The Agreements with the US Attorney and the SEC

On December 21, 2007, the Department of Justice and the Securities and Exchange Commission (SEC) announced that they had reached agreements with Lucent Technologies Inc. (Lucent) with respect to alleged trips provided to employees of Chinese government-owned or government-controlled telecommunications companies in order to secure business from these companies. Both agreements stem from allegations that Lucent spent over $10,000,000 for approximately 1,000 employees of Chinese state-owned or state-controlled telecommunications enterprises, to travel to the United States or elsewhere under the guise of inspecting facilities or training. The allegations claim, however, that the foreign officials spent little or no time visiting Lucent facilities or training, but instead visited tourist destinations.

Non-prosecution Agreement on Criminal Charges

The Department of Justice alleged that Lucent’s conduct violated the Foreign Corrupt Practices Act (FCPA) by providing travel and other things of value to Chinese government officials and improperly accounted for certain corporate expenditures on behalf of those officials in company books and records. Under the Non-prosecution Agreement with Lucent, the Department of Justice agreed not to prosecute Lucent in exchange for Lucent admitting to the conduct and to the improper recording of those expenses in its corporate books and records, paying a penalty of $1 million to the U.S. Treasury, and adopting new or modifying existing internal controls, policies and procedures. The enhanced internal controls must ensure that Lucent makes and keeps fair and accurate books, records and accounts, and adopts a rigorous anti-corruption compliance code, along with standards and procedures designed to detect and deter violations of the FCPA and other applicable anti-corruption laws. In order to avoid prosecution, Lucent must comply with the agreement for a period of two years.

Civil SEC Charges

In its complaint against Lucent, the SEC alleged that Lucent violated the books and records and internal controls provisions of the FCPA. While Lucent has neither admitted nor denied the allegations in the SEC’s civil complaint, it consented to the entry of a final judgmen permanently enjoining it from future violations of the FCPA and agreed to pay $1.5 million in civil penalties.

Alleged Facts of the Case

The SEC alleged that Lucent violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act by authorizing and improperly recording the payments for approximately 315 trips for Chinese government officials that had a disproportionate amount of sightseeing, entertainment and leisure. They also alleged that Lucent lacked the internal controls to detect and prevent trips intended for sightseeing, entertainment and leisure, rather than business purposes.

Specifically, the SEC claimed that Lucent:

• Improperly recorded many of the trips in its books and records. For example, over 160 trips were booked to Lucent’s “factory inspection account” even though the customers did not visit a Lucent factory at any time during the trip.
• Failed 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. Specifically,

many of Lucent’s Chinese customers were state-owned or state-controlled companies that constituted instrumentalities of the government of China and because the customers were instrumentalities of the Chinese government, the employees of these companies were foreign officials under the FCPA.

The Chinese Foreign officials traveling at Lucent’s expense were often identified as “decision makers” with respect to awarding new business, but the chairman and President of Lucent’s wholly-owned Chinese subsidiary (“Lucent China”) and other Lucent China executives authorized and paid for the travel without appropriate oversight concerning the purpose and content of those visits.

The trips paid for by Lucent, according to the SEC, fell into two categories: “pre-sale,” those trips made in conjunction with Lucent obtaining new business, and “post-sale,” those trips made in connection with an existing contractual arrangement, often under the label of “factory inspections” or “training.” The SEC complaint alleges that Lucent spent more than $1 million on approximately 55 “pre-sale” trips and more than $9 million on approximately 260 “post-sale” trips.

The trips were allegedly funded through Lucent China’s sales department. When arranging a trip, the Lucent employees would prepare a “Customer Visit Request Form” providing information about the proposed travel, including whether the visitor was a “decision-maker” or “influencer,” whether “sightseeing/entertainment” was required, and the quality of requested accommodations.

According to the SEC, the logistics of the trip were arranged by Lucent China employees based in Lucent’s U.S. headquarters. All of these arrangements, including those with minimal business activity in relation to the entertainment and leisure time and expense, were reviewed and approved by Lucent China staff and executives.

The SEC claimed that Lucent’s internal compliance controls provided no mechanism for assessing whether these trips violated the FCPA and little to no enquiry was made as to (i) whether the visitors were considered to be government officials under the FCPA, (ii) whether the entertainment and leisure activities paid for by Lucent could constitute things of value under the FCPA, or (iii) whether the purpose of the visit may have violated the anti-bribery provisions of the FCPA.

“Pre-sale” trips

The SEC alleged several instances where it believed that Lucent paid for a “pre-sale” trip that violated the FCPA and how they were improperly recorded in Lucent’s books and records.

