FCPA Blog: Panasonic case provides a teachable moment

By Erich Lochner

President and CEO, Steele Compliance Solutions Inc.

Erich Lochner, Steele Compliance Solutions

Erich Lochner, Steele Compliance Solutions

The Panasonic enforcement action in April — resulting in $280 million in penalties and disgorgement to the DOJ and SEC — offers almost every lesson a compliance officer might want to discuss about anti-bribery programs.

First, due diligence matters all the time, all the way down

As often happens with anti-bribery offenses under the FCPA, bribes were relayed to government officials through intermediaries and sales agents. Multiple agents working for Panasonic failed the company’s internal due diligence checks and parted ways with the company — and were then hired back as subcontractors, with a sales agent that had passed the due diligence.

That scenario underlines the point of what due diligence truly is: an effort to expel corrupt third parties from the enterprise permanently, rather than a simple background check to be performed at one moment in time.

If the mantra is, “Companies don’t commit crime; people working for companies do,” then due diligence programs should flag specific high-risk people and ensure they don’t work on behalf of the organization. That can require language in contracts with other third parties (to avoid subcontractor risk), follow-up audits, and similar measures.

Second, accounting controls also matter

Panasonic engaged in considerable books-and-records violations both to mask the improper payments and to inflate revenue and pre-tax income by recognizing revenue early. Panasonic ultimately paid more than $1.75 million to supposed sales agents who provided few (if any) actual services. None of that was properly recorded in the company’s books.

Moreover, Panasonic employees knew about, and concealed, the scheme to sub-contract the sales agents who had been terminated. The third party that employed those sub-contractors was paid from a Panasonic budget line under the sole control of a senior Panasonic Avionics executive, with no oversight from anyone else at the company.

Proper accounting controls are crucial to effective FCPA compliance, since they can choke off the supply of money necessary for criminal violations. For example, a company could require multiple executives to counter-sign any payment above, say, $50,000; and require documentation that the party receiving that money has delivered the services promised.

Compliance with the civil side of the FCPA (implementing strong accounting controls) supports compliance with the criminal side (not paying bribes).

Third, leadership works if the first two issues to matter.

Large organizations are always porous collections of people and business practices. Even the most exhaustive controls, policies, and procedures leave some crack where misconduct can sprout. Strong ethical leadership is the sealant that tries to fill those cracks. The absence of strong leadership does the company no favors.

In Panasonic’s case, an internal audit in 2010 flagged potential problems with high-risk agents, and that report was circulated among senior executives. No follow-up happened for years.

Panasonic didn’t disclose the misconduct voluntarily. Only when the Securities and Exchange Commission began requesting documents did Panasonic admit potential problems and begin cooperating. That said, after the investigation began Panasonic did cooperate fully, including a thorough internal investigation and providing foreign employees for interviews with the Justice Department.

The company ultimately received a 20 percent discount on its penalties, per the DOJ’s new FCPA Corporate Enforcement Policy (pdf).

mglass

KPMG due diligence partner accused of leaking merger secrets

By John L. Guerra

Editor, GRC & Fraud Software Journal

sec logoThe SEC has charged a top KMPG tax partner with tipping off his stock broker with proprietary information he obtained while performing tax due diligence on upcoming mergers and acquisitions.

Thomas Avent, Jr., Southeast partner in charge of mergers and acquisitions tax at KPMG LLP, is accused of giving proprietary information to stock broker Raymond J. Pirrello, about three impending acquisitions.

Pirello then used the nonpublic information to tip a former colleague and long-time friend, Lawrence Penna, who traded in the securities of each of the three companies.

The companies included NCR Corporation, Radiant Systems, and other entities.

Much of the evidence of collusion is in the form of text messages, which the SEC provides in its complaint.

“Through his work, Avent learn[ed] secret, proprietary, carefully guarded information about upcoming corporate acquisitions,” the SEC complaint says, “including tender offers for publicly-traded companies – some of the most valuable sensitive, nonpublic information that exists within the sphere of the stock markets.

Check out the complaint.

mglass