Originally Published: V&E Government
Investigations and White Collar Criminal Defense E-communication,
July 7, 2010
Over the past several years, enforcement authorities have brought
enforcement actions netting hundreds of millions of dollars in
fines and penalties for violations of the U.S. Foreign Corrupt
Practices Act (FCPA). Such multi-million dollar settlements,
once striking, are now hardly noteworthy. What has drawn
attention is a recent FCPA settlement announced by the U.S.
Securities and Exchange Commission ("SEC" or
"Commission") that is remarkable because of the size of
the penalty, but not in the way one would expect. In this
case, the SEC reached a settlement of only $300,000, based on
allegations of an alleged gift scheme, including gifts of flowers
to the spouse of a foreign state company's CEO, and an offer of
a payment that was intercepted before it was
paid. This settlement demonstrates what practitioners long
have told their clients, there is no de minimus exception
to the FCPA, and even seemingly minor infractions may lead to
enforcement action. This settlement further underscores the
need for vigorous compliance.
On June 29, 2010, the SEC announced that Veraz Networks Inc.
(Veraz), a California-based telecommunications company, agreed to
settle allegations that the company violated the books and records
and internal controls provisions of the FCPA. According to the
SEC's complaint filed in U.S. District Court for the Northern
District of California, Veraz failed accurately to record improper
payments on its books and records and failed to devise and maintain
a system of effective internal controls to prevent such payments.
Veraz, without admitting or denying the allegations in the
SEC's complaint, consented to the entry of a final judgment
permanently enjoining Veraz from future violations of the
Securities Exchange Act of 1934 and agreed to pay a civil penalty
of $300,000.
According to the SEC complaint, from 2007 to 2008, Veraz resellers,
consultants, and employees made payments to government-controlled
telecommunications companies in China and Vietnam to influence them
to continue business with Veraz. Specifically, the SEC alleged
that a Veraz consultant in China provided approximately $4,500
worth of gifts to a state-owned telecommunications company. As
evidence of the company's knowledge of the payment, the SEC
highlights a single e-mail from one Veraz supervisor, who described
one of the payments as a "gift scheme."
In addition, the SEC alleged that in 2007 and 2008, Veraz sold
products to a state-owned Vietnamese telecommunications company
through a reseller who, "at times," made or offered
illicit payments and provided gifts to officials of the state-owned
company. The one gift identified by the SEC in the complaint
was flowers purchased for the wife of the Vietnamese company's
CEO. Further, a Veraz consultant is alleged to have offered a
separate payment to the above Chinese officials to secure a deal
for Veraz worth $233,000. One e-mail set the consultant's
fee at 15 percent. Although the contract was awarded, Veraz
discovered the improper offer and cancelled the
contract. Despite the fact that Veraz was, by its own
processes and procedures, able to identify the improper conduct and
take remedial action, the SEC alleged that the offer was evidence
of the company's failure to maintain an effective system of
internal controls.
While the $300,000 fine may seem insignificant, it comes on the
tail of a two-year internal review and
investigation. According to the company's SEC filings, as
of November 2009, Veraz had spent approximately $2.5 million to
review and defend the matter. In addition, because of the
on-going investigation in 2008, the company delayed filing its
quarterly reports for March and May 2008, which prompted a warning
from NASDAQ that the Veraz common stock was potentially subject to
delisting. Ultimately, after a hearing, NASDAQ decided to continue
to list the stock, but the Veraz share price has fallen
substantially on the heels of the investigation. Indeed, Veraz has
now been notified by NASDAQ that unless its share price climbs
above $1.00 in the near future, it is again potentially threatened
with delisting.
The SEC's enforcement action, Veraz's lengthy and expensive
internal investigation, and the subsequent effect on the
company's share price, all demonstrate the continued necessity
for diligence in FCPA compliance. The Veraz settlement is yet
another cautionary tale for companies to ensure that their
compliance programs are in working order. Past enforcement
actions relating to gift schemes typically have involved
substantial payments over a sustained period of time. In
contrast, from the face of the complaint, the Veraz enforcement
action involves fairly small payments in a condensed time frame,
including an offer for payment that was identified and rectified.
Nevertheless, the consequences for Veraz have been
significant. From this settlement, it appears that there may
not be a readily discernable threshold for an FCPA enforcement
action. No gift, payment, or bribe may be too small to capture
the attention of U.S. regulators.
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