribery policies; failure to monitor or review customer usage in high-risk regions; failure to translate anti-bribery and anti-corruption policies into Mandarin; inadequate employee training on compliance and anti-bribery policies; and the lack of effective procedures for reviewing and approving business entertainment.”
Both Akamai-China’s and the parent company’s books and records were inaccurate because Akamai-China had made improper payments, in the form of gifts and entertainment, which were inaccurately recorded as legitimate business expenses. Akamai-China’s books and records. These inaccurate subsidiary financials were subsequently consolidated with Akamai’s books and records, rendering Akamai’s books and records inaccurate.
B. Nortek
As set out in its NPA, Nortek is a US stock exchange listed company which manufactures and sells a wide variety of products for residential and commercial constructions and remodeling and the personal and enterprise computer markets, including heaters, range hoods, heating, ventilation and air conditioning systems, and garage door and security systems. Nortek had an indirect subsidiary, Linear Electronics (Shenzhen) Co. Ltd. (“Linear China”), which provided manufacturing services for Nortek in China. Both companies had operations in China where they violated the FCPA.
According to its NPA, from at least 2009 to 2014, the Managing Director of Nortek’s Chinese subsidiary, together with the “accounting manager, customs liaison officer, and other employees made or approved improper payments and gifts to local Chinese officials in order to receive preferential treatment, relaxed regulatory oversight, and/or reduced customs duties, taxes, and fees.” There were over 400 illegal payments made and the totaled approximately $290,000. The payments and gifts “to local Chinese officials included cash payments, gift cards, meals, travel, accommodations, and entertainment. Linear China made the illicit payments to local officials from multiple different governmental departments, including customs, tax, fire, police, labor, health inspection, environmental protection, and telecommunications.”
Further, Nortek had a systemic failure in its internal controls that led to these FCPA violations. Its NPA stated, “Nortek failed to devise and maintain a system of internal accounting controls at Linear China sufficient to provide reasonable assurances that, among other things, transactions were executed in accordance with management’s general or specific authorization, and transactions were recorded as necessary to maintain accountability for assets. Linear China made improper payments from multiple accounts, which Nortek failed to review or test. Nortek failed to notice obvious red flags in Linear China’s financial records, including the number and size of Linear China’s meals and entertainment expenses.” Belying the recent criticism of training, “Nortek failed to establish procedures to ensure its Linear China employees were trained in anti-corruption compliance.” Nortek also failed to accurately record these payments on its books and records.
There was no information presented on the size of any specific or particular payment made by either Akamai or Nortek. While it is not clear from the Nortek NPA whether some of the payments made might fall under the facilitation payment exemption to the FCPA, it was clear that the company did not correctly record the payments in its books and records.
II. How to garner a declination
In a similar letter to both companies, Kahn stated, “Based upon the information known to the Department at this time, we have closed our inquiry into this matter. Consistent with the FCPA Pilot Program, we have reached this conclusion despite the bribery by an employee of the Company's subsidiary in China and one of that subsidiary's channel partners, based on a number of factors, including but not limited to Akamai's prompt voluntary self-disclosure of the misconduct, the thorough investigation and fulsome cooperation by the Company (including by identifying all individuals involved in or responsible for the misconduct and by providing all facts relating to that misconduct to the Department) and its agreement to continue to cooperate in any ongoing investigations of individuals, the steps that the Company has taken to enhance its compliance program and its internal accounting controls, the Company's full remediation (including promptly suspending at the start of the investigation the individual involved in the China misconduct who then resigned shortly thereafter, terminating the relationship with the channel partner involved in the misconduct, and disciplining five other employees who should have prevented other violations of the Company's policies), and the fact that Akamai (or Nortek) will be disgorging to the SEC the full amount of disgorgement as determined by the SEC.”
Unpacking Kahn’s letters there are several key factors for any CCO who may find their company under a FCPA investigation.
A. Voluntary Self-Disclosure
Nortek’s NPA reported that even before completing its internal investigation, Nortek promptly self-reported its preliminary findings to both the SEC and the DOJ. The internal investigation was deemed thorough as “Nortek conducted an internal audit of Linear China’s books and records. The internal audit team identified questionable payments made to local Chinese officials.” Based on the preliminary information, “Nortek conducted an internal investigation of Linear China’s conduct and forensically analyzed Linear China’s financial records. The internal investigation confirmed Linear China had made improper payments to Chinese officials local to Shenzhen, China.”
