Lessons for Internal Audit from the SEC's Latest FCPA Enforcement Action

This week the Securities and Exchange Commission settled a case with Mass.-based technology company PTC Inc. and its Chinese subsidiaries that could create new imperatives for internal audit practices and assurance of anti-bribery programs.

PTC agreed to pay more than $28 million to settle parallel civil and criminal actions involving violations of the Foreign Corrupt Practices Act (FCPA). An SEC investigation found that two Chinese subsidiaries of PTC provided non-business related travel and other improper payments to various Chinese government officials in an effort to win business.

“PTC failed to stop illicit payments despite indications of potential corruption by agents working with its Chinese subsidiaries, and the misconduct continued unabated for several years,” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said in a statement.

According to the SEC’s order instituting a settled administrative proceeding against PTC:

  • From at least 2006 to 2011, two PTC China-based subsidiaries provided improper travel, gifts, and entertainment totaling nearly $1.5 million to Chinese government officials who were employed by state-owned entities that were PTC customers. 
  • Chinese officials were compensated directly and through third-party agents for sightseeing and tourist activities.
  • Third-party agents typically arranged overseas sightseeing trips in conjunction with a visit to a PTC facility, typically the corporate headquarters in Massachusetts.  After one day of business activities, the additional days of sightseeing visits lacked any business purpose. 
  • PTC-paid travel destinations for Chinese officials included New York, Las Vegas, San Diego, Los Angeles, and Honolulu. Officials enjoyed guided tours, golfing, and other leisure activities. 
  • Employees of PTC’s Chinese subsidiaries also provided improper gifts and entertainment to Chinese government officials, including small electronics such as cell phones, iPods, and GPS systems as well as gift cards, wine, and clothing.
  • The improper payments were disguised as legitimate commissions or business expenses in company books and records.

The infractions serve as a reminder for compliance and audit functions to pay close attention to how travel and expense costs are reported and to look for improper use of such funds. The SEC has clearly indicated that it will pursue potential cases of bribery when travel and related expenses don’t have a clear business purpose.

"Defrauding the company through expense reports is not only a time-honored tradition, but it can also be used to get a pot of money to pay bribes,” says Tom Fox, editor of the FCPA Compliance and Ethics Blog. In the PTC case, token visits to the company were not sufficient to justify golf outings and guided tours to popular U.S. destinations.

Audit Rights

Fox also suggests companies ensure that they have audit rights for the third parties they work with, since, as was the case in this SEC enforcement action, bribes are often funneled through third-party agents. According to Fox, bribery risks are not subsiding. “Last year we had the largest number of FCPA enforcement actions in any single year.” He says he doesn't see that trend declining anytime soon.

Companies that can identify wrongdoing themselves and self-report to the SEC will have a better chance at getting favorable treatment when settling. The SEC’s order finds that PTC violated the anti-bribery, internal controls, and books and records provisions of the Securities Exchange Act of 1934. In the settlement, the SEC considered PTC’s self-reporting of its misconduct as well as the significant remedial acts the company has since undertaken. 

As part of the settlement, the SEC also announced its first deferred prosecution agreement (DPA) with an individual in an FCPA case.  DPAs facilitate and reward cooperation in SEC investigations by foregoing an enforcement action against an individual who agrees to cooperate fully and truthfully throughout the period of deferred prosecution.  FCPA charges will be deferred for three years against Yu Kai Yuan, a former employee at one of PTC’s Chinese subsidiaries, as a result of significant cooperation he has provided during the SEC’s investigation.