The SEC said this month it will not be taking any action against Harris Corporation following the completion of its investigation into potential violations of the U.S. Foreign Corrupt Practices Act, even as it brought charges against one of the company’s former executives for making bribery payments to Chinese government officials to obtain or retain business.
As Compliance Week previously reported, Harris—a communications company, defense contractor, and information technology services provider—completed its acquisition of Carefx and its subsidiaries, including its China subsidiary, Carefx China in 2011. Following the closing, the company said it “became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly.”
“In response, we initiated an internal investigation and learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers, potential customers, consultants, and government regulators, after which we took certain remedial actions,” Harris said.
It disclosed the results of the investigation to its audit committee, board of directors and auditors, and voluntarily to the Department of Justice and the SEC, which then initiated investigations into the matter. During the second quarter of fiscal year 2016, the Justice Department advised the company that it would not take any action against it.
The Justice Department said it based its decision on its overall view of the evidence “as to our level of acquisition due diligence and integration efforts, our voluntary disclosure to the DOJ and SEC, our remediation efforts and our cooperation throughout the investigation, which is continuing,” Harris said.
The SEC investigation found that Jun Ping Zhang (Ping), in his capacity as the chairman and CEO of a Chinese subsidiary of Harris, authorized and facilitated a practice of giving gifts to officials at state-owned hospitals in China. With Ping’s knowledge and under his management, the subsidiary’s sales staff used bogus expense receipts to generate cash for the gifts.
Ping and the supervisors that he managed authorized the false expense claims, knowing that they were fabricated and that the “reimbursed” funds were actually used to buy gifts for government officials to influence their decisions to purchase the subsidiary’s products and services. Ping knew that these false expenses were improperly recorded in the subsidiary’s books and records as legitimate expenses or fees and that, as a result, their true nature would not be disclosed to Harris.
“Because the subsidiary’s financials were consolidated into Harris’s books and records, Ping caused Harris’s failure to make and keep accurate books, records, and accounts, as required under the FCPA,” according to the SEC.
The SEC’s order found Ping in violation of the anti-bribery, books and records, and internal accounting controls provisions of the Securities Exchange Act. Ping consented to the entry of the cease-and-desist order and agreed to pay a $46,000 civil penalty.
“Although only able to perform limited pre-acquisition due diligence on the subsidiary, Harris took immediate and significant steps after the acquisition to train staff in China and integrate the subsidiary into Harris’s system of internal accounting controls,” the SEC said. “As a result of Harris’s post-acquisition measures, including the implementation of an anonymous complaint hotline, Harris discovered the misconduct at the subsidiary within five months of the acquisition.”
Thus, the SEC said it decided not to bring charges against Harris, “taking into consideration the company’s efforts at self-policing that led to the discovery of Ping’s misconduct shortly after the acquisition, prompt self-reporting, thorough remediation, and exemplary cooperation with the SEC’s investigation.
The declinations by both the SEC and Justice Department make this a landmark case, Robert Kent, a partner with law firm Baker & McKenzie, wrote in a client alert, because it “represents the first time in a ‘pure’ FCPA investigation that a multinational corporation has avoided prosecution entirely, while one of its former employees was sanctioned for FCPA violations that created clear potential FCPA liability for the company.” Kent represented Harris in the case.
As Compliance Week reported, Morgan Stanley in 2012 received a declination while its former employee was prosecuted for FCPA violations, “but that case involved self-dealing by the employee, a factor not present in the Harris case,” Kent added. By issuing a declination to Harris while charging Ping with bribery, the SEC and Justice Department “have matched their rhetoric with deeds, and have demonstrated the real benefit to companies of an effective compliance program, voluntary disclosure, and substantial cooperation.”
Additional analysis on this case will appear in the Tues., Oct. 4 online edition of Compliance Week.