We write to advise you as to why the declination issued last week to Harris Corporation by the U.S. Securities and Exchange Commission ("SEC") is important to your company. Put simply, Harris' declination from the SEC -- following on the declination Harris received from the U.S. Department of Justice ("DOJ") in November 2015 -- represents the first time in a "pure" FCPA investigation that a multinational corporation has avoided prosecution entirely while one of its former employees was sanctioned for FCPA violations that created clear potential FCPA liability for the company. Morgan Stanley received a declination while its former employee was prosecuted for FCPA violations, but that case involved self dealing by the employee, a factor not present in the Harris case. By issuing a declination to Harris while charging its former employee with having paid $1 million in bribes, the enforcement authorities have matched their rhetoric with deeds, and have demonstrated the real benefit to companies of an effective compliance program, voluntary disclosure, and substantial cooperation. In addition, the Harris declination shows how the acquisition of a company, even one that represents a small portion of an acquirer's total revenue, can expose the acquirer to potential substantial FCPA liability -- and how effective anti-corruption due diligence and post-closing integration can significantly mitigate that risk.
Summary: Harris Receives Declinations, But Its Employee is Sanctioned
Harris, which was represented by Baker McKenzie in this matter, is a global communications and information technology company based in Melbourne, Florida. The investigation arose out of Harris' acquisition of CareFx Corporation in April 2011. CareFx had a wholly-owned subsidiary in China ("CareFx China") that was in the business of developing and selling electronic patient medical records software to Chinese health agencies and hospitals. CareFx China was a small operation - the consolidated revenue of CareFx China in fiscal year 2012 was approximately $1.4 million, which was less than 0.1 % of Harris' total consolidated revenue.
The chairman and CEO of CareFx China was Jun Ping Zhang ("Ping"). The SEC alleged that, after the acquisition, Ping (who was also a Harris employee) caused CareFx China to provide between $200,000 and $1 million in improper gifts to Chinese health officials, who awarded $9.6 million in contracts to CareFx China. Ping allegedly concealed the gift giving scheme from Harris by causing CareFx China's employees to describe the gift expenses in CareFx China's accounting records as "entertainment," "office supplies," and "transportation."
Harris discovered the scheme as a result of its post-acquisition integration efforts, conducted an internal investigation, and voluntarily disclosed the investigation to the DOJ and the SEC in August 2012. After making its voluntary disclosure, Harris closed all of CareFx China's sales operations in September 2012.
On November 30, 2015, the DOJ advised Harris that it had decided to decline prosecution of the company. On September 12, 2016, the SEC announced its declination as to Harris in an Administrative Proceeding release found here. On the same day, the SEC published an Administrative Order against Ping (found here), in which Ping consented to findings that he had violated the anti-bribery provisions of the FCPA, had caused Harris' books and records to be inaccurate, and had knowingly circumvented Harris' internal controls. Ping agreed to pay a civil monetary penalty in the amount of $46,000.