Originally Published: V&E Government Investigations and White Collar Criminal Defense E-communication, July 7, 2010

Over the past several years, enforcement authorities have brought enforcement actions netting hundreds of millions of dollars in fines and penalties for violations of the U.S. Foreign Corrupt Practices Act (FCPA). Such multi-million dollar settlements, once striking, are now hardly noteworthy. What has drawn attention is a recent FCPA settlement announced by the U.S. Securities and Exchange Commission ("SEC" or "Commission") that is remarkable because of the size of the penalty, but not in the way one would expect. In this case, the SEC reached a settlement of only $300,000, based on allegations of an alleged gift scheme, including gifts of flowers to the spouse of a foreign state company's CEO, and an offer of a payment that was intercepted before it was paid. This settlement demonstrates what practitioners long have told their clients, there is no de minimus exception to the FCPA, and even seemingly minor infractions may lead to enforcement action. This settlement further underscores the need for vigorous compliance.

On June 29, 2010, the SEC announced that Veraz Networks Inc. (Veraz), a California-based telecommunications company, agreed to settle allegations that the company violated the books and records and internal controls provisions of the FCPA. According to the SEC's complaint filed in U.S. District Court for the Northern District of California, Veraz failed accurately to record improper payments on its books and records and failed to devise and maintain a system of effective internal controls to prevent such payments. Veraz, without admitting or denying the allegations in the SEC's complaint, consented to the entry of a final judgment permanently enjoining Veraz from future violations of the Securities Exchange Act of 1934 and agreed to pay a civil penalty of $300,000.

According to the SEC complaint, from 2007 to 2008, Veraz resellers, consultants, and employees made payments to government-controlled telecommunications companies in China and Vietnam to influence them to continue business with Veraz. Specifically, the SEC alleged that a Veraz consultant in China provided approximately $4,500 worth of gifts to a state-owned telecommunications company. As evidence of the company's knowledge of the payment, the SEC highlights a single e-mail from one Veraz supervisor, who described one of the payments as a "gift scheme." 

In addition, the SEC alleged that in 2007 and 2008, Veraz sold products to a state-owned Vietnamese telecommunications company through a reseller who, "at times," made or offered illicit payments and provided gifts to officials of the state-owned company. The one gift identified by the SEC in the complaint was flowers purchased for the wife of the Vietnamese company's CEO. Further, a Veraz consultant is alleged to have offered a separate payment to the above Chinese officials to secure a deal for Veraz worth $233,000. One e-mail set the consultant's fee at 15 percent. Although the contract was awarded, Veraz discovered the improper offer and cancelled the contract. Despite the fact that Veraz was, by its own processes and procedures, able to identify the improper conduct and take remedial action, the SEC alleged that the offer was evidence of the company's failure to maintain an effective system of internal controls.

While the $300,000 fine may seem insignificant, it comes on the tail of a two-year internal review and investigation. According to the company's SEC filings, as of November 2009, Veraz had spent approximately $2.5 million to review and defend the matter. In addition, because of the on-going investigation in 2008, the company delayed filing its quarterly reports for March and May 2008, which prompted a warning from NASDAQ that the Veraz common stock was potentially subject to delisting. Ultimately, after a hearing, NASDAQ decided to continue to list the stock, but the Veraz share price has fallen substantially on the heels of the investigation. Indeed, Veraz has now been notified by NASDAQ that unless its share price climbs above $1.00 in the near future, it is again potentially threatened with delisting.

The SEC's enforcement action, Veraz's lengthy and expensive internal investigation, and the subsequent effect on the company's share price, all demonstrate the continued necessity for diligence in FCPA compliance. The Veraz settlement is yet another cautionary tale for companies to ensure that their compliance programs are in working order. Past enforcement actions relating to gift schemes typically have involved substantial payments over a sustained period of time. In contrast, from the face of the complaint, the Veraz enforcement action involves fairly small payments in a condensed time frame, including an offer for payment that was identified and rectified. Nevertheless, the consequences for Veraz have been significant. From this settlement, it appears that there may not be a readily discernable threshold for an FCPA enforcement action. No gift, payment, or bribe may be too small to capture the attention of U.S. regulators.

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