Two units of U.S.-based engineering software company PTC will pay a total of $28 million (USD) to resolve probes into whether they gave more than $1 million in recreational travel to foreign government officials from China, in a probable violation of the Foreign Corrupt Practices Act, the U.S. Department of Justice and the Securities and Exchange Commission said in February 2016.
NASDAQ-listed PTC has 6,000 employees in 30 countries and sales of $1.26 billion in 2015. Its software range is dedicated to the manufacturing sector and includes CAD (computer-aided design) software as well as Product, Application, and Service life-cycle management tools. Typical users are engineers working for manufacturers of industrial equipment, automotive, high tech and electronics, aerospace and defense, retail, consumer, and medical devices.
The two units in Shanghai and Hong Kong, through local business partners, arranged and paid for employees of several Chinese state-owned enterprises to travel to the United States. The trips, which occurred over six years and ended in 2011, were purportedly for training at PTC’s headquarters, but were mostly for recreation in the United States. During the trips, Chinese officials typically visited headquarters for a day and then enjoyed leisure activities. Employees of the Chinese units also gave improper gifts to the Chinese officials, including cell phones, multimedia players, and gift cards. The improper payments were hidden as commissions or business expenses in company accounts.
PTC’s Chinese units paid approximately $1 million to fund trips while entering into contracts worth around $13 million with the Chinese state-owned entities. Assuming these contracts were all for software licenses, as opposed to engineering services, the gross margin thus generated might have been in the $11 million range.
PTC will pay a $14 million penalty, return just shy of $12 million in improper profits, and pay close to $2 million in interest. Finally, PTC will take “extensive remedial measures,” including terminating employees involved and launching a compliance program in the affected overseas units.
The Chinese state-owned enterprises would have purchased the engineering software anyway, as it is a required tool for R&D and other engineers, but perhaps not from PTC. Key competitors include Ansys, DS/Dassault Systemes, ESI Group, and MSC. At an average $10,000 per user per year, and often less in the Chinese market, $13 million over six years will equip 200 to 250 R&D engineers, quite a sizable department.
There is indeed a strong demand for improper gifts and cash on the part of some but not all buyers in the business-to-business market in China, despite government crackdowns; resisting such demands and so-called “local customs” both at headquarters level and in local units while realizing sales in a competitive environment is challenging but far from impossible. The issue is discussed in an article in the March 2016 issue of Global Benefits Vision magazine.