Securities Regulation Daily SEC orders Panasonic to pay $143M for FCPA and accounting fraud violations
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Monday, April 30, 2018

SEC orders Panasonic to pay $143M for FCPA and accounting fraud violations

By John Filar Atwood

Japan’s Panasonic Corp. has agreed to pay $143 million in disgorgement and interest to resolve charges brought by the SEC for violations of the Foreign Corrupt Practices Act (FCPA) and fraudulent accounting in its global avionics business.In a separate matter, the Department of Justice imposed a criminal penalty of $137 million as part of a deferred prosecution agreement related to causing books and records violations of the FCPA (In the Matter of Panasonic CorporationRelease No. 34-83128, April 30, 2018).

In its order against Panasonic, the SEC alleged that the company’s U.S. subsidiary, Panasonic Avionics Corp. (PAC), which provides in-flight entertainment and communication systems, offered a lucrative consulting position to a government official at a state-owned airline to induce the official to help PAC obtain and retain business from the airline. At the time of the alleged bribery scheme, PAC was negotiating two agreements with the airline valued at more than $700 million. The SEC claimed that PAC retained the government official and paid approximately $875,000 for a position that required little to no work, using an unrelated third-party vendor to conceal the payments.

Internal audit. The SEC noted that PAC’s internal audit group identified the payments to the government official as high risk, but PAC continued to pay him. Senior PAC executives received a report from the internal audit group which stated that no services were requested from the government official and that no deliverables were provided by the government official, but that invoices continued to be paid through the vendor. The report identified the payments as high risk, stating that the consultant payment should be carefully reviewed in light of FCPA regulations due to lack of clarity in deliverables. Despite the report, PAC continued to pay the government official through the vendor.

The SEC also found that Panasonic fraudulently overstated pre-tax and net income by prematurely recognizing more than $82 million in revenue for the fiscal quarter ended June 30, 2012. According to the Commission, PAC backdated an agreement with the government airline and provided misleading information about the agreement to PAC’s auditor in order to include the revenue in that quarter. Thereafter, Panasonic intentionally prematurely recognized this revenue in violation of generally accepted accounting principles.

Insufficient controls. The SEC further determined that Panasonic lacked sufficient internal accounting controls and failed to make and keep accurate books and records in connection with purported consultants retained by PAC, as well as sales agents used to solicit business from state-owned airlines and other customers throughout the Middle East and Asia.

Specifically, the SEC claimed that PAC paid over $1.76 million to purported consultants, including the government official, who provided few if any legitimate consulting services. As with the payments to the government official, the payments were made through a third-party vendor, and Panasonic’s books and records did not accurately reflect the true nature of the payments. Additionally, because certain sales agents could not meet PAC’s internal due diligence requirements, PAC devised a scheme to retain those sales agents in the Asia and China regions by paying them through a separate sales agent, the SEC said.

The SEC stated in the order that during the time its securities were registered with the Commission, Panasonic filed periodic reports containing, among other things, Panasonic’s consolidated financial statements. The consolidated financial statements incorporated financial information of its numerous subsidiaries, including PAC. Panasonic reported to shareholders that the company’s consolidated financial statements were prepared in conformity with U.S. GAAP. However, the SEC claimed that as early as 2006, PAC backdated certain customer contracts in order to recognize revenue in time periods prior to when those contracts were actually signed.

Remedial efforts. The SEC said in a news release that Panasonic consented to the order finding that it violated the anti-bribery, anti-fraud, books and records, internal accounting controls, and reporting provisions of the 1934 Act.In determining to accept Panasonic’s settlement, the Commission considered remedial efforts undertaken by the company and cooperation afforded the Commission staff in the later stages of the staff’s investigation.

As a result of the investigation, Panasonic replaced the senior PAC executives involved in the violations, and established an Office of Compliance and Ethics led by a new chief compliance officer. The company also implemented new compliance and accounting procedures, and enhanced internal accounting controls to prevent and detect the type of misconduct described in the order.

The release is No. 34-83128.

Companies: Panasonic Corp.; Panasonic Avionics Corp.

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