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SEC Levies $300,000 FCPA Penalty for Misrecording Gifts and Entertainment

July 13, 2010

 

On June 29, 2010, the U.S. Securities and Exchange Commission (“SEC”) announced a settlement with California-based telecommunications company Veraz Networks, Inc. (“Veraz”) in which Veraz agreed to pay a $300,000 penalty for alleged violations of the Foreign Corrupt Practices Act (“FCPA”) related to government-controlled telecommunications companies in China and Vietnam. Announced on the heels of a $338 million FCPA settlement with Technip, the Veraz settlement might initially be overlooked, but it is noteworthy in its own right.

The SEC’s complaint highlights an aggressive enforcement regime in which just $4,500 in alleged improper gifts, a $35,000 offer of payment that was discovered by the company and stopped, and other alleged gifts and entertainment of unknown value resulted in a $300,000 penalty. Moreover, the type of gifts described by the SEC as “questionable” included “flowers for the wife of the CEO.”

Companies operating in countries where gifts and entertainment are expected as part of doing business with government-owned enterprises should review this case and ensure that proper controls are in place to police such activity. This settlement shows that the SEC is prosecuting conduct that, in the past, may have been passed over in pursuit of more significant wrongdoing.

Summary of Allegations

The SEC alleged that Veraz, which went public in 2007, made or offered to make gifts and improper payments in 2007 and 2008 to employees of government-controlled telecommunications companies in China and Vietnam in order to improperly influence those foreign officials to award business to, or continue doing business with, the company.

The complaint discloses little information about the specifics of the alleged misconduct, but alleges that Veraz hired a consultant in China to sell products to an unnamed government-controlled telecommunications company. The consultant allegedly provided approximately $4,500 in gifts to officials at the Chinese company in late-2007. His supervisor at Veraz allegedly approved funding for the gifts and referred to this as the “gift scheme.” In January 2008, the consultant allegedly offered officials at the Chinese company a “consultant fee” in order to secure a deal valued at approximately $233,000. The fee was to be set at 15 percent, or approximately $35,000. Veraz was awarded the contract, but discovered the improper offer of payment before receiving any money from the transaction and cancelled the sale.

Veraz also sold products in 2007 and 2008 to an unnamed government-controlled telecommunications company in Vietnam through a Singapore-based reseller. Through the reseller, a Veraz employee allegedly made or offered payments to the CEO of the Vietnamese company. The complaint does not specify the amount of the alleged payments. Veraz also allegedly approved and reimbursed the employee for “questionable expenses” related to the Vietnamese company, including gifts and entertainment for employees and flowers for the wife of the CEO. Again, the complaint does not specify the value of the alleged gifts.

The SEC alleged that Veraz failed to make or keep appropriate books and records reflecting the gifts and payments and that the company failed to devise and maintain an effective system of internal controls to prevent or detect violations of the FCPA.

Disposition

The SEC’s settled complaint alleged that Veraz had violated the accounting provisions of the FCPA. There are no allegations that the company violated the FCPA’s anti-bribery provisions, presumably because all of the activity took place overseas in a subsidiary. Veraz, without admitting or denying the allegations, consented to entry of a final judgment ordering it to pay a $300,000 civil penalty and a permanent injunction.

Key Issues

The Veraz settlement is important for the following reasons:

  • The SEC is continuing its aggressive approach to enforcing the FCPA. The complaint describes just $4,500 in actual gifts to foreign officials, but the SEC nevertheless considered the case worthy of an enforcement action and a significant penalty of $300,000. This is despite the fact that the company discovered and stopped an offer of payment of $35,000 and no profits were realized by the company.
  • The complaint is remarkably ambiguous about the substance of the alleged violations. The complaint refers to “gifts,” “illicit payments,” and “questionable expenses,” but provides little useful insight as to the surrounding circumstances or even the value of some of the alleged gifts and payments. Similarly, the complaint does not state how the company recorded the payments or how the records were inaccurate. Given that there are few FCPA court opinions, the SEC should seek through these settled complaints to fully explain the facts underlying its actions and how those facts violate the law.
  • By punishing Veraz for such conduct, the SEC provides little incentive for a company to voluntarily disclose misconduct, cooperate, and thereby seek leniency. It is unstated whether Veraz cooperated with the SEC investigation, but the company did disclose that it spent $3 million on the investigation. For that sum, the company presumably assisted the SEC’s investigation, but no credit (or explanation for a lack of credit) is given. The specter that even small payments will be prosecuted may drive companies to conclude that remediation without the government’s involvement is the wiser approach.
  • The SEC is sending the message that newly public companies must have an FCPA program. In a press release announcing the case, the SEC said that “[i]t is particularly important that newly public companies doing business overseas establish the appropriate policies and procedures to prevent a culture of payment to foreign officials from developing.”
  • Like numerous prior cases, the SEC alleges that employees of foreign government-controlled companies are foreign “government officials.” Until a court decides otherwise, the SEC and the Department of Justice will continue to broadly interpret the FCPA and companies will need to diligence the ownership and control of commercial organizations across the world to avoid running afoul of the FCPA.
  • The SEC press release recognizes the U.S. Department of Homeland Security (“DHS”) as having assisted in the case, suggesting that DHS may have played a role in initially detecting the case. Alternatively, the DHS may have helped with border watches on individuals associated with the case. Either way, the SEC is working with other government agencies beyond the typical law enforcement agencies like the FBI.

Additional Materials

SEC Press Release No. 2010-115
SEC Litigation Release No. 21581
SEC Complaint