We continue our exploration of the Foreign Corrupt Practices Act (FCPA) enforcement action involving Panasonic Avionics Corporation (PAC) and its parent Panasonic Corporation (Panasonic). Today, I want to review the bribery schemes involved.

The penalty assessed was approximately $280 million broken down into a $137 million payment by the company’s US unit, PAC, in criminal penalties to the Department of Justice (DOJ). The Japanese parent, Panasonic, agreed to pay disgorgement of $126,900,000 and prejudgment interest of $16,299,018.93, for a total payment of $143,199,018.93 to the Securities and Exchange Commission (SEC). The DOJ resolution documents included a Deferred Prosecution Agreement(DPA) and a Criminal Information(the Information). The SEC issued a Cease and Desist Order(the SEC Order). Both the DOJand SECalso issued Press Releases.

PAC is a US subsidiary of Panasonic, the Japanese electronics giant. PAC manufactures and markets in-flight entertainment and communication systems for airlines. In many parts of the world, airlines are state owned enterprises and PAC found itself in FCPA hot water for issues around bribery and corruption with some of these foreign state-owned enterprises. Interestingly, PAC’s corruption also extended to the US domestic market and while some of its fraudulent conduct occurring in the US domestic market was detailed in the resolution documents, it is not clear how it may have worked its way into the FCPA enforcement action, other than contributing to the accounting provisions violations.

The Bribery Schemes

The first thing that jumps out are the breadth and scope of the bribery schemes. Not only did they last for almost 15 years, with the participation of top management at PAC (PAC Executives 1-4), but they also encompassed airlines across the globe and even domestically in the US. It certainly appears that bribery and corruption was a part of the business strategy and business plan of the US subsidiary. While there were no individuals identified from the Japanese parent, one can only wonder how closely, if at all, they were watching their money-making US subsidiary from the compliance perspective.

Bribing Government Officials with Consultancy Offers

There were several bribery and corruption schemes identified in the Information. One scheme was to bribe a foreign official while he was employed by a foreign government with the promise of a consulting gig after he left his employment. Using this tactic, PAC negotiated a consulting position with a foreign official at the same time this person was involved in negotiating a lucrative contract amendment on behalf of Middle East Airline with PAC. After he left the employ of the government the foreign official ultimately did little work for PAC, over a six-year period PAC made $875,000 in payments to foreign official that were accounted for in Panasonic’s accounting books and records as legitimate consulting expenses.

The Presidential Fund

A second scheme was truly Presidential in inspiration. This is so because bribe payments were made out of discretionary fund designated as “Office of the President Budget” which was controlled by un-named PAC Executive 1 (maybe the President?). This money was solely and totally at PAC Executive 1’s discretion and it was “neither reviewed nor approved by any Panasonic personnel.” This budget exceeded several hundred thousand dollars annually and was “booked on PAC’s general ledger in various categories, including travel, payroll, and consultant payments”. For over seven years, PAC Executive 1 “used the Office of the President Budget 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.”

As early as two years into the use of the President’s Fund, PAC’s internal audit department flagged that services providers where (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” [bold in original] and was circulated to PAC senior management but amazing (or perhaps not) this highlighted language was removed from the final audit report. In legal parlance, this is called actual knowledge.

 Third-Parties

PAC also used the tried and true method to pay bribes to corrupt third-parties. This strategy was a favorite in the Asia-Pacific region. PAC did little to no due diligence on these third-party agents;  hired agents recommended by those counter-parties they were negotiating with, hired agents with no experience in the aviation industry and made offshore payments to agents in locations other than where they purportedly delivered services and lived. PAC also actively worked to hide the identities of its third-parties in some countries by moving them to sub-agents of previously approved agents. Of course, neither PAC nor Panasonic had effective internal controls to detect this subterfuge or detect when payments to previously approved agents increased.

Domestic Corruption

Given the corruption business plan PAC senior executives utilized, it is perhaps not too surprising their unethical conduct would also be employed in the US domestic market. Here PAC bribed a domestic consultant who was employed with an airline with which PAC was negotiating to provide “non-public, inside, or otherwise sensitive information to PAC Executive 1 and others at PAC, including forwarding internal communications among Domestic Airline’s employees about PAC, information about Domestic Airline’s negotiations with a PAC competitor, and pricing information of a PAC competitor”. This domestic consultant was paid some $825,000 for this inside information and while his bribery may not have violated the foreign aspect of the FCPA, the characterization of his payments as “consulting services” by PAC and as “selling and general administrative expenses” by Panasonic violated the books and records provisions of the FCPA, as noted below.

False Books and Records

PAC worked to actively hide its corrupt payments in its books and records. The $875,000 in payments made to the former foreign official who was hired as a consultant was named as “consulting payments” on PAC’s books and records but magically became “selling and general administrative expenses” on Panasonic’s books and records. One approved sales agent was paid over $7 million which “for the benefit of at least thirteen different sub-agents were improperly booked by PAC as commission payments to PAC Sales Agent 2, when in fact they were payments to other sales agents who were otherwise ineligible to work with PAC”.

Tomorrow I will consider Panasonic’s and PAC’s conduct during the investigation and their remediation which led to a 20% discount in the overall DOJ criminal penalty.

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