Securities Regulation Daily Chinese subsidiaries bribed officials with travel, gifts
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Tuesday, February 16, 2016

Chinese subsidiaries bribed officials with travel, gifts

By Amanda Maine, J.D.

A Massachusetts-based technology company settled civil and criminal Foreign Corrupt Practices Act (FCPA) charges for failing to detect and stop illicit payments made by two of its subsidiaries to government officials in China. The Department of Justice also announced that the subsidiaries agreed to enter a non-prosecution agreement. In addition, the SEC said that it had reached its first deferred prosecution agreement (DPA) with an individual in an FCPA case (In the Matter of PTC Inc.Release No. 34-77145, February 16, 2016).

PTC. PTC Inc. is a Massachusetts company that designs and sells product management software. PTC has operations throughout the world, including two wholly-owned subsidiaries in China (PTC-China). PTC exercised substantial control over PTC-China, according to the SEC’s order instituting administrative proceedings.

Bribes. The SEC alleged that PTC-China routinely hired third parties called “business partners” to find deals for sales to Chinese state-owned enterprises (SOEs). The business partners provided PTC-China with “influence” and information technology services, but PTC-China did not independently verify if the business partners had performed the subcontracted services. The payments were recorded as “Complete Outsourced Deals” (COD) expenses related to the subcontracted services, but in fact were used to pay for travel and gifts for Chinese government officials, according to the SEC. In return for these payments, PTC-China received sales contracts from SEOs resulting in over $11 million in profits. PTC failed to conduct a sufficient review of the business capabilities or ethics programs of the “business partners,” the SEC alleged.

Travel and gifts. The overseas trips taken by the Chinese officials and funded by PTC-China would typically involve a one-day visit at PTC’s corporate headquarters in Massachusetts. However, the travel that followed or preceded the Massachusetts visit lacked any business purpose. Destinations included New York City, Las Vegas, San Diego, Los Angeles and Honolulu and would involve golfing and sightseeing at tourist attractions such as the Grand Canyon, Universal Studios, Rockefeller Center, and the Statue of Liberty.

The PTC-China sales staff also provided over a quarter million dollars in improper gifts and entertainment directly to Chinese government officials, the SEC alleged. The improper gifts included gift cards, wine, clothing, and electronics such as cell phones and GPS systems. The gifts violated PTC’s internal controls policies that placed limits on the provision of gifts and entertainment and for other business expenses.

Internal accounting controls lacking. In addition, the SEC stated that PTC failed to identify and correct corporate governance and compliance breakdowns at its Chinese subsidiaries. It failed to properly vet the “business partners,” police for corrupt payments, monitor and supervise senior sales staff, and scrutinize travel and other expenses.

Charges and settlement. The SEC charged PTC with violating the anti-bribery and accounting controls provisions of the FCPA for its role as an agent of PTC-China and for failing to design and maintain internal accounting controls that could have prevented or detected the corrupt behavior.

PTC agreed to pay disgorgement and prejudgment interest totaling $13.6 million, representing the profits PTC-China gained as a result of bribing the Chinese officials. It also agreed to cease and desist from future violations. The Commission’s order noted that it would not be imposing a civil penalty on PTC due to the subsidiaries’ settlement of criminal charges, under which it agreed to pay a $14.5 million criminal fine.

The order also acknowledged PTC’s self-disclosure and remedial efforts undertaken following the discovery of the improper payments. The DPA of three years with a former employee of one of the subsidiaries was agreed as a result of his significant cooperation during the SEC’s investigation, the SEC stated in a press release.

The release is No. 34-77145.

Attorneys: Roger Witten (WilmerHale) for PTC Inc. Elizabeth Gray (Willkie Farr & Gallagher) for Yu Kai Yuan.

Companies: PTC Inc.; Technology (Shanghai) Software Company Ltd.; Parametric Technology (Hong Kong) Ltd.

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