International Law Advisory - Sight-Seeing Tiger, Hidden Dragon - Lucent Fined for Financing Sight-Seeing Trips for Chinese Officials

Capping off a year of record enforcement activity, on December 21, 2007, the Department of Justice (“DoJ”) and Securities and Exchange Commission (“SEC”) settled enforcement actions with telecommunications company Lucent Technologies Inc. (“Lucent”).  Pursuant to the settlements, Lucent agreed to pay $1 million in fines and $1.5 million in civil penalties for asserted FCPA violations in connection with Lucent’s sponsorship of officials of Chinese state-owned telecommunications companies to travel to the United States and other countries.  This settlement resolved a matter pending at least since August 2003, when Lucent first disclosed it was conducting an internal investigation into operations of its wholly-owned subsidiary, Lucent China.  In April 2004, Lucent fired four Lucent China executives, including the president of Lucent’s China operations and its chief operating officer.  In May 2005, the SEC notified these former executives that it would not recommend enforcement actions against them.

The relatively low amount of Lucent’s fines and penalties in relation to the amount of the questionable payments and number of violations – over $10 million spent in the course of several hundred trips, as discussed more fully below – is perhaps the most striking feature of the settlement.  Press reports at one point indicated that the enforcement agencies were seeking a much larger fine, on the order of $25 million.  Also noteworthy is the absence of a compliance monitor and disgorgement penalties.

The settlement terms may reflect the fact that not all FCPA shoes have dropped for Lucent, now merged with Alcatel, or the individuals associated with the payments.  The activities in question predated the merger, which was consummated in November 2006.  Lucent’s deferred prosecution agreement with the DoJ extends only to its foreign sales activities prior to the merger, and enforcement authorities continue to investigate whether Alcatel and its affiliates violated the FCPA in connection with its mobile telecommunications business in Costa Rica and elsewhere.

Payments at Issue

From at least 2000 to 2003, in order to obtain contracts with various Chinese state-owned telecommunications enterprises on behalf of its subsidiary in China, Lucent China, Lucent spent over $10 million for the travel of approximately 1,000 Chinese foreign officials on at least 315 trips.  These trips consisted primarily of sightseeing, entertainment, and leisure, and were approved with the consent of the highest officials at Lucent China.  The trips were arranged by Lucent employees in the company’s “China Operations Support Team”, located at Lucent headquarters in New Jersey.  Lucent’s “Customer Visit Request Form” specifically asked if customers were “decision-maker/influencers” and provided space to request  “sightseeing/entertainment” as well as to specify the quality of the requested accommodations. 

Lucent alleged that the majority of the trips were designed to allow the Chinese foreign officials to inspect Lucent’s factories, pursuant to contracts between Lucent and the Chinese parastatals.  However, during many of these trips, the officials spent little or no time visiting Lucent’s facilities and instead visited tourist destinations such as Hawaii, Las Vegas, the Grand Canyon, Disney World, Los Angeles, and New York City.  Moreover, both the SEC and the DOJ noted that Lucent began outsourcing its manufacturing in 2001, leaving few factories to visit.  Lucent also provided the officials with per diems of $500 to $1,000 per day, even though it provided all lodging, transportation, food, and entertainment expenses.

In one example highlighted by the SEC settlement, Lucent provided six delegates from a Chinese state-owned company with a $33,000, 11-day tour of the United States and Hong Kong that featured no factory visits, purportedly because the customers refused to travel to the East Coast in the wake of the September 11^th, 2001 attacks on the World Trade Center.  In an internal email, a Lucent representative described the customer as “a very special case” because Lucent had already received $50 million from the customer and estimated it could gain two to three billion more.  Internal emails also revealed that Lucent employees were aware that trips did not involve “factory tours” but used the term to help Chinese customers obtain visas and get through U.S. immigration controls.

Most of the trips were recorded in Lucent’s books and records as “Marketing Expenses”, “Services Rendered – Other Services”, “Transportation International”, and “Lodging Expenses”, though none of these accounts was meant to record customer travel.  In addition, Lucent recorded expenses for some customer’s sightseeing trips in its “Factory Inspection” account though there had been no visit to a Lucent factory.

