Global manufacturer 3M has agreed to pay more than $6.5m to resolve charges of the US Foreign Corrupt Practices Act violations (FCPA) related to a subsidiary in China, the SEC said on Friday.
From 2014 to at least 2018, the 3M subsidiary made arrangements to provide Chinese government officials with overseas travel, including tourism activities, to induce them to purchase company products, according to the SEC in its administrative order.
The St. Paul, Minnesota-based business was charged with violating the FCPA’s books and records and internal controls provisions, and it agreed to pay $4.5m in prejudgment interest and disgorgement, plus $2m as a civil penalty.
3M did not admit or deny the SEC’s findings in consenting to the order.
Alternate itineraries
Employees at the 3M unit colluded with local travel agencies to make the arrangements, with the subsidiary paying nearly $1m to fund at least 24 trips for Chinese government officials that included having employees of state-owned health care facilities attend overseas conferences, educational events, and healthcare facility visits.
The SEC said those arrangements were often a pretext to provide the Chinese government officials with overseas travel, shopping visits, and luxury tourist activities, with those activities often scheduled at the same time as the educational events the officials were supposedly attending. At times, the Chinese officials missed whole days of the events or simply never attended at all, the SEC said.
The Marketing manager who coordinated the travel and tourism activities with local tourism agencies was aided in the scheme by several employees in 3M-China’s sales, marketing and professional services departments, the SEC said.
In violation of the books and records provisions of the Exchange Act, the travel and activities were improperly recorded by 3M-China as legitimate business expenses and consolidated into 3M’s books and records.
Those 3M-China employees circulated alternate itineraries that detailed the luxury travel and activities through hand delivery or personal WeChat accounts and asked the participants to keep those agendas hidden, plus they falsified internal compliance documents that denied and/or omitted mention of the tourism activities that were planned as part of the overseas trip, the SEC said.
In addition, the educational seminars that the Chinese government officials were supposedly attending were conducted in English; a number of the trips they actually went on included Chinese government officials who neither understood English nor had adequate translation services.
Books & records
In violation of the books and records provisions of the Exchange Act, the overseas travel and tourism activities were improperly recorded by 3M-China as legitimate business expenses and then consolidated into 3M’s books and records, rendering them inaccurate.
The costs of the trips were improperly recorded in 3M’s books and records as legitimate business expenses, without any indication that they included tourism activities, and 3M improperly benefited by at least $3.5m from increased sales, the SEC said.
Also, in violation of the internal accounting controls provisions of the Exchange Act, 3M failed to devise and maintain an adequate system of internal accounting controls over the cross-border transfer of funds to vendors, which helped facilitate the scheme.
Cooperation credit
The SEC said it considered 3M’s self-reporting, cooperation and remedial efforts in fashioning its consent order.
3M promptly self-reported the misconduct after first learning of it, made witnesses available for interviews, voluntarily produced translations of relevant documents, shared facts uncovered during its internal investigation – including notes of witness interviews – and provided comprehensive, periodic updates on its investigation.
3M also undertook significant remedial measures, including disciplining and/or terminating involved employees, terminating its relationship with the China Travel Agencies, and further enhancing its internal controls environment.