11 May 2018
Penalties Imposed for Illegal Dealings with Mainland China
BIS has imposed a US$100,000 civil penalty against a U.S. company and its owner for violating the Export Administration Regulations by exporting electronic equipment controlled on national security grounds to mainland China without the required BIS export licence. Separately, a U.S. company has agreed to pay more than US$9 million to the U.S. Securities and Exchange Commission to resolve charges that it violated the Foreign Corrupt Practices Act in connection with improper payments made by two mainland Chinese subsidiaries. This amount includes US$6.08 million in disgorgement, US$1.14 million in pre-judgment interest and a US$2 million civil penalty. However, the U.S. Department of Justice has declined criminal prosecution of this matter.
According to BIS, the entities obtained the equipment from U.S. manufacturers in what they made to appear as domestic transactions and then exported the items while taking steps to avoid export control scrutiny and detection. These steps included concealing the type of equipment involved, its value and/or its ultimate destination; using packaging that was deliberately relabelled to falsely identify the items inside; and transshipping the equipment via Hong Kong while falsely stating on export transaction documents that Hong Kong was the ultimate destination.
BIS is suspending half of the civil penalty as well as a five-year denial of export privileges for five years, and will waive these measures thereafter, provided that the company and its owner pay the other half of the penalty, comply with the provisions of the settlement agreement and commit no further export violations during that time.
In the second case, the SEC indicates that the two mainland Chinese subsidiaries used third-party agents to make unlawful payments to obtain data vital to the parent company’s business. One subsidiary, part of a joint venture with a mainland Chinese company, acquired non-public financial statement information on mainland Chinese entities, in violation of mainland Chinese law, by making unlawful payments to mainland Chinese government officials. The second subsidiary made improper payments to third parties to acquire non-public personal data in violation of mainland Chinese law and also made improper payments to obtain specific business. The SEC states that despite concerns raised during pre-acquisition due diligence efforts, the parent company failed to take appropriate action to stop the improper payments or the false entries in the subsidiary’s books and records, which continued for several years after the acquisition.
Despite these actions, the DOJ has declined to prosecute the parent company based on a number of factors, including that the company identified the misconduct, made prompt voluntary self-disclosures, undertook a thorough investigation and fully co-operated with the DOJ, took steps to enhance its compliance programme and its internal accounting controls, engaged in full remediation (including terminating the employment of 11 individuals and disciplining others) and agreed to disgorge the amount determined by the SEC.