The SEC continues its cutting edge FCPA enforcement program, bringing in a variety of enforcement cases and employing some new strategies.

In its latest foray, the SEC settled with Las Vegas Sands, owned by Sheldon Adelson, for $9 million for deficiencies in its internal accounting controls concerning its operations in China and Macao. The SEC’s enforcement action reflects one important theme – they could not prove bribery by a specific third-party consultant and instead resorted to an accounting controls enforcement case.   This is not surprising given the difficulty of conducting investigations in China, and the lack of cooperation that companies often face when focusing on a third party intermediary.

While the SEC was unable to uncover sufficient evidence of bribery, the SEC relied on the broad sweep of its books and records provision, along with internal controls, to identify a number of deficiencies in Sands’ internal controls. In the end, the SEC’s action reflected the vast authority it has to extract settlements from companies based on violations of the FCPA’s internal controls and books and records requirements.

The consultant at the center of this settlement action played a unique role: he was the designated liaison with Chinese government representatives and served to obscure Las Vegas Sands’ role in the China and Macao business operations (referred to as the “beard”).

Sands operated in China through a number of subsidiaries, but they all rolled up into Sands as the parent company. The SEC’s settlement action centered on Sands’ accounts payable process, the purchasing process, due diligence, and its controls surrounding contracts.

Sands did not conduct due diligence of the consultant until after had been engaged and had received a number of payments under the contract. Even when the company conducted due diligence, they failed to conduct any due diligence on seven of his associated companies.

The questionable payments, which were conducted without compliance with internal controls included:

The Basketball Team

Sands paid the consultant a total of $14 million to buy and operate a basketball team in the Chinese basketball Association, which prohibited Sands from owning and operating a basketball team. The $14 million payment included $8 million in “operating” expenses which were never documented.

The Beijing Building

Sands enlisted the same consultant to purchase a building in Beijing for Sands from a state-owned entity to develop a business center for U.S. companies. Some employees of the company were concerned that the purchase of the building was made for political purposes.

Almost $43 million in payments were made to the consultant without any research, analysis, or proper approval of the expenses by any Sands employee.

Approximately $900,000 was paid to an entity controlled by the consultant and recorded as “property management fees” for services that were not actually performed.

Approximately $1.4 million was paid for “arts and crafts” although no artwork was ever obtained for the building.

Macao Operations

Sands established a ferry service from China and Hong Kong to Macao. Sands employees selected a local partner that was partially owned by an old state-owned ferry company. In addition, the partnership included a separate company owned by the consultant and the SOE Chairman. Due diligence was only completed on the local partner partially owned by the old state-owned ferry company. The ferry company was eventually flagged by Sands’ audit department for spending all of its business entertainment expenses on government officials, including meals and “red envelopes” of cash around the Chinese New Year.

Sands failed to enforce internal controls for purchases, reimbursements to outside counsel and comps to customers. In one example, an employee obtained a $28,000 cash advance and a cash reimbursement of $86,000 without proper authorization. An outside counsel requested a reimbursement of $25,000 for a trip but admitted that this was funds for a friend. In addition, Macao employees did not keep track of comps to identify potential comps to government officials.