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Many Lessons in Polycom FCPA Case

Corporate compliance officers have one more enforcement action to study in 2018: Polycom, the company that makes those UFO-shaped speaker phones on your conference room table. The company (now a subsidiary of Plantronics Corp.) just agreed to pay $36 million to settle FCPA charges in a case with lessons for pretty much everybody.

The FCPA misconduct itself isn’t terribly new. According to the SEC’s settlement order, Polycom’s China division ran a bribery scheme from 2006 into 2014. Sales executives authorized “discounts” to Polycom’s distributors in China, and those discounts then covered the cost of bribes the distributors paid to Chinese government officials. Over the eight years in question, Polycom netted roughly $31 million in profit from the bribery scheme.

FCPAThe improper payments were orchestrated by Polycom’s vice president for China, who maintained a separate, private sales management system for the corrupt deals, while making false entries into Polycom’s global accounting system to cover up them up. Even better: senior sales executives in China had employees work on those deals using their personal email addresses rather than Polycom’s corporate system.

There’s more. Polycom didn’t bother to translate some anti-corruption training materials into Mandarin. It frequently failed to follow up on Polycom China employees skipping anti-corruption training. In 2013 as part of a due diligence review, Polycom discovered that one distributor had bribery allegations in its past — and then dug no further. The distributor remained on payroll, still selling to Chinese government agencies.

So already we can say Polycom offers abundant reminders about training, due diligence, and third-party oversight — largely by providing contrary examples of what not to do, since Polycom China’s practices were as loose as an untied shoelace. Just do the opposite, and you’ll be more than halfway home.

As I read the SEC’s order, however, I wondered: why did the bribery scheme stop in July 2014? How did Polycom management discover the shenanigans in China?

Which brings us to Polycom’s former CEO, Andrew Miller, and the company’s other internal control failure.

Miller Time

Miller ran Polycom from May 2010 to July 2013. During that time, he racked up $190,000 in personal expenses and improper perks (trips, sporting tickets, spa treatments), which Miller billed back to Polycom — falsifying receipts and violating Polycom policies along the way. The board sacked Miller in 2013, the SEC launched its own investigation, and enforcement lawsuits ensued.

Miller settled with the SEC in 2016, paying $450,000 and agreeing not to serve on public companies until 2021. Polycom settled with the SEC in 2015, paying a $750,000 penalty.

Miller

What’s striking are the overlap and similarities between Miller’s perks abuse and Polycom China’s bribery scheme. For example, according to the SEC’s complaint against him, one Miller misadventure was a 10-day trip to South Africa in 2012 to scout locations for a company event, where Miller brought his girlfriend and racked up $51,000 in expenses. While working with an outside event planner for the trip (because Miller excluded Polycom’s internal events team), he wrote from a Yahoo email address and said: “Please use YAHOO for all email re Africa going forward !!!!!!!!!!!!!!”

Miller also submitted false expense reports, such as recording the names of customers for dinner entertainment when really Miller was treating friends and family. He directed subordinates to submit expense reports for costs he had incurred, or split expenses into smaller amounts to avoid suspicion.

The audit committee was alerted to Miller’s abuses in May 2013, and the board ousted Miller on July 19, 2013. If you read the FCPA settlement announced last week, shortly thereafter seems when Polycom’s board started taking that misconduct seriously.

Miller’s expense abuses and Polycom China’s bribery scheme were two symptoms of a larger malaise afflicting Polycom rooted in a weak corporate culture.

To be clear, there is no evidence to suggest Miller and the Polycom China misconduct are connected. My point is only that Miller’s expense abuses and Polycom China’s bribery scheme were two symptoms of a larger malaise afflicting Polycom.

That malaise began before Miller’s arrival in 2009 (the FCPA issues date back to 2006) but it worsened after his arrival, to the point that Polycom endured two types of internal control failure, in two divisions (headquarters and China), simultaneously.

No wonder Polycom sputtered during this time. From 2011 to 2013, total revenue fell from $1.4 billion in 2011 to $1.37 billion in 2013, China revenue from $161.5 million to $147.3 million. The company’s bottom line swung from $125 million in net income to a $18 million net loss.

Polycom Lessons Learned

The biggest lesson, of course, is that ethical leadership matters, because leadership builds culture and culture drives behaviors. Miller engaged in greedy, egotistical misconduct, so he could live the good life personally while Polycom floundered financially. With tone at the top like that, is anyone surprised that Polycom China executives thought nothing of cheating to win business?

Polycom

Source: Polycom SEC filings

Only when a new CEO arrived in late 2013, along with two new board members, did Polycom change course on its China bribery issues. That part of its FCPA story is nothing new to compliance officers either. The company disclosed its troubles, cooperated with regulators’ investigation, and overhauled its compliance program.

The cooperation included translating company documents from Mandarin to English, making employees available for interviews, and “identifying unrelated misconduct to the [Justice] Department for investigation and potential prosecution.” The remediation included firing eight executives, cutting ties with one distributor, demanding personnel changes at others, and improving training and due diligence procedures. In other words, all the usual stuff.

The result: a declination to prosecute from the Justice Department, although Polycom must disgorge $31 million in profits and pay a $3.8 million fine and $1.3 million in pre-judgment interest to the SEC.

So another lesson is that the Justice Department’s FCPA Corporate Enforcement Policy is in full swing. Polycom violated many good conduct norms and had a bad culture. Then new leadership reported its misconduct, cooperated, and fixed the mess.

Yes, Polycom had to surrender its ill-gotten profits, and I’m sure the internal investigation was not cheap. Still, this is another in a line of examples from prosecutors showing what they want companies, and their compliance programs, to do.

Back to Ethical Rigor

Above all, however, I keep returning to Polycom China’s long-term misbehavior, and how nobody uncovered it. For example, when the Polycom China executives recorded their bogus entries into the company’s global CRM database, they cited “competition” as reason for the discounts given to distributors — again, and again, and again.

Discounts over a certain size had to be reviewed and approved by Polycom executives in Singapore, who were in a separate division from China. Why did nobody question that same bogus reason, cited over and over again? They had to have known China is rife with corruption. Did they not care? Were they not trained to exercise professional skepticism?

Likewise, how might Polycom’s auditors, both internal and external, have uncovered Polycom China’s misconduct? The Polycom China executives essentially created a dual system of sales and communication for their corrupt deals. That’s easier and easier to do with modern technology. Audit and IT functions will need better ways to identify and block that maneuver.

Polycom’s tale is, fundamentally, a mix of the usual bad practices that arise under a weak corporate culture; and the modern enforcement policies trying to push companies away from those bad habits.

Like I said, something in this case for everyone.

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