Enforcement Actions

Consistent with other recent prosecutions, the SEC charged Lucent with violations of the books and records and internal controls provisions of the FCPA, specifying that the latter were insufficient because they did not allow Lucent management to ensure the accountability of the company’s assets or prohibit employees from accessing funds without proper authorization.  Though the DoJ did not specify the FCPA charges against Lucent, Lucent admitted to and acknowledged responsibility for conduct constituting violations of the antibribery and accounting provisions of the FCPA in its deferred prosecution agreement with the DoJ, and agreed not to make any public statements contradicting the conduct described in the agreement.

In the SEC settlement, Lucent consented to an order permanently enjoining it from future violations of the books and records and internal controls provisions.  The DoJ agreed to defer prosecution for two years as long as Lucent adopted improved “internal controls, policies, and procedures,” including a “rigorous anti-corruption compliance code, standards, and procedures designed to detect and deter violations of the FCPA.”  The DOJ’s primary list of “to dos” for Lucent is consistent with its pronouncements in other FCPA cases this year.

Compliance Lessons

Compliance Programs Must Provide Employees with the Training to Appreciate FCPA Risks.  The SEC emphasized that “Lucent’s violations occurred because Lucent failed, for years, to properly train its officers and employees to understand and appreciate the nature and status of its customers in China in the context of the FCPA.”  Many if not all of China’s telecom companies are state-owned.  Although the role of the state in today’s China has receded somewhat, many enterprises remain state-owned or controlled.  Companies in many businesses, not just telecommunications, may deal with customers where employees are “foreign officials” under the FCPA, as Lucent’s were.  Training local operations personnel as well as corporate personnel approving or arranging travel to recognize these issues is key.

Internal Controls Form Only One Part an Effective Compliance Program.  Lucent’s deferred prosecution agreement effectively requires it to establish an improved compliance program.  This case demonstrates that without significant monitoring, even the most robust internal controls cannot detect and prevent FCPA violations.  Travel was approved despite the red flags indicated on request forms.  (In fact, the way the request forms were drafted brought out those red flags.)  Monitoring is particularly important in the context of travel sponsorship.  Beyond simply fielding questions, companies should critically review the underlying facts of sponsorships to determine if there is a legitimate business purpose and whether that purpose is the primary reason for the proposed travel.  In addition, companies should maintain records that allow them to detect and prevent cumulative amounts of sponsorships to a particular government official or government body.

Improper Recording Prevents Detection of FCPA Violations.  Proper and consistent recording of expenditures allows senior management and compliance personnel to review the activities of company operations.  In Lucent, the recording of travel sponsorship in a scattering of account categories hampered the company’s ability to monitor the magnitude of the sponsorship provided. 

The Crouching Tiger, Hidden Dragon?

This settlement raises a question whether other FCPA allegations that have surfaced with respect to Lucent in recent years, such as the 2003 allegations regarding payments in Saudi Arabia, will ripen into enforcement action.

Moreover, Alcatel’s FCPA problems appear to be far from over.  In June 2007, former Alcatel executive Christian Sapsizian, a French citizen, pleaded guilty to participating in the payment of more than $2.5 million in improper payments to senior Costa Rican government officials in order to obtain a mobile telephone contract from that country’s state-owned telecommunications authority, and enforcement authorities continue to look into Alcatel’s pre-merger activities in Costa Rica as well as other countries.  As part of his plea, Sapsizian agreed to cooperate in the ongoing investigation.

We will continue to keep you apprised of developments related to FCPA enforcement.  If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051; Erik Kitchen at 202.429.8132;  Ed Krauland  at 202.429.8083; Pat Norton at 202.429.8034; Jonathan Drimmer at 202.429.6477; Matt Herrington at 202.429.8164; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Negar Katirai at 202.429.8028; Sarah Lamoree at 202.429.6488; Michael Lieberman at 202.429.8064; or William Gordon at 202.429.8013.

Read more about our FCPA/Anti-Corruption Practice.

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_{1.  SEC v. Lucent Technologies Inc., Case No. 1:07-cv-02301 (D.D.C.) (Complaint and Order filed Dec. 21, 2007) and associated SEC Lit. Rel. No. 20414 (Dec. 21, 2007);  Settlement Agreement between DoJ and Lucent Technologies Inc. (Signed Dec. 5, 2007), Including Statement of Facts and Setting out Compliance Obligations) and associated DoJ Press Release 07-1028 (Dec. 21, 2007).}