Risk Management and Crisis Response Blog

Qualcomm pays FCPA fine for hiring relatives of Chinese government officials

Mar 10, 2016 4 MIN READ
Lawrence E. Ritchie

Partner, Disputes, Toronto

On the March 1, 2016, the U.S. Securities and Exchange Commission (SEC) announced that Qualcomm Incorporated (Qualcomm) had agreed to pay a $7.5 million fine and report its remediation efforts to the SEC for two years in order to settle charges of violating the Foreign Corrupt Practices Act (FCPA). The SEC found that Qualcomm, by hiring relatives of government officials employed at two Chinese enterprises and engaging in other unlawful business practices, was seeking to obtain business advantage in its dealing with these state-owned telecommunications companies in an extremely competitive international telecommunications market.

SEC’s Findings

Some of the findings of the SEC included the following:

  • Qualcomm hired relatives of Chinese government officials and provided paid internships for these family members who were internally referred to as “must place” or “special” hires for the purpose of obtaining or retaining business in China.
  • When offering paid internships or full-time employment to family members or referrals of Chinese foreign officials, Qualcomm did not evaluate or attempt to mitigate the potential FCPA risks associated with the hires.
  • A Qualcomm executive personally provided the son of an executive at a state-owned enterprise with a $70,000 loan to buy a home. Qualcomm also provided the son with a Qualcomm internship and a $75,000 research grant to an American university where he was studying to allow him to retain his position in his PhD program and renew his student visa. He was offered subsequent permanent employment despite interviewers concluding that he did not meet Qualcomm’s hiring standards for the position.
  • Qualcomm frequently entertained Chinese officials and provided them with meals and gifts, such as tickets and sightseeing for their spouses and luxury goods.
  • Qualcomm failed to devise and maintain adequate internal controls. For example, Qualcomm offered foreign officials at Chinese state-owned enterprises lavish hospitality packages for the 2008 Beijing Olympics, which Qualcomm’s executive management team and its local management in China inadequately identified as a potential FCPA risk.
  • Qualcomm failed to maintain accurate books and records. For example, Qualcomm recorded transactions where it was providing things of value to obtain or retain business in a generic manner that obscured their purpose.

The state telecommunications companies’ customers thereafter began using mobile devices with Qualcomm technology, resulting in Qualcomm obtaining substantial revenues from the sale of chips and licenses to cell phone manufacturers.

Significance of this Decision

This decision confirms that the scope of the FCPA extends beyond the giving of bribes in the form of entertainment, meals, gifts and other things of monetary value to such business practices as the hiring of relatives of government officials, if this is motivated by an unlawful purpose such as obtaining business in exchange for hiring relatives of the government officials. This is the second case, this time in the telecommunications sector, where the SEC has cited hiring of relatives of government officials as a potentially illegal practice under the FCPA. See our Osler Update on BNY Mellon for an example of hiring practices of a firm in the financial services sector that was found to be in violation of the FCPA.

As we noted in a recent Osler Update, Canadian public companies listed on a U.S. stock exchange are subject to all of these obligations of the FCPA. In addition, Canadian companies, both publicly owned and private companies, are subject to the provisions of the Canadian Corruption of Foreign Public Officials Act (CFPOA). The CFPOA also includes a provision making it illegal to bribe foreign government officials with entertainment, gifts, meals and other things of value. It also requires Canadian companies, whether public or private, to maintain accurate books and records.

Canadian companies should evaluate whether their compliance programs and internal policies (including hiring practices) provide clear guidance to company employees and agents that may conduct business on the company’s behalf, on what is and is not permissible. We have previously commented on the importance of anti-corruption compliance programs and companies undertaking timely investigations which correspond to the level of risk they face. Implementing such internal controls can minimize the risk of violating the applicable anti-bribery legislation. As we have discussed before, internal controls include, among other things, control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties).

In addition, books and records have to accurately record transactions undertaken by the company and its assets and liabilities. Without such measures, carrying on business in some countries overseas that are known to be rife with corruption, poses a very high risk that the company and its employees will become subject to punitive enforcement actions of Canadian and potentially other government enforcement agencies including in the U.S.