• Lucent paid more than $34,000 for the Deputy Manager and the Deputy Director of the Technical Department of a Chinese government majority-owned telecommunications company to visit the United States. The visit consisted of three days of business activity and more than five days of sightseeing, entertainment and leisure, including visits to Disney World and Hawaii. The customer was identified in internal documents as a “key customer” and the Deputy General Manager as a “decision maker.” An e-mail described the trip as “very important” because it was “an opportunity for enhancing [Lucent’s] relationship with the deputy manager.” Lucent was awarded this contract.
  • Lucent recorded the expenses for this trip as “Services Rendered – Other Services.” This account was meant for “other services” expenses, however, and not to record travel expenses pertaining to pre-sale trips.
• Lucent paid more than $73,000 for six officers and engineers of a Chinese government majority-owned telecommunications company with the objective of negotiating a memorandum of understanding between Lucent and the company. The Chinese officials spent five days visiting Lucent facilities in Illinois, New Jersey, and Colorado, and nine days in Las Vegas, the Grand Canyon, and Hawaii sightseeing, and other entertainment and leisure activities. In internal documents, Lucent identified the purpose of the trip as a “gold [sic] opportunity for Lucent to introduce our network operation center to [the customer].” Lucent also noted that there were other vendors competing for the services and that the contract would be worth $500 million in potential business revenue. Lucent also identified the visitors as “decision-makers or influencers.”
  • Lucent recorded the expenses for this trip as “Transportation International” expense. This account was to be used, however, for “costs of international freight forwarded and transportation provider services where the product crosses country borders.”

“Factory Inspection Tours”

Some of Lucent’s contracts with its Chinese customers required that Lucent provide factory inspection tours to demonstrate to the customers the technologies and products Lucent was providing to them under their contract. In 2001, however, Lucent began relocating its manufacturing operations, leaving few factories in the United States to visit. Nonetheless, Lucent arranged for its customers to visit the United States and other locations, including Australia and Europe, even where there were no factories. The visit would usually involve a day touring Lucent’s headquarters or a Lucent facility, but not a factory. These visits were, in fact, primarily sightseeing, entertainment and leisure trips.

According to the SEC, Lucent employees were aware that the purported factory inspection tours to Chinese officials involved little or no business purpose and that false description of the factory tours could be used to help the Chinese customers to get to the United States. In an e-mail attaching an invitation letter to a Chinese official, one employee allegedly said that while the letter could be used to verify the official’s visit to the U.S., there were concerns about the fact that the itinerary showed the trip was just for sightseeing and had no business purpose.

The SEC alleged several instances where it believed that Lucent paid for a “factory inspection tour” that violated the FCPA and how they were improperly recorded in Lucent’s books and records.

• Lucent paid $46, 854 for six employees of a unit of a Chinese government-owned investment company to go on a “factory inspection” trip, half of which included sightseeing in Niagara Falls, Las Vegas, the Grand Canyon, and elsewhere. The sightseeing locations had been specifically requested by the Chinese officials. These officials were described in Lucent documents as “decision-makers” or “influencers.” In an e-mail about the trip, a Lucent employee stated that because their competition had agreed to such a trip, Lucent, in the face of such competition, needed to arrange a similar visit as well, Lucent was awarded the $23 million contract.
  • Lucent recorded the costs as a “lodging” expense, even though the lodging account was supposed to be used for “the cost of lodging incurred on behalf of Lucent employees on Company business.”
• In another instance 19 employees from a Chinese government majority-owned telecommunications company spent two weeks in the United States for a purported factory inspection, that included one day at a Lucent factory and the rest of the time on sightseeing and other entertainment and leisure activities in locations such as New York City, Washington D.C., Niagara Falls, Las Vegas, Los Angeles, the Grand Canyon, San Diego and Hawaii at a cost of over $130,000 to Lucent.
  • According to the SEC, the trips were designated as “factory inspections” on the company’s books and records, but they were actually used to conduct “pre-sale” type sales inspections. Furthermore, they were improperly recorded as “Services Rendered-Other Services.”
• In another visit involving six employees of a subsidiary of a Chinese government-majority-owned telecommunications company, Lucent paid for their trip to the U.S. for ten days of sightseeing, entertainment and leisure. Although the trip initially included a factory inspection, the officials refused to participate in that portion of the trip in light of concerns following the events of September 11, 2001, as the factory was on the East Coast. Lucent noted in documents that there was the potential of $2-3 billion in potential business opportunities with this customer and the employees were identified as “decision-makers/influencers.”
  • Lucent recorded the costs for this trip to its “Factory Inspection” account despite the trip not including any factory inspection.

“Training” Visits

According to the SEC, Lucent sponsored post-sale “training” visits designed to offer some training with respect to Lucent’s products, but which also included a disproportionate amount of sightseeing, entertainment and leisure activities, as well as per diems. Lucent would pay for the transportation, meals, and lodging when they traveled from the training facility to other non-training related locations.

The SEC alleged several instances where it believed that Lucent paid for a “training visit” that violated the FCPA and how they were improperly recorded in Lucent’s books and records.

• Six engineers from a subsidiary of a Chinese government majority-owned telecommunications company went to the United States, hosted by Lucent, for a 21 day training visit, which cost Lucent $46,828.08. These visitors were described as “influencers” and internal documents identified a potential $6 million business opportunity related to the customer. The engineers spent five days in Lucent training in Orlando, Florida and then 16 days in sightseeing, entertainment and leisure activities in locations such as San Francisco, Los Angeles, San Diego, Las Vegas, the Grand Canyon, New York City, Washington, D.C., and Hawaii.
  • The expenses for this trip were recorded as “Service Rendered – Other Services.”