December 10, 2010 Carlos F. Ortiz, Esq. LeClair Ryan One Riverfront Plaza 1037 Raymond Boulevard Sixteenth Floor Newark, New Jersey 07102 Roy K. McDonald, Esq. DLA Piper US LLP 555 Mission Street, Suite 2400 San Francisco, California 94105-2933 Re:...
Exhibit 10.23
|
U.S. Department of Justice |
December 10, 2010
Xxxxxx X. Xxxxx, Esq.
XxXxxxx Xxxx
One Riverfront Plaza
0000 Xxxxxxx Xxxxxxxxx
Xxxxxxxxx Xxxxx
Xxxxxx, Xxx Xxxxxx 00000
XxXxxxx Xxxx
One Riverfront Plaza
0000 Xxxxxxx Xxxxxxxxx
Xxxxxxxxx Xxxxx
Xxxxxx, Xxx Xxxxxx 00000
Xxx X. XxXxxxxx, Esq.
DLA Piper US LLP
000 Xxxxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000-0000
DLA Piper US LLP
000 Xxxxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000-0000
Re: RAE Systems Inc.
Dear Gentlemen:
On the understandings specified below, the United States Department of Justice,
Criminal
Division, Fraud Section, and the U.S. Attorney’s Office for the Northern District of
California
(collectively, the “Department”) will not criminally prosecute RAE Systems Inc., and its
subsidiaries and affiliates (collectively, “RAE Systems”) for any crimes (except for criminal
tax violations, as
to which the Department cannot and does not make any agreement) related to RAE Systems’s
knowing violations of the internal controls and books and records provisions of the Foreign
Corrupt
Practices Act (“FCPA”), Title 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(2)(B),
78m(b)(5), and 78ff(a) arising from and related to improper benefits corruptly paid by
employees of two joint ventures majority owned and controlled by RAE Systems to foreign
officials of
departments, agencies, and instrumentalities of the government of the People’s Republic of
China
(“PRC”), as described in Appendix A attached hereto, which is incorporated herein by reference. The
Department enters into this non-prosecution agreement based, in part, on the following factors:
(a) RAE Systems’s timely, voluntary, and complete disclosure of the
facts described in Appendix A; (b) RAE Systems’s thorough, real-time cooperation with the Department and the U.S.
Securities
and Exchange Commission (“SEC”); (c) the extensive remedial efforts already undertaken
and to be undertaken by RAE Systems; and (d) RAE Systems’s commitment to submit periodic
monitoring reports to the Department.
It is understood that RAE Systems admits, accepts, and acknowledges responsibility for
the conduct set forth in Appendix A and agrees not to make any public statement contradicting
Appendix A.
This Agreement does not provide any protection against prosecution for any crimes
except as set forth above, and applies only to RAE Systems and not to any other entities except
as set forth in this Agreement, including Appendix A, or to any individuals. RAE Systems
expressly
understands that the protections provided to RAE Systems under this Agreement shall not apply
to any acquirer or successor entities unless and until such acquirer or successor formally
adopts and executes this Agreement.
This Agreement shall have a term of three years from the date of this Agreement, except as
specifically provided in the following paragraph. It is understood that for the three-year
term of this
Agreement, RAE Systems shall: (a) commit no crimes whatsoever; (b) truthfully and completely
disclose non-privileged information with respect to the activities of RAE Systems, its
officers and
employees, and others concerning all matters about which the Department inquires of it,
which information can be used for any purpose, except as otherwise limited in this Agreement;
and (c) bring to the Department’s attention all criminal conduct by, or criminal
investigations of, RAE
Systems or any of its employees, that comes to the attention of RAE Systems or its senior
management, as well as any administrative proceeding or civil action brought by any
governmental authority that alleges fraud by or against RAE Systems.
