California Company Settles Criminal and Civil FCPA Allegations for $1.7 Million

On December 10, 2010, Department of Justice (DOJ) reported that RAE Systems, Inc. (RAE), a San Jose, CA, corporation, has agreed to pay $1.7 million to resolve charges of violating the Foreign Corrupt Practices Act (FCPA). 

The information included in the non-prosecution agreement which resulted after RAE voluntarily disclosed the violations, RAE is an equipment manufacturer who is engaged in the development and manufacture of rapidly deployable, multi-sensor chemical and radiation detection monitors and networks. From 2005 to 2008, the company had significant operations in the People's Republic of China (China), and sold its products and services primarily through two subsidiaries organized as joint ventures with local Chinese entities: RAE-KLH (Beijing) Co. Limited (RAE-KLH) and RAE Coal Mine Safety Instruments (Fushun) Co. Ltd. (RAE Fushun). The information further provides that a significant number of RAE-KLH's and RAE Fushun's customers were Chinese government departments and bureaus, and large state-owned agencies and instrumentalities, including regional fire departments, emergency response departments and entities under the supervision of the provincial environmental agency.
 
The agreement describes that RAE used RAE-KLH and RAE Fushun employees to pay bribes to foreign officials in China. As a result of due diligence conducted by RAE before acquiring the majority of the joint venture that became known as RAE-KLH, RAE became aware of improper commissions, kickbacks and "under table greasing to get deals" by employees.   The information contained in the agreement provides, however, that RAE elected to implement internal controls only "halfway" so as not to "choke the sales engine and cause a distraction for the sales guys."  As a result, improper payments continued at RAE-KLH. When acquiring the majority of RAE Fushun, RAE did not conduct any pre-acquisition corruption due diligence in spite of a number of red flags. It was later confirmed that RAE Fushun also gave bribes to Chinese officials.   
 
According to the settlement agreement, RAE Systems voluntarily disclosed this conduct to the department, conducted a thorough and credible internal investigation, and undertook extensive remediation. RAE agreed to fully cooperate with investigations by law enforcement authorities, to adhere to a set of enhanced corporate compliance and reporting obligations, and to submit periodic reports to the department regarding RAE's compliance with its obligations under the agreement.
 

In a related matter, RAE reached a settlement with the U.S. Securities and Exchange Commission (SEC) in which RAE consented to the entry of a permanent injunction against FCPA violations and agreed to pay $1,147,800 in disgorgement and $109,212 in prejudgment interest. RAE also agreed to comply with certain undertakings regarding its FCPA compliance program.