Nothing beats a good “princeling” case under the Foreign Corrupt Practices Act for tough, teachable moments that a compliance officer should study. We have that example today, since Qualcomm just paid $7.5 million in fines and penalties to the SEC for its princeling offenses. So let’s take a look.
The facts are straightforward. Qualcomm makes chips for cellular phones, so its customers tend to be those giant electronics manufacturers in Asia—and above all, in China. From 2002 to 2012, Qualcomm made a huge push into China, courting regulators and handset makers there (which, naturally, were state-owned companies) to use its chips rather than others based on rival technology.
That push, according to the SEC’s order, included meals, gifts, entertainment, airline tickets and luxury goods for spouses, invitations to world-class sporting events, and all the usual goodies we see in FCPA settlements. This spending went undetected by Qualcomm’s internal control systems, the SEC said, partly because Qualcomm had no chief compliance officer nor anyone overseeing FCPA compliance in China specifically, despite that country being an enormous part of Qualcomm’s strategy and the epicenter of FCPA risk.
Even when some Qualcomm employees did try to raise FCPA concerns, the cleanup efforts were so amateurish they made the whole mess look worse. In 2008, someone finally suggested to Qualcomm counsel that perhaps spending $95,000 to entertain 15 foreign officials at the Beijing Olympics might be unwise. So just before the Olympic flame was lit, the company rescinded five invitations already sent, and all five disinvited guests worked at three state-owned firms.
The company said last November that the Justice Department would not proceed with any criminal charges. On the SEC side, the resolution was ho-hum: a civil penalty; self-monitoring and reporting to the SEC for two years; and sharing Qualcomm’s internal audit plan for extra review to its external auditor (PwC).
What We Can Learn
I count three points worth pondering here for compliance officers. First, the case underlines how poor risk assessment and poor tone at the top can go hand-in-hand. More than 90 percent of Qualcomm’s revenue comes from overseas operations, and China was universally known as huge piece of Qualcomm’s strategy. Unfortunately, China was also universally known as a hotbed of FCPA risk, and by 2008 FCPA enforcement was not a new idea to Corporate America. Yet somehow the plainly apparent risks weren’t taken seriously as a matter of corporate practices at Qualcomm, even when the company had an FCPA policy.
Second, the case shows a failure in how to think about training needs imaginatively. Remember that Qualcomm’s mistake here was the hiring of princelings to do customers and regulators a favor. In hindsight, it’s easy to see the problem with emails about princelings that use keywords like “special” or “must hire.” But nobody considered those risks and actions in advance, to understand that some FCPA violations are not based on money; they are based on gestures (like the hiring of a regulator’s child), and those risks will manifest in other ways.
More simply, nobody at Qualcomm bothered to think that if hiring a princeling is a bribe, then the bribe transaction will happen in the HR department’s hiring process. So nobody trained HR employees on how FCPA risks might apply to them. Failure to think about your risks and training needs imaginatively.
That idea of making a gesture brings us to our last, and hardest, lesson: Qualcomm was trapped between two clashing cultural values.
Business in China is conducted based on the concept of guanxi, which roughly translates into “connections”—although another meaning is “mutual obligations,” and that seems more apt here. Qualcomm did favors for its customers and regulators, and in exchange those parties did favors for Qualcomm. The line between favors and bribes is subtle and unspoken in Chinese society, but at the same time, Chinese see mutual obligation as the precursor to mutual benefit, which is what business is supposed to be all about. Chinese don’t see the offense in guanxi that Americans do.
On the other hand, consider describing this to your American workers. In one instance, Qualcomm supported the son of an executive working at one state-owned enterprise by: (1) supporting a $75,000 grant at an American university so the son could finish his PhD; (2) giving him a Qualcomm internship; (3) giving him a full-time job even after HR decided he lacked skills and would slow the team; (4) assigning him a business trip so he could go home to China and visit his parents during the Chinese new year. The Qualcomm executive who orchestrated all this also loaned the son a $70,000 to buy a house.
To Americans, behavior like that contradicts our cultural value of rugged individualism; it offends our sensibilities to the core, and sends a terrible message to other workers who believe in merit and performance, rather than money and inherited connections. I don’t know what the correct answer is to that clash of perspectives, beyond the glib response of “communication, communication, communication!”—which doesn’t seem to work well, in my observation. But it may be the least bad option compliance officers have.