Akamai also promptly self-reported its actions and conducted a timely and thorough investigation. The company was made aware of the allegations through an internal whistleblower who reported the “Regional Sales Manager had received improper payments from channel partners and had made improper payments to end customer employees to secure business.” Its NPA noted, “Within weeks, Akamai voluntarily disclosed its investigation to the Commission staff and the Department of Justice.”
B. Extensive Cooperation During Investigation
Both companies engaged in extension cooperation during the pendency of the investigation. Akamai provided comprehensive, organized, and real-time cooperation with the both the SEC and DOJ, “including: (i) sharing the detailed findings of its internal investigation, including the results of its audits of its Chinese channel partners, analyses of customer usage versus purchased capacities, summaries of witness interviews, and factual chronologies and supporting documentation; (ii) identifying and presenting relevant documents to the staff; (iii) timely updating the staff with additional findings when its investigation uncovered new information; (iv) proactively updating the staff on its remedial measures, including updates to its compliance policies and procedures; (v) voluntarily translating documents from Chinese into English; and (vi) voluntarily making witnesses available for interviews and testimony.”
Nortek’s NPA stated they “provided comprehensive, organized, and real-time cooperation with the staff of the [SEC] during the course of its internal investigation, including: (i) sharing the detailed findings of its internal investigation, including identifying all improper payments and potential improper payments made to foreign officials and providing its summaries of witness interviews; (ii) timely updating the staff with additional findings when its investigation uncovered new information; (iii) effectively segregating, organizing, and presenting the most salient documents to the staff; (iv) voluntarily translating documents from Chinese into English; (v) voluntarily making witnesses available for interviews, including those in China; and (vi) conducting a risk assessment to determine whether the improper conduct at Linear China occurred at Nortek’s other manufacturing locations in China.”
C. Remediating the Compliance Program
Both companies extensively remediated their compliance programs during the investigations. Akamai terminated both the Regional Manager involved in the conduct as well as the channel partner. Nortek terminated the employees at Linear China after they were interviewed for the internal investigation. It was also noted that those terminated included “Linear China’s managing director and chief financial officer.”
Beyond this Nortek, “(i) revised its internal audit testing and protocols to focus on quickly discovering any FCPA-related improprieties; (ii) strengthened its anti-corruption policies; (iii) developed a Compliance Committee consisting of representatives from management and subsidiaries to supervise compliance implementation of Nortek’s policies and training; (iv) provided extensive mandatory in-person and on-line trainings on the FCPA and anti-corruption policies to its employees around the globe in appropriate languages; and (v) adjusted its internal audit schedules to prioritize facilities located in geographic areas known for higher incidences of corruption.”
Akamai, as stated in its NPA, “(i) implemented comprehensive due diligence processes for channel partners, including engaging an outside consultant to conduct channel partner risk assessments; (ii) strengthened its anticorruption policies; (iii) implemented enhanced compliance monitoring functions and structures, such as naming a Chief Compliance Officer and staffing a global team of dedicated compliance professionals in Europe, the U.S., and Asia; (iv) provided extensive mandatory in-person and on-line trainings on FCPA and anti-corruption policies to its employees around the globe in appropriate languages; and (v) enhanced its travel and expense control requirements in China, including requiring more detailed expense descriptions and supporting documentation and appointing an independent function with Chinese language capability to review and approve expense claims.”
D. Profit Disgorgement
Both companies disgorged the profits they generated from their FCPA-violative conduct. The language in each NPA, “to pay disgorgement obtained or retained as a result of the violations discovered during the Investigation”, does not provide any insight into how the amount was calculated or what transactions this profit disgorgement was based on.
III. The Calculus on Self-Disclosure has changed
The reason I think we may have reached is that previously in the fact pattern presented by either Nortek or Akamai, a company may have well made the decision to investigate thoroughly, remediate effectively and then not self-disclose to the government. However these two enforcement actions, coupled with the Pilot Program may well change this calculus. This begins with the length of time from initial discovery to self-disclosure to the final resolution announced last week.
These enforcement actions were resolved quickly and efficiently. Further Nortek’s self-disclosure was based on the company’s 2014 audit which had identified potential issues in a routine audit of the China subsidiary. These concerns were elevated for a full FCPA forensic audit and that investigation provided the information for the self-disclosure. Akamai began its investigation after a whistle-blower report in December 2014. Both cases then show a less than two-year period from initial discovery to conclusion. This speaks to the robust nature of their detect prongs; either through Nortek’s internal audit or Akamai’s whistleblower program and response.
