PTC Settlement: Compliance Reminders for Internal Controls, Travel and Gifts
PTC, a Massachusetts software company, reached settlements with the SEC and DOJ last week for FCPA violations for a total of $28 million. Interestingly, the SEC announced a DPA with a PTC official who assisted in the investigation. DOJ also reappeared on the FCPA enforcement radar with a non-prosecution agreement and collection of a $14 million fine. The SEC reached a $14 million settlement with PTC.
The open question for this enforcement action is whether any individuals are under consideration for prosecution. My guess is no – that the PTC settlement is another pre-Yates Memorandum business as usual prosecution and settlement.
The facts set forth by the government in its filings reveal another in the line of excessive gifts, travel and entertainment schemes in China to funnel lavish benefits to foreign officials.
What is surprising is the elaborate twisting and circumvention of financial controls that are typically used to detect improper payments. The use of disguised codes and revision of underlying contracts and invoices is elaborate and required the complicity of sales, marketing, financial and even senior managers.
In the end, the scheme boiled down to use of third parties and excessive commission payments to generate funds so that third parties could purchase and arrange lavish trips and entertainment for state-owned enterprise officials. Throughout the internal review and approval process, PTC employed weak, barely existent controls, and permitted shoddy review and substitution of codes and charges in payments to third parties. Interestingly, several of the lavish trips were keyed to legitimate one-day visits to PTC’s headquarters in Massachusetts for training and sales explanations.
As it turned out, PTC’s headquarters in Massachusetts was only a first stop in weeks long tours and trips in the US to New York City, Washington DC, Las Vegas, San Diego, Honolulu, the Grand Canyon and many other interesting sites. The trips were lavish, including five-star hotels, and expensive in the tens of thousands of dollars.
On top of that, the government cited direct gift giving by PTC sales staff as separate FCPA violations. These gifts cost approximately $273k over 2 years and included electronics (cell phones, iPods, GPS systems, gift cards, wine and clothing. The government noted that these gifts were given in part to retain or obtain business, suggesting that a portion of the motive may have been “legitimate.”
PTC’s compliance failures were numerous and gave the government a broad basis on which to build this enforcement action. Like many other China-based enforcement actions, the company’s dedication to compliance was minimal and its willingness to ignore or permit illegal bribery as rampant.
Some of the more significant aspects of the enforcement action include:
- Deficient internal investigation: PTC conducted a compliance investigation of its third parties in 2011, reported to the DOJ/SEC about potential problems and failed to uncover the full scope of the problem until 2014, presumably when outside counsel became involved;
- Failure to conduct periodic risk assessments: PTC did not conduct periodic comprehensive risk assessments;
- PTC’s vague and inadequate gift-giving policies: PTC’s rules for review and approval for giving gifts to foreign officials was “vague” and keyed to “good taste” and “customary business standards.
- Non-enforcement of policies: PTC did not comply with its existing prospective gift approval requirements for any gift over $50.
- Lack of audit and compliance staff: PTC did not maintain in China an internal audit staff and independent compliance officer to review and intervene in management activities.
- Inadequate due diligence review of third party partners: PTC had an inadequate system for reviewing and monitoring business partner qualifications and activities, and failed to conduct meaningful due diligence of the third parties involved in carrying out the lavish trip planning and delivery to foreign officials; and
- Inadequate monitoring and supervision of sales staff: PTC failed to monitor its sales staff and reimbursement requests. PTC did not impose any annual limitations on gift giving and entertainment of government officials.
The laundry list of deficiencies is significant because it shows compliance breakdowns in almost every aspect of PTC’s China operations.