Recently, the DOJ and SEC concluded enforcement actions involving PTC Inc.
(PTC), Parametric Technology (Shanghai) Software Co. Ltd. and Parametric Technology (Hong Kong) Limited. PTC was previously known as Parametric Technology Corporation, and the two other companies were wholly owned subsidiaries (collectively the Chinese entities). The fines and penalties were quite substantial.
Books and records violations
The 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 failures
Further, 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.
To avoid enforcement action, all companies need to closely examine their internal controls
for weaknesses and failures, especially those involved in foreign transactions. To learn more about how to prevent and detect bribery, watch Tom Fox's on-demand webinar