Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, December 11, 2010

RAE Systems Settles FCPA Charges Involving Chinese Joint Ventures

On Friday the SEC filed a settled enforcement action against RAE Systems Inc., a San Jose-based company, alleging violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). RAE has offered to pay approximately $1.2 million as part of its settlement with the SEC. RAE’s proposed settlement offer has been submitted to the Court for its consideration. 

The SEC’s complaint alleges that:

From 2004 through 2008, RAE made illicit payments, through two of its joint venture entities in China, of approximately $400,000, directly or indirectly, to government officials in China to obtain or retain business from Chinese governmental entities. These payments were made primarily by the direct sales force utilized by RAE at its two Chinese joint-venture entities, named RAE-KLH (Beijing) Co., Limited (“RAE-KLH”) and RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (“RAE-Fushun”). In all, these payments resulted in contracts worth approximately $3 million in revenues and profits of $1,147,800.
RAE KLH and RAE Fushun sales personnel typically made the improper payments by obtaining cash advances from RAE KLH and RAE Fushun accounting personnel. RAE did not impose sufficient internal controls or make any meaningful changes to the practice of sales personnel obtaining cash advances to make the improper payments. In addition, the expenses associated with these cash advances were improperly recorded on the books of RAE-KLH and RAE-Fushun as “business fees” or “travel and entertainment” (T&E) expenses.
While the payments were made exclusively in China and were conducted by Chinese employees of RAE-KLH and RAE-Fushun, RAE failed to act on red flags of this activity, which allowed, at least in part, the conduct to continue at RAE-KLH.

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