SEC Settles FCPA Case Against RAE Systems

21 December 2010 Publication

On December 10, 2010, RAE Systems Inc. ("RAE"), a San Jose-based company that specializes in developing and manufacturing chemical and radiation detection monitors, settled FCPA charges with the Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") totaling $2.9 million in fines and penalties. According to the SEC's complaint, from 2004 through 2008, RAE made approximately $400,000 in improper payments to government officials in China through two of its joint venture entities in China to obtain business from Chinese governmental entities. The SEC's complaint alleges that these payments were made primarily by the direct sales force utilized by RAE at its two Chinese joint-venture entities, RAE-KLH (Beijing) Co., Limited (“RAE-KLH”) and RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (“RAE-Fushun”), which resulted in contracts worth approximately $3 million in revenues and profits of $1,147,800. According to the SEC's complaint, RAE-KLH and RAE-Fushun sales personnel typically made the improper payments by obtaining cash advances from local accounting personnel which were then improperly recorded on the books of the joint ventures as “business fees” or “travel and entertainment”  expenses.

Notably, the SEC's complaint discusses several instances in which RAE was made aware of red-flags and potential FCPA violations by its Chinese employees of RAE-KLH and RAE-Fushun. Although RAE implemented FCPA compliance training and required each RAE-KLH employee to certify that he or she did not engage in bribery practices, the complaint notes that RAE nevertheless failed to perform an internal audit or investigation into the conduct, and alleges RAE failed to implement a sufficient system of internal controls that eliminated the practice of sales personnel obtaining cash advances that were used to bribe government officials. As a result, the improper conduct was allowed to continue.

Without admitting or denying the SEC's allegations, RAE consented to the entry of a court order permanently enjoining it from future violations and agreed to pay $1,147,800 in disgorgement, plus $109,212 in prejudgment interest. RAE also will need to comply with certain undertakings regarding its FCPA compliance program. In a parallel action, RAE entered into a non-prosecution agreement with the DOJ under which it agreed to pay a monetary penalty of $1.7 million.