Faro Pays $2.95 Million For FCPA Settlement

Faro Technologies Inc. confirmed that it has resolved Foreign Corrupt Practices Act offenses with the Department of Justice and the Securities and Exchange Commission. The DOJ settlement requires payment of a $1.1 million criminal penalty and entry into a two-year non-prosecution agreement with appointment of a compliance monitor. In settling with the SEC, Faro will pay about $1.85 million in disgorgement and prejudgment interest.

Florida-based Faro — which designs, develops, and markets software and portable, computerized measurement devices — self-disclosed potential FCPA violations in China to U.S. authorities in March 2006. It announced an anticipated settlement with prosecutors in its October 30, 2007 earnings release (see our post here).

Faro began selling its products directly to customers in China in 2003 through a Shanghai-based subsidiary, Faro China. In 2004 and 2005, a Faro employee authorized corrupt payments in the form of “referral fees” directly to employees of state-owned or controlled entities to secure business. It made illicit payments of $444,492 to obtain contracts worth about $4.9 million, and its net profit from the contracts was $1,411,306.

Faro employees routed the corrupt payments through a shell company to “avoid exposure,” according to internal e-mails. The employees also caused Faro China to enter into a bogus service contract with an intermediary, using it to pay the bribes. The intermediary aggregated the payments and invoiced Faro for reimbursement under the service contract. In its books and records, Faro falsely recorded the bribes as referral fees. The DOJ and SEC said the company failed to devise and maintain a system of internal controls for foreign sales sufficient to ensure compliance with the FCPA.

Faro’s own documents, the DOJ said, revealed the extent of the bribery. “Profit lists” reflected the price of contracts and the costs of manufacture, along with line items for “referral fees” of 10%-15% of the contract price that were kickbacks to employees of state-owned customers. The DOJ gave the following examples:

A 2005 profit list for Purchase Order CH2005-VW34 for a purchase by Shanghai Turbine Generator Co., Ltd., a Chinese government entity, shows a contract value of $148,700 and an anticipated referral fee of $14,800, or approximately 10% of the contract value.

A 2005 profit list for Purchase Order Ch-2005-VW50(SW) for a purchase by Jiangxi Changhe Auto Co., Ltd. Hefel Plant, a Chinese government entity, shows a contract value of $53,086 and a referral fee of $8,000, or approximately 15% of the contract value.

Faro’s non-prosecution agreement has a two-year term instead of the usual three years, presumably reflecting the company’s prompt and detailed self-disclosure and effective corrective action. Faro said its estimated costs associated with the monitoring and stepped-up compliance obligations will be “in the range of $1 million to $2 million.”

Neither Faro nor the DOJ explained why it took more than nine months to formally approve the previously announced settlement. We’ve speculated (here) that the Justice Department was delaying settlements involving compliance monitors, including Faro’s, pending some accommodation with lawmakers on safeguards for the appointments. Controversy erupted last year after New Jersey U.S. Attorney Chris Christie appointed his former boss, ex-U.S. Attorney General John Ashcroft, as a monitor in a domestic bribery case for orthopedic device maker Zimmer Holdings Inc. The news that Mr. Ashcroft’s firm could make as much as $52 million from the appointment sent shock waves around Capitol Hill and triggered Congressional hearings.

It appears from FCPA settlements announced in the past month involving Willbros, AGA Medical, and now Faro that monitor appointments are back on track. The solution appears to have been relatively simple. As with Willbros and AGA Medical, Faro will nominate its candidate to act as compliance monitor (after consulting with the DOJ), and the DOJ will have final approval over its choice. Provided the DOJ doesn’t interfere directly and allows Faro and the other companies to pick their own qualified candidates, the selection is taken out of the hands of the DOJ. That should prevent the appearance of political abuse or cronyism in the appointments.

Faro Technologies, Inc. trades on NASDAQ under the symbol FARO.

View the DOJ’s June 5, 2008 news release here.

View the SEC’s Securities Exchange Act of 1934 Release No. 57933 / June 5, 2008, Accounting and Auditing Enforcement Release No. 2836 / June 5, 2008, and Administrative Proceeding File No. 3-13059 here.

View Faro’s June 5, 2008 press release here.
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