WASHINGTON – RAE Systems Inc., a publicly-traded U.S. corporation headquartered in San Jose, Calif., has entered into an agreement with the Department of Justice to pay a $1.7 million penalty for violations of the Foreign Corrupt Practices Act (FCPA), announced Assistant Attorney General Lanny A. Breuer for the Criminal Division and U.S. Attorney Melinda Haag for the Northern District of California.
According to information contained in the non-prosecution agreement, RAE Systems developed and manufactured 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 (PRC), 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). A significant number of RAE-KLH’s and RAE Fushun’s customers were PRC 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.
As described in the agreement, RAE Systems accepted responsibility for violating the internal controls and books and records provisions of the FCPA arising from and related to improper benefits corruptly paid by employees of RAE-KLH and RAE Fushun to foreign officials in the PRC. As a result of due diligence conducted by RAE Systems before acquiring the majority of the joint venture that became known as RAE-KLH, RAE Systems was aware of improper commissions, kickbacks and “under table greasing to get deals” by employees. Yet, according to information contained in the agreement, the company chose 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. In acquiring the majority of RAE Fushun, RAE Systems did not conduct any pre-acquisition corruption due diligence in spite of a number of red flags. It was later confirmed that corrupt benefits were also being provided by RAE Fushun. In both instances, RAE Systems learned of corrupt practices at RAE-KLH and RAE Fushun and knowingly failed to implement effective systems of internal controls and failed to properly classify the improper payments in its books and records.
According to the agreement, RAE Systems voluntarily disclosed this conduct to the department, conducted a thorough and credible internal investigation, and undertook extensive remediation. In reaching this agreement, the department applied the Principles of Federal Prosecution of Business Organizations, including consideration of the corporation’s timely and voluntary disclosure of wrongdoing, its willingness to cooperate in the investigation of its agents and the corporation’s remedial actions.
As outlined in the agreement, RAE Systems agreed to fully cooperate with investigations by law enforcement authorities of the company’s corrupt payments, to adhere to a set of enhanced corporate compliance and reporting obligations, and to submit periodic reports to the department regarding RAE Systems’ compliance with its obligations under the agreement.
FCPA enforcement action documents can be found at www.justice.gov/criminal/fraud/fcpa.
In a related matter, RAE Systems reached a settlement with the U.S. Securities and Exchange Commission (SEC) filed today 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.
The case is being prosecuted by Deputy Chief Charles E. Duross of the Fraud Section, and Assistant U.S. Attorneys Adam A. Reeves and Thomas E. Stevens of the U.S. Attorney’s Office for the Northern District of California. The department acknowledges and expresses its appreciation for the significant assistance provided by the staff of the SEC during the course of this investigation .