Nortek self-disclosed this matter in January 2015 and Akamai self-disclosed to the government in February 2015 and both had resolution in June, 2016. This is a very short reported time frame for resolution of a FCPA matter and hopefully it will be a harbinger of things to come in terms of the reduced time frame from self-disclosure to resolution. Further the reported investigations costs were far below those usually seen in FCPA investigations and enforcement actions as Nortek reported approximately $4.2 in “FCPA related costs”; which is significantly lower than most reported costs in such a matter.
With the stated credit available in the Pilot Program and now the language from the DOJ in its declination and form the SEC in the two NPAs, I think companies may now see the benefits of coming forward and self-disclosing. Any company which made the decision not to self-disclose most probably investigated and remediated so those costs will be incurring under such a scenario. However, if companies see the benefit of such self-disclosure, both in term of not only a positive result but also a quick and efficient process, I think the calculus will change. I would also note, the straight line from the Yates Memo to the hiring of the new DOJ Compliance Counsel, Hui Chen to the Pilot Program may well need to be extended to these two enforcement actions to demonstrate the change in the DOJ enforcement strategy.
However there is more to be learned from these enforcement actions than simply it may now be better to self-disclose than to choose not to do so, after complete investigation and full remediation. There were nuts and bolts nuggets about what to look for in your internal investigations. Indeed there were a couple of compelling references made not often seen in FCPA investigations reports. First in the Akamai internal investigation, its NPA reported that as a part of the company investigation it provide to the government “analyses of customer usage versus purchased capacities”. This is the type of data analysis we rarely see discussed in FCPA compliance programs yet I believe can greatly assist a CCO in looking at a large amount of information to see what risks strategically need to be investigated. Yet typically how many compliance practitioners either make this type of analysis or even have the capability to do so? This is why data analytics can be of such a use to the CCO going forward and indeed may be one of the prime ways to help the compliance function in the detect prong. Moreover, if such an analysis is used proactively, as a monitoring tool on an ongoing basis, it could move the needle from detect to prevent. This is well worth considering as you think about your compliance budget and resources going forward.
The second investigative prong reference I found interesting was in Nortek’s investigation protocol which stated the company “conducting a risk assessment to determine whether the improper conduct at Linear China occurred at Nortek's other manufacturing locations in China.” Note that the government did not say Nortek performed a full FCPA forensic audit at the company’s other manufacturing locations in China but only a risk assessment. If there was every language which validates the concept that a company does not have to “boil the ocean” in the context of an internal FCPA investigation, I think this statement may be it. If you move forward with a thoughtful approach, that is a well-though out process, in a step-by-step approach; you do not need to look everywhere for everything under every rock.
You should use both NPAs as guide posts to benchmark your company’s compliance program as the remediate steps which both entities engaged in were favorably commented upon by the SEC and DOJ. In other words there were lessons on the actual doing of compliance which are significant for the compliance professional.
From the Nortek NPA, it articulated the following steps the company took:
1. Revising its internal audit testing and protocols to focus on quickly discovering any FCPA-related improprieties;
2. Strengthening the company’s its anti-corruption policies;
3. Developing a Compliance Committee consisting of representatives from management and subsidiaries to supervise compliance implementation of Nortek's policies and training;
4. Providing extensive mandatory in-person and on-line trainings on the FCPA and anti-corruption policies to its employees around the globe in appropriate languages (there’s that translations issues again); and
5. Adjusting its internal audit schedules to prioritize facilities located in geographic areas known for higher incidences of corruption.
From the Akamai NPA, it articulated the following steps the company took:
1. Implementing a comprehensive due diligence processes for channel partners, which included engaging an outside consultant to conduct channel partner risk assessments;
2. Strengthening the company’s anticorruption policies;
3. Implementing enhanced compliance monitoring functions and structures, such as naming a Chief Compliance Officer and staffing a global team of dedicated compliance professionals in Europe, the U.S., and Asia;
4. Providing extensive mandatory in-person and on-line trainings on FCPA and anti-corruption policies to its employees around the globe in appropriate languages; and
Enhancing the company’s travel and expense control requirements in China, including requiring more detailed expense descriptions and supporting documentation and appointing an independent function with Chinese language capability to review and approve expense claims.
I believe these declinations and NPAs will be a harbinger for both DOJ and SEC enforcement to come, where companies not only receive credit for turning over information on individuals for the government to prosecute but for taking steps to engage in the doing of compliance and not simply having a paper compliance program in place. No matter what the reason for the timing of these settlement resolutions, they are a welcomed addition for the FCPA compliance practitioner.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
