Why pre-acquisition due diligence and post-acquisition remediation are so critical

The SEC settled a rare FCPA enforcement action against an individual last week when it announced the resolution of a matter involving Jun Ping Zhang, via a Cease and Desist Order. The matter involved Harris Corporation and its Chinese business unit Hunan CareFX Information Technology, CareFx China). Ping, a US citizen served as both Harris Corporations’s Vice President of Technology and CareFx China’s Chairman and CEO in 2011 and 2012. Harris employed Ping with its acquisition of the US entity CareFX Corporation.

Harris Corp. interviewed Ping in its pre-acquisition phase of due diligence of CareFX Corporation and its Chinese subsidiary. However, Ping was not asked any questions about engaging in bribery or corruption, failed to disclose he was leading a massive bribery effort or lied to the pre-acquisition due diligence investigators. He continued to lead this bribery and corruption effort after Harris Cor[.closed the acquisition of CareFX Corp. and thus the Chinese subsidiary of Harris Corporation made “approximately $200,000 to $1 million in improper gifts to Chinese government officials.” For these illegal gifts, CareFX China was awarded “over $9.6 million in contracts with state-owned enterprises.” Ping agreed to a civil penalty of $46,000.

This rare individual SEC FCPA enforcement action may well portend another enforcement action involving Harris Corporation going forward. Whatever happens to Harris Corp., this case makes clear the need for robust pre-acquisition due diligence, then followed up by an even more robust post-acquisition forensic audit of the books and records of high risk business units. China has been on the FCPA radar for many years and since 2010, fully 20% of all enforcement actions have come out of China. This is not new information and company are on clear notice that failure to perform these basic steps can lead to some catastrophic results.

The cost for Harris Corporation failures have not been insignificant even though CareFx’s revenues accounted for less than 1 percentof Harris’s gross revenues. In December 2011, Harris dissolved CareFx as a separate business entity. According to the order, Harris Corporation sold, in 2012 all of CareFx China’s "outward facing operations" and in  “2015, Harris terminated all employees in CareFx China and no longer has any active China-based business operations.”