The recent PTC Case caught my attention for a few reasons. First, the company is based near my house and I biked past it’s headquarters this past weekend. Second, the actions stated in the headline were not good, but seemed to be at the extreme of what I thought would be considered bribery.
According to the SEC’s press release, an SEC investigation found that two Chinese subsidiaries of PTC Inc. provided non-business related travel and other improper payments to various Chinese government officials in an effort to win business. From 2006 to 2011, two PTC China-based subsidiaries provided improper travel, gifts, and entertainment totaling nearly $1.5 million to Chinese government officials who were employed by state-owned entities that were PTC customers.
The travel was sightseeing trip in the US in connection with visiting the corporate headquarters in Massachusetts.
That does not sound so bad. Not great. But not a $28 million fine bad.
There is obviously the red flag of PTC selling to a China-based company. Most would start with the assumption that the company is state owned and therefore the employees could be considered government officials. If they are government officials you have to be worried about the FCPA.
The SEC order states that the employees are government officials and does not spend any time addressing this.
Were the trips meant to generate business for PTC? The SEC order only mentions a small connection, stating that the officials who went on the trips were “often” signatories on the purchase agreements.
It’s a settlement order and not a pleading, so we have to just agree that the individuals were government officials and that the things given to them were meant to influence their purchasing decision.
I’ve said it before and I stand behind the statement:
“If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble.”
At first blush this PTC case caused me to question the statement.
Combining business activities with some pleasure activities is a common practice. The presence of government officials should not change this practice. The concern is whether the pleasure activities are excessive compared to the business activities.
The SEC and the DOJ have made it clear that bribery is not limited to cash in an envelope. Excessive gifts and travel can be considered an illicit bribe.
That was the case here.
The officials would visit the PTC office in Massachusetts for one day and then spend ten days touring the sights of New York City, Los Angeles, the Grand Canyon and Honolulu. That’s a ten to one ratio of business to pleasure.
That does sound excessive.
It sounded excessive to PTC who had a policy prohibiting excessive gifts and entertainment. PTC’s policy required pre-clearance for expenses over $500 with documentation of the business purpose.
The costs of the overseas travel were hidden in the contracts. The funds budgeted for the overseas travel were disguised as expenses related to success fees or subcontracting payments for business partners. The cover-up made the trips more illicit. If the employees involved thought the trips were legitimate there would have been no reason to hide them.
I do have a problem with the SEC order including “tours of MIT, Harvard, and Faneuil Hall” in the list of what the SEC considers excessive leisure activities. Showing prospective business partners the area, amenities and source of corporate talent should be a legitimate leisure activity connected with the business. PTC is headquartered in a suburban office park. The Charles River is lovely in that area, but it’s legitimate to show the Greater Boston.
The rest of the activities sound excessive to me. Excessive enough, that I would not expect to pay those expenses for a business partner, whether it was a private individual or a government official.
Sources:
- SEC: Tech Company Bribed Chinese Officials
- SEC order
- Deferred Prosecution Agreement
- More FCPA Grief Involving Gifts, Travel & Entertainment: PTC in China – Part I in FCPA Compliance Report
- SEC Strikes Its First Individual FCPA DPA in WSJ.com’s RIsk & Compliance Report
- PTC Inc. And Related Entities Pay $28 Million In Yet Another FCPA Enforcement Action Involving Travel And Entertainment Provided To Alleged “Foreign Officials” in the FCPA Profesor
- Issues To Consider From The PTC Enforcement Action in the FCPA Profesor
- Do You Now Understand Why The Meaning Of “Foreign Official” Matters?
- What is an “Instrumentality” under the FCPA?
