Compliance Lessons Learned from Panasonic Avionics $280 Million FCPA Enforcement Action (Part II of II)
The Panasonic Avionics (PAC) FCPA enforcement settlement for $280 million with the Justice Department and the Securities and Exchange Commission contains a number of important lessons learned. The overall scope and breadth of PAC’s misconduct was significant and reflects the absence of a meaningful compliance program and commitment to a culture of ethics. Here are the important lessons learned:
C-Suite Misconduct: PAC is yet another example of the damaging impact of C-Suite misconduct. As the underlying facts show, PAC’s President and other senior executives were aware of ongoing misconduct and failed to take action to stop or prevent the conduct.
At the heart of the problem was PAC’s President, who was eventually terminated. PAC’s President maintained a fund over which he had unsupervised authority. He arranged payments to two consultants who were engaged in illegal behavior. PAC’s President engaged them and was aware of the criminal conduct.
The PAC settlement follows yet another example of a senior executive maintaining access to funds for unregulated purposes. Last year, Sociedad Quimica y Minera, a Chilean mining company, paid a total of $30.5 million for FCPA violations. A SQM senior executive conducted the bribery scheme using funds from a CEO account. The absence of financial controls and compliance programs to the C-Suite permitted the senior executive to make illegal payments.
Sub-Agents and Sub-Distributor Risks: The underbelly of every good due diligence program is the use of sub-agents. It is a difficult and perplexing problem. Many sales agents and distributors rely on networks of sub-agents and sub-distributors. Companies have to devote attention to this risk and need visibility into the risks created by sub-agents and sub-distributors.
PAC’s employees were able to circumvent PAC’s due diligence program to have sales agents retain sub-agents who were previously terminated by PAC as sales agents because they failed to meet PAC due diligence standards. PAC’s employees used this strategy to bring on risky third parties and funneled $7 million to these sales agents.
Companies employ a number of different strategies to address this risk, including: (1) prohibiting agents and distributors of hiring sub-agents and sub-distributors; (2) conditioning hiring of sub-agents and sub-distributors on company review and approval; (3) pushing compliance requirements in the contract with the sales agent or distributor, requiring compliance and due diligence requirements on the sales agents hiring and use of sub-agents and sub-distributors.
Internal Audit Reports: PAC’s internal audit department prepared a report on PAC’s vendors that exposed significant risks relating to PAC’s ongoing illegal activities. Unfortunately, no one took any action to remedy the issues identified in the internal audit report. Such a failure to address internal audit findings undermines the credibility of internal audit and its fundamental purpose.
Verification of Services: PAC’s breakdown in its financial controls included its invoice-to-payment process. Every company has to ensure that its invoice (or purchase order) to payment process includes verification of services. PAC ended up paying hundreds of thousands of dollars to consultants and agents for little to no services provided. It is critical for companies to maintain robust policies and procedures to confirm documentation of services provided as part of overall review of an invoice before payment.