Until the date upon which all investigations and prosecutions arising out of the
conduct described in this Agreement are concluded, whether or not they are concluded within
the three-year term specified in the preceding paragraph, RAE Systems shall: (a) cooperate
fully with the
Department, the Federal Bureau of Investigation, the SEC, and any other law enforcement agency
designated by the Department; (b) assist the Department in any investigation or prosecution
arising out of the conduct described in this Agreement by providing logistical and technical
support for any meeting, interview, grand jury proceeding, or any trial or other court
proceeding; (c) use its best efforts promptly to secure the attendance and truthful
statements or testimony of any officer, agent, or employee at any meeting or interview or
before the grand jury or at any trial or other court proceeding; and (d) provide the
Department, upon request, all non-privileged information, documents, records, or other tangible
evidence about which the Department or any designated law enforcement agency inquires.
It is understood that RAE Systems has agreed to pay a monetary penalty of
$1,700,000. RAE
Systems agrees to pay this sum to the United States Treasury within ten days of executing
this
Agreement. RAE Systems acknowledges that no tax deduction may be sought in connection with
this payment.
It is understood that RAE Systems will strengthen its compliance, bookkeeping, and
internal controls standards and procedures, as set forth in Appendix B. It is further
understood that RAE
Systems will report periodically to the Department regarding its compliance with this
Agreement, as set forth in Appendix C.
It is understood that, if the Department in its sole discretion determines that RAE
Systems
has committed any crimes after signing this Agreement, that RAE Systems has given false,
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incomplete, or misleading testimony or
information at any time, or that RAE Systems has
otherwise violated any provision of
this Agreement, RAE Systems shall
thereafter be subject to prosecution for any
violation of federal law of which the Department
has knowledge, including perjury and
obstruction of justice. Any such
prosecution that is not time-barred by the
applicable statute of limitations on the
date of the signing of this Agreement may be
commenced against RAE Systems, notwithstanding
the expiration of the statute of limitations
between the signing of this Agreement and the
expiration of the term of this agreement plus
one year. Thus, by signing this Agreement,
RAE Systems agrees that the statute of limitations with respect to any prosecution that is not
time-barred on the date that this Agreement is signed shall be tolled for the term of this
Agreement plus one year.
It is understood that, if the Department in its sole discretion determines that RAE
Systems has committed any crime after signing this Agreement, that RAE Systems has given
false, incomplete, or misleading testimony or information at any time, or that RAE Systems has
otherwise violated any provision of this Agreement: (a) all statements made by RAE Systems to
the
Department or other designated law enforcement agents, including Appendix A hereto, and
any testimony given by RAE Systems before a grand jury or other tribunal, whether prior or
subsequent to the signing of this Agreement, and any leads from such statements or testimony,
shall be admissible in evidence in any criminal proceeding brought against RAE Systems; and
(b) RAE Systems shall assert no claim under the United States Constitution, any statute, Rule 410
of the
Federal Rules of Evidence, or any other federal rule that such statements or any leads therefrom
arc inadmissible or should be suppressed. By signing this Agreement, RAE Systems waives all
rights in the foregoing respects.
It is further understood that this Agreement does not bind any federal, state, local, or
foreign prosecuting authority other than the Department. The Department will, however, bring
the cooperation of RAE Systems to the attention of other prosecuting and investigative offices,
if requested by RAE Systems.
It is further understood that RAE Systems and the Department may disclose this Agreement
to the public.
| With respect to this matter, from the date of execution of this Agreement forward, this Agreement supersedes all prior, if any, understandings, promises, and/or conditions between the Department and RAE Systems. No additional promises, agreements, or conditions have been entered into |
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other than those set forth in this Agreement and none will be entered into unless
in writing and signed by all parties.
