Recent FCPA Enforcement Action Serves as a Compliance Reminder for PE Firms and their Portfolio Companies

The U.S. Department of Justice’s (DOJ) recent enforcement action under the Foreign Corrupt Practices Act (FCPA) against the Chinese subsidiaries of PTC Inc., a Massachusetts-based manufacturer of product management software, is another timely reminder about the need to ensure that portfolio companies of private equity firms operating overseas implement effective anti-corruption policies.

In a non-prosecution agreement entered on February 16, 2016, DOJ sanctioned Parametric Technology (Shanghai) Software Co. Ltd., and Parametric Technology (Hong Kong) Limited (collectively, PTC-China), for violating the anti-bribery provision of the FCPA by corruptly securing contracts with Chinese state-owned entities (SOEs).[1]  As a result, DOJ imposed a monetary penalty of over $14.5 million on PTC-China, an amount more than the value of the contracts.  In a related action against PTC Inc., the SEC ordered disgorgement of almost $12 million and pre-judgment interest of over $1.75 million for the same conduct, resulting in total penalties of over $28 million, or more than twice the value of the contracts.

PTC-China’s problems arose in part because of the lack of sufficiently robust compliance procedures to conduct meaningful due diligence of corruption risks associated with Chinese third-party business partners that PTC-China retained to assist in securing contracts from SOE customers.  In our experience, this is not an uncommon situation.

In this instance, PTC-China’s management arranged for employees of potential SOE customers to enjoy paid sightseeing and leisure travel in the U.S., although the pretext for traveling to the U.S. was to visit PTC’s facilities in Massachusetts.  The customers were accompanied by employees of PTC-China on these trips, which included itineraries to Hawaii, Los Angeles, Las Vegas, New York and Washington D.C.  The trips were paid for by the consultants, who would then be reimbursed by PTC-China through either false subcontracting expense invoices or inflated commissions.  Because PTC Inc. gave its sales managers in its subsidiaries wide discretion in setting commissions for business partners, PTC-China easily avoided detection by PTC Inc.  PTC-China ultimately secured approximately $13.5 million in contracts from SOE customers who were provided with these travel benefits.

The resolution against PTC-China is also a reminder of the need to craft clear policies and procedures regarding travel, hospitality and entertainment expenses, particularly when government officials may be the recipients of such benefits.  Ideally, policies should be crafted to limit the discretion of sales managers to dispense such benefits unless strict criteria are met.  Increasingly, some companies are requiring that any benefit intended for a government official, including employees of SOEs, must be pre-approved in writing by compliance personnel to mitigate the risks associated with such conduct.

The potential costs of an FCPA investigation and associated monetary penalties can significantly impact a portfolio company’s financial statements.  U.S. and international private equity firms should therefore appreciate that DOJ can exercise jurisdiction under the FCPA over portfolio companies based outside the U.S. when their conduct in furtherance of a corrupt scheme touches the U.S.  Moreover, any overseas portfolio company that is controlled by a U.S. entity (such as a U.S.-based private equity firm) may be subject to jurisdiction under the FCPA, although DOJ will usually look for some additional U.S. nexus to alleged corrupt conduct before exercising jurisdiction.[2]  Increasingly, other countries’ anti-corruption laws may also reach the operations of international portfolio companies, including the U.K. Bribery Act, which has very broad jurisdiction over entities that have any U.K. presence.  Private equity firms would thus be advised to make the necessary investments in compliance staff and anti-corruption policies and procedures in their portfolio companies to mitigate the corruption risks presented by these businesses.

For more information on the issues discussed in this article, please contact Steven Tyrrell, Holly Loiseau or Adam Safwat in Weil’s White Collar Defense & Investigations Practice in Washington, D.C.

[1] Commercial enterprises that are controlled or majority-owned by the state may be considered “instrumentalities” of a foreign government under the FCPA, thus making their officers and employees “foreign officials” under the FCPA.  For more on this subject, please see our White Collar Defense & Investigations Alert

[2] It is also worth observing that DOJ is increasingly cooperating with anti-corruption regulators across the globe, including in Asia, and that these regulators are increasing their own anti-corruption enforcement efforts.  We have previously highlighted some of these international enforcement developments.  See Weil’s 2015 Anti-Corruption Enforcement Review.