Before the moment slips by, we should take a look at that FCPA enforcement action against Clear Channel Outdoor Holdings that the Securities and Exchange Commission announced two weeks ago. The more you read the details, the more you wince at this tale of poorly managed executives and ineffective internal auditing. Don’t let this stuff happen at your company.
What did happen? According to a settlement announced by the SEC on Sept. 29, the head of Clear Channel’s Chinese subsidiary run roughshod over the company’s internal controls for years in the 2010s. Clear Channel sells advertising on roadside billboards, bus stops, and other public spaces. That means it deals with a lot of government agencies — and the head of the Chinese subsidiary apparently did so with gusto.
The SEC settlement order recounts years’ worth of eye-popping expenses, where the Chinese executive spent hundreds of thousands of dollars on first-class travel, hotel rooms, meals, gifts, and entertainment; all on Chinese government officials who had the authority to issue the necessary permits for Clear Channel to sell its advertising.
The case has all the usual missteps we tend to see in FCPA enforcement: incomplete or misleading documentation about payments; kickbacks funneled through bogus intermediaries, which in this instance were known as “cleaning and maintenance entities;” slush funds described as a “customer development expense” program, which were payments to consultants who helped Clear Channel China win business — except the identities of those consultants were kept confidential, naturally.
Compliance professionals have heard all those stories before. The interesting failures here are more about (1) the unchecked authority of the executive running Clear Channel China; and (2) ineffective internal audits, which warned about possible corruption in China and accomplished little else.
When the Executive Is the FCPA Risk
Clear Channel’s relationship with its China executive — alas, we don’t know his name — goes back to 1998, when the company bought a controlling interest in Chinese advertising businesses that the executive owned. He then became the principal executive officer for Clear Channel’s China operations, which formally were known as Clear Media.
Theoretically Clear Channel exercised some degree of oversight over him. For example, two Clear Channel executives served on Clear Media’s board of directors, including one who served as executive chairman. Executives from Clear Channel’ finance, legal, and compliance functions also participated regularly in Clear Media’s board meetings, as well as in certain Clear Media audit committee meetings.
Alas, whatever oversight Clear Channel was supposed to exercise over Mr. China Executive, clearly it didn’t work. The SEC complaint lists all those lavish expenses; plus the sham cleaning and maintenance companies (and other sham intermediaries as well, such as a shell company that listed China Executive’s driver as a principal officer); plus that customer development scheme with the unnamed consultants. But there’s more! China Executive also blocked Clear Channel’s internal auditors from receiving requested records, and prevented investigators from interviewing “executives” at those sham intermediaries and vendors.
The real compliance risk here was this larger-than-life executive, engaging in all sorts of reckless behavior because people more senior than him failed to exercise proper oversight and control.
I’ve written about these larger-than-life executives before. They are almost inevitably men who built their enterprise from the ground up, and therefore treat the business like their personal asset, where the rules do not apply to them.
When a corporation lacks structures to check these oversized personalities — or worse, when the company embraces structures that enhance and enshrine the power of such men — you end up with a mess. As Lord Acton said, power tends to corrupt, and absolute power corrupts absolutely.
Is that what happened here with Mr. China Executive? Did Clear Channel management in the United States dither while he bribed, lied, and covered up?
Well, that brings us to the other notable failure in this case.
Internal Audits, No Follow Through
The SEC settlement order also documents numerous instances where Clear Channel’s internal audit team did raise concerns about corruption in the China business. Then nothing happened.
For example, in 2012, Clear Channel internal auditors reported that the China unit had made payments to those cleaning and maintenance businesses but the payments couldn’t be traced to written contracts. In 2013, the internal auditors reported that those issues raised in their 2012 compliance audit had been addressed, but didn’t explain how. Then internal audit flagged the same payments-without-contracts issues again in 2014 and 2015 audits. Huh?
It continues. Clear Channel’s internal auditors warned senior management or the audit committee about “problematic” or “high risk” payments to government officials in 2015, 2016, and 2017. An audit in 2016 also flagged gaps in the China unit’s compliance training and how the unit publicized the whistleblower hotline. At the same time, the auditors failed to perform any testing of the China unit’s due diligence files and contracts to verify the accuracy of the unit’s claims about its use of third parties, contrary to the audit team’s standard testing protocol.
We could go on from there, but you get the picture. Internal auditors did make some attempts to raise concerns about suspicious payments and internal control failures, but nobody took those findings and put them to good use — namely, by insisting on reforms to a clearly suspect China unit. The problem was an internal audit function both under-performing and under-used.
Eventually things unraveled, as they always do. An employee of the China unit confessed to regulators there about a long-running embezzlement scheme, which finally started to bring the rot into public view. Accounting firms were hired, investigations were conducted, and Mr. China Executive still tried to thwart auditors’ access to financial records into 2019. Ultimately Clear Channel announced a strategic review of its business operations in 2019, and sold off the China unit in 2020.
The final result today is that Clear Channel must pay $20.11 million in disgorgement and interest costs, plus a $6 million civil penalty. It also had to implement the usual suite of compliance program improvements, such as adopting stronger anti-corruption policies, hiring more compliance and internal control personnel, and weaving ethics and compliance concerns into personnel evaluations and compensation plans. Clear Channel itself neither admits nor denies any facts in the SEC settlement order.
But really, the bigger lesson here is about taking ethics and compliance concerns seriously. Clearly the China executive did not. Worse, Clear Channel’s management didn’t move to rein in his abuses, even when internal audit repeatedly raised concerns about suspicious payments, policy violations, weak documentation, and trampled internal controls. What’s the point of all that effort, if management then does nothing substantive with it?
By the way, the Justice Department has yet to bring any criminal charges against Clear Channel, nor has it published any declination to prosecute. With a fact pattern as painful as this one, you have to wonder whether we’ve heard the end of this story.