The Cost of Entertaining for Lucrative Chinese Contracts: $3M

On the last day of 2009, the Department of Justice announced that a California-based telecommunications company, UTStarcom, Inc., agreed to pay a $1.5M fine for violating the Foreign Corrupt Practices Act.

According to the announcement, the company’s wholly-owned Chinese subsidiary provided travel and other things of value to employees of Chinese state-owned telecommunication firms. The state employees traveled to Hawaii, Las Vegas and New York City, ostensibly for “training” at UTSI’s facilities. Apparently, however, UTSI did not have facilities in those locations and there was no training done. The travel and related costs were recorded as “training expenses,” when, in fact, the entertainment was provided in an effort to obtain and retain lucrative Chinese telecommunications contracts. This, of course, is prohibited under the FCPA.

Reportedly, in addition to the $1.5M fine, UTSI agreed to implement “rigorous internal controls” and cooperate fully with the DOJ. The DOJ agreed not to prosecute UTSI or its subsidiary and the agreement recognized UTSI’s voluntary disclosure and thorough self-investigation of the matter. In addition to being governed by the FPCA’s anti-bribery provisions, as a publicly-traded company UTSI is subject to the Securities and Exchange Commission’s jurisdiction. In a related matter, UTSI reached a settlement with the SEC to pay an additional $1.5M and meet additional obligations over the next 4 years.

This settlement shows that U.S. companies must carefully monitor entertainment and travel expenses for foreign customers and prospective customers when they are employees of a state-owned company. They must also ensure their foreign subsidiaries are compliant with the FCPA.

This settlement is remarkably similar to a settlement the DOJ reached with Lucent Technologies almost 2 years to the date prior. In December, 2007, Lucent settled a case in which it reportedly paid expenses for more than 1,000 employees of Chinese state-owned companies to travel to U.S. destinations. The trips were supposedly to inspect Lucent factories and train the foreign officials in using Lucent technology, but the investigation showed that very little or no time was spent visiting Lucent facilities in the U.S.; instead, the Chinese employees visited tourist destinations including Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City. Those violations reportedly arose from Lucent’s wholly-owned subsidiary in China.