Breaking Down 3M’s FCPA Case

Manufacturing giant 3M Corp. is our latest addition to the annals of FCPA enforcement, agreeing last week to pay $6.5 million to resolve civil charges from the Securities and Exchange Commission that the company’s China subsidiary wined and dined government officials with tourism junkets.

By now it’s an old story to compliance professionals: U.S. company adopts anti-corruption policies, Chinese subsidiary ignores those policies, Chinese subsidiary whisks foreign government officials to “business events” around the world and then lets those government officials play hooky instead. U.S. headquarters subsequently settles charges with the SEC on a books and records violation. 

So how did this happen exactly? The SEC settlement order tells the tale

The misconduct happened from 2014 to 2018. A marketing manager at 3M China conspired with two Chinese travel agencies to plan secret tourism trips for Chinese government officials who were coming to the United States supposedly for business conferences, site visits, training, and the like. Assisting the marketing manager were several other employees in 3M-China’s sales, marketing and professional services departments.

In total, 3M China sent the government officials on at least 24 overseas trips that included secret tourism, and on numerous occasions 3M-China employees tagged along. The educational events always took place near U.S. tourism hotspots, and the tourism side trips included guided tours, shopping visits, day trips to nearby sites, and other leisure activities.

For example, in 2017 3M China took 12 government officials on a week-long trip to Boston and St. Paul. While the formal agenda did include business events every day, in reality the officials “mostly participated in tourism activities rather than attend the educational events.” 

In 2016, 3M China took five government officials on an eight-day trip to Chicago, and two of the officials brought along their spouses. One official and his wife ducked out on the first day of the event and didn’t resurface until the last day; another official attended one day of the event, “then left Chicago and never returned.” 

The Documentation Coverup

The false paper trail to hide all this chicanery unfolded on multiple levels. First, the marketing manager and the Chinese travel agencies created two sets of itineraries: the fake ones for corporate headquarters, and the real ones listing the secret tourist trips. 3M-China employees then circulated the secret itineraries only through hand delivery of paper documents or personal WeChat accounts. (Improper messaging apps, people! We’ve talked about this too.)

When the 3M China employees had to cover some tourism expenses from their own pocket, they reimbursed themselves for those costs by having the Chinese travel agencies submit inflated invoices. At other times, the travel agencies had 3M China’s local distributors pay their invoices, at the direction of the 3M China employees. 

The 3M employees also tracked all these travel expenses closely, to see whether their tourism junkets translated into higher sales that were consistent with the company’s sales goals. Ultimately, 3M China paid nearly $1 million to fund the trips, all of it recorded in the official books as legitimate business expenses. The company netted at least $3.5 million in increased sales from the scheme. 

Eventually 3M’s corporate offices became aware of the misconduct (exactly how, we don’t know) and self-reported the mess “promptly.” The SEC also credited 3M for extensive cooperation in the ensuing investigation, which included making witnesses available for interviews, voluntarily producing translations of relevant documents, and sharing facts uncovered during its internal investigation. 3M also undertook “significant remedial measures,” which included firing the offending employees, cutting business ties with the complicit travel agencies, and tightening its internal controls for cross-border fund transfers.

Final result: $4.5 million in disgorgement of ill-gotten gains, plus a $2 million civil penalty, and presumably a painfully high sum spent on internal investigation costs. The Justice Department has not said anything about criminal enforcement actions, although this case seems relatively small and self-contained, so my bet is we’ll see a declination to prosecute sooner or later. 

Compliance Points to Ponder

When one hears about an FCPA enforcement action involving China or some other highly corrupt jurisdiction, your first thought is usually, “Corrupt third-party agents! Better due diligence!” That’s almost always the correct lesson to learn — but this might be the rare example where it isn’t.

Usually we see a case where the company contracts with some shadowy overseas agent, which is charging some preposterous fee for services the agent couldn’t possibly deliver. An astute and diligent compliance program would demand enough documentation to uncover the third-party subterfuge before the transaction happens. For example, think of all those resellers who say they need to offer “discounts” to end-use customers because of “competition.” You can demand more extensive proof of that before granting the discount, which of course just goes into a slush fund to pay for bribes.

That’s not really what happened here. The travel agencies were competent to provide the services listed, and $1 million wasn’t an unreasonable amount to take groups of people on business trips across the world at least 24 times. The 3M China employees and the travel agencies did file itineraries that looked reasonable. If you looked at all that documentation before the trips happened, you wouldn’t necessarily find anything amiss. 

The real lesson here seems to be how compliance or internal audit teams would sniff out the secret tourism after the trips began happening. That is, what sort of post-event documentation would you want to see, to prove that the government officials attended the events listed on the itinerary? That’s the question compliance officers want to ponder as we look at the 3M case.

We could look to our friends in the U.S. pharmaceutical and healthcare sectors for inspiration. They operate under the Anti-Kickback Statute, which (among other things) imposes tight restrictions on when and how they might invite a doctor to a research symposium or some other speaking engagement. So a compliance officer might ask for evidence such as brochures advertising the symposium or copies of sign-in sheets to see who actually attended. 

Would such evidence be foolproof? Perhaps not — but at least your documentation policies and procedures would be tackling the problem from a useful direction. Sometimes preventive controls, before a transaction happens, aren’t enough to uncover the FCPA scheme that’s afoot. Detective controls, after the transaction, can be just as vital.

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