Panasonic Avionics, a subsidiary of Panasonic, based in Lake Forest, California, designs and distributes in-flight entertainment systems and global communications services for airlines and airplane manufacturers, has agreed to pay a criminal fine of $137.4 million and $143 million in disgorgement, including prejudgment interest. In addition, Panasonic Avionics agreed to a Compliance Monitor for a 2-year period.
According to admissions and court documents, Panasonic Avionics knowingly and willfully caused Panasonic to falsify its books and records with respect to Panasonic Avionics retention of consultants for improper purposes. The consultants, which did little or no actual consulting work for Panasonic Avionics, were retained through a third-party service provider and were paid for out of a BUDGET over which a senior Panasonic Avionics executive had complete control and discretion, without meaningful oversight by anyone at Panasonic Avionics or Panasonic (parent).
One such individual was offered the consulting position by Panasonic Avionics at the time that he was employed by a state-owned airline and involved in negotiating a lucrative contract amendment on behalf of the airline with Panasonic Avionics. According to court documents, that consultant was subsequently paid $875,000 by Panasonic Avionics over a 6-year period and Panasonic Avionics earned over $92 million in profits from portions of the contract over which the consultant had some involvement or influence while employed with the airline. Panasonic Avionics admitted that it mischaracterized these payments as “consultant payments” on its general ledger, which it knew caused Panasonic to incorrectly designate those payments as “selling and general administrative expenses” on Panasonic’s books, records, and accounts.
Panasonic Avionics received NO credit for voluntary disclosure because it received a subpoena from the SEC and then subsequently notified the Justice Department. Panasonic Avionics did receive credit for cooperation and remediation, although the DOJ noted its concern in the DELAY in TERMINATING Panasonic Avionics President and other executives.
Panasonic Avionics also admitted that employees in its Asia region concealed Panasonic Avionics use of certain sales agents, which did not pass the Company’s internal diligence requirements. According to admissions and court documents, Panasonic Avionics formally terminated its relationship with these sales agents, as required by its compliance policies, but Panasonic Avionics employees then secretly continued to use the agents by having them rehired as sub-agents of another company, which had passed Panasonic Avionics due diligence checks
Practice Pointers – when on boarding a new third party consider providing a list of terminated and banned third parties, including sales agents and have them certify those individuals are not associated or involved with them! Also, make sure your human capital folks have a list of banned hires. Lastly, develop an ongoing monitoring program that reviews those banned third parties with actual payments made.
When designing or enhancing internal controls make sure you understand what the objectives are! Click here for the definition of an internal control and remember a control is a process and not a thing – it does something!
Through this process, Panasonic Avionics employees hid more than $7 million in payments to at least 13 sub-agents.
By mischaracterizing the payments made to consultants and sales agents and providing false or incomplete representations and Sarbanes-Oxley subcertifications to Panasonic about Panasonic Avionics financials and financial controls, Panasonic Avionics caused Panasonic (parent) to falsify its books, records, and accounts in violation of the FCPA.
The DOJ and SEC settlements involved books and records violations. The underlying conduct, however, clearly involved bribery payments made to foreign officials associated with state-owned airlines. The SEC settlement includes anti-bribery, accounting and internal controls violations.
The fact pattern here seems to indicate that management overrode internal controls!
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