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APPENDIX A
STATEMENT OF FACTS
This
Statement of Facts is incorporated by reference as part of the non-prosecution
agreement, dated December 10, 2010, between the United States Department of Justice,
Criminal
Division, Fraud Section, the U.S. Attorney’s Office for the Northern District of California
(collectively, the “Department”), and RAE Systems Inc. and its subsidiaries and affiliates
(collectively, “RAE Systems” or the company). The Department and RAE Systems agree that the
following facts are true and correct:
| I. | Background |
1. RAE Systems is a Delaware corporation headquartered in San Jose, California.
During the relevant period, RAE Systems’s common stock was registered pursuant to Section l2(g)
of the Securities Exchange Act of 1934 (“Exchange Act”) and was listed on the New York Stock
Exchange (NYSE Amex: RAE). RAE Systems filed periodic reports with the Securities and
Exchange Commission (“SEC”) pursuant to Section 13 of
the Exchange Act. Accordingly, RAE
Systems was an “issuer” within the meaning of the Foreign Corrupt Practices Act (“FCPA”),
Title
15, United States Code, Sections 78dd-1 and 78m(b)(2). RAE Systems was first listed on
the NYSE
on June 23, 2000, and remains listed on the NYSE.
2. RAE Systems developed and manufactured rapidly deployable, multi-sensor
chemical
and radiation detection monitors and networks for the global market. Between 2005 and 2008, RAE
Systems had between 678 and 1,324 full-time employees. During the relevant period, the
company had significant operations in the People’s Republic of China (“PRC”), which were organized
under a holding company called RAE Asia, headquartered in Hong Kong. RAE Systems sold
products and
services in mainland PRC primarily through two second-tier subsidiaries
organized as joint ventures
with local Chinese entities.
3. One
of the joint ventures, known as RAE-KLH (Beijing) Co., Limited (“RAE-KLH”),
was headquartered in Beijing, PRC. RAE Systems acquired a 64% stake in RAE-KLH in 2004. In
June 2006, RAE Systems negotiated the purchase of an additional 32% stake in RAE-KLH, for a
total ownership stake of approximately 96%. Today, RAE-KLH remains a joint venture, with
its former sole owner owning 4% of the stock. Throughout the relevant time period,
XXX-XXX’s financial results were included in the consolidated financial statements that RAE Systems
filed with the SEC.
4. RAE
Systems also owned a 70% interest in a joint venture known as RAE
Coal Mine
Safety Instruments (Fushun) Co., Ltd. (“XXX Xxxxxx”), based in Fushun, Liaoning Province,
PRC.
RAE Fushun sold a wide range of portable and fixed-use safety products, primarily for use in
the
Chinese coal mining industry. RAE Systems purchased its interest in
the RAE Fushun joint venture
in December 2006. The other 30% was owned by a coal industry group. Throughout the
relevant time period, XXX Xxxxxx’s financial results were included in the consolidated
financial statements that RAE Systems filed with the SEC.
| II. | RAE Systems’s Government Customers in China |
5. A
significant number of RAE-KLH’s and XXX Xxxxxx’s customers were PRC
government departments and bureaus and large state-owned agencies and instrumentalities.
6. The Lanzhou City Honggu Mining Safety Bureau, for example, was a government
customer. Other government clients included regional fire departments, emergency response
departments, and entities under the supervision of the provincial environmental agency,
among
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others. Accordingly, officers and employees of a significant number of XXX-XXX’s and XXX
Xxxxxx’s customers were “foreign officials” within the meaning of the FCPA, Title 15,
United States
Code, Section 78dd-l(f)(l)(A).
| III. | RAE Systems’s Knowing Failure to Implement Systems of Effective Internal Controls at RAE-KLH and XXX Xxxxxx Post Closing |
7. RAE’s due diligence prior to its joint venture with KLH identified KLH’s principal
clients as the PRC government and PRC owned and controlled agencies and instrumentalities.
XXX’s due diligence further indicated that it was important for KLH to keep excellent
relationships
with those government officials.
8. As par of its due diligence investigation, a report was prepared and submitted to
the
RAE Systems’s Board of Directors. The report concluded that relying on the current
structure and leadership would be efficient, “[b]ut to some
extent it may lack of [sic]
internal control.” The report went on to make troubling findings:
As the important clients are those related to the government, it is very
important for the company to keep very good relationship [sic] with those government people. In normal practice, KLH will
determine its internal product price, the salesmen can negotiate the
price with the client based on that and can take away the difference
between the internal product price and the final sales price as
commission. It is the salesmen, not the company, who will decide
the [sic] whether and how much amount of the commission they should
give to the clients. The salesmen didn’t get the commission in cash
directly, but instead they get the cash by provide [sic]
different acceptable invoices. These invoices will then be used as
original supporting documents for
accounting records. They are recorded as different expenses in
the financial statements. To some extent, the financial statements have
been distorted by these commissions [sic].
With the change of market regulations in China, the government
influence will be less important, there is a challenge as to whether
KLH could still keep these clients. Although KLH let the salesmen
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to deal
with the kickback, still they are the employees of the company and they
represent the company in the transaction.
9. Under another heading entitled “Kickbacks,” another report stated:
In
the management accounts, there is no a [sic] separate account to
record kickbacks. As per discussion with the accounting manager
and the administration manager, we were informed that kickbacks were
calculated on the sales value and collection performance and these
kickbacks were paid directly to salesmen by reimbursement on variety
invoices. How to allocate these kickbacks in the management accounts
is determined on which kind of invoices provided by the salesmen,
i.e. if the salesmen provides [sic] meal invoices, it will be
charged to meal expense or if the salesmen provides transportation
invoices, will be charged to transportation expense and so on. In
the practice, KLH doesn’t provide the kickback directly to those
customers, but through the salesmen. Salesmen arrange these
kickbacks directly to customers of whom they take charge. Due
to the fact that it is a confidential business practice, we could
not obtain the supplemental records for those kickbacks.
10. In
May 2004, a RAE Systems employee from the United States met with KLH
personnel, and following her inspection of KLH operations, the RAE Systems employee reported
to high-ranking executives at RAE Systems that they “discussed the sales commission/incentive
structure, under table greasing to get deals regardless if profitable/collectible or not,
kosher or not etc. KLH sales team is good at and used to selling cycle that is highly
dependent on ‘guanxi’ — whatever it takes to spec and close deal. . . .” The RAE Systems
employee continued:
They said openly the “travel&entertainment” expense incurred
is essential to build relationship/guanxi and commonly practiced
by all and thus, somewhat gray and therefore, can be rationalizable [sic] as not “illegal.” If you want them to be aggressive and grow
business per goals set, they will do whatever it takes. To draw
boundary limits, our goals have to be clearly articulated as “clean,
profitable sales orders/revenue ie “xxxxx” metrics of both top line
and bottom line, not just market share and growth terms — this
will be a challenge to change their business operational models to
be more transparent.
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The employee then turned to a discussion about implementing a compliance program, cautioning
that
implementing an effective compliance program could hurt sales:
It will be a challenge to restructure because it changes the way they
have been “successful” and rewarded in the past. As you know, KLH
sales guy (sic) behave/get compensated as distributors and get
“discretionary discount structure” (any residual = compensation to
keep or to dispense as they see fit to close deal. To kill the
sales model that has worked for them all these years is to kill the
JV deal value or hurt sales momentum.
So we need to tread carefully in designing something halfway that
won’t choke the sales engine and cause a distraction for the sales
guys. We knew this risk all along and have accepted it upon entering
the JV deal.
11. Not long after, the employee stated to a high-ranking RAE Systems executive in the
United States that “at the minimum we evidence we told them
[about the FCPA], spell out in JV
contract which we did and that’s all we can do.” In response, the high-ranking RAE Systems
executive responded, “We can either increase cost or follow local practices with board
blessing and knowing how much risk we are taking.”
12. Two months later, following acquisition of XXX- XXX, the employee reiterated
to the
high-ranking RAE Systems executive that implementing an effective systems of internal controls
would hurt business:
KLH does not have internal controls in the context of the western
world and we canNOT forcefit [sic] