PTC in China: internal controls failure
Books and records violationsThe Chinese subsidiaries agreed to a penalty of $14,540,000 to the DOJ. PTC agreed to profit disgorgement of $11,858,000 and prejudgment interest of $1,764,000 paid to the SEC. PTC sustained both books and records and internal controls violations. The books and records violations occurred because the Chinese subsidiaries improperly recorded bribes on their books and records disguised as legitimate commissions and business expenses. These were then rolled up into the corporate parent’s books and records.
Internal control failuresFurther, PTC either did not have appropriate internal controls or if they did have them, they were clearly inadequate. While a CCO should expect that internal controls at locations outside the United States are of the same effectiveness as internal controls within U.S. business units and at the U.S. corporate office, unfortunately, that is not always the case. Often, corporate level internal controls are stronger than those in foreign business units. That would certainly appear to be the case with PTC. For each of the bribery schemes in place, there were internal control failures. In the scheme where the commission was decided after the sale was concluded, so as to know how much money to bake into the commission rate for the bribe payment, the Chinese subsidiary “sales staff reported to a PTC employee who had authority over the commission approval process.” There was at least a control in place, yet that control was not effective because the PTC oversight did not work. This also speaks to an internal control weakness that allows one corporate employee to have oversight over an approval process. This is simply not a sufficient control. First and foremost, there should be multiple levels of controls for the commissions of third-party representatives, as they are the highest risk under the FCPA. Compound that with the known high risk of doing business in China, and you can immediately spot the internal control failure.
Editor's noteTo avoid enforcement action, all companies need to closely examine their internal controls for weaknesses and failures, especially those involved in foreign transactions.
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About the Author
Tom Fox practiced law in Houston for 30 years before founding Advanced Compliance Solutions, which assists companies with anti-corruption and anti-bribery compliance programs. He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield manufacturing and service company. He was previously division counsel with Halliburton Energy Services, Inc. He is now one of the country's leading experts on the Foreign Corrupt Practices Act and anti-corruption and anti-bribery compliance. Tom is the author of the award-winning FCPA Compliance and Ethics Blog and the international best-selling books Lessons Learned on Compliance and Ethics and Best Practices Under the FCPA and Bribery Act. His latest book is Effective Leadership Skills in Compliance: CCO 3.0 and Beyond. He writes and speaks across the globe on anti-corruption and anti-bribery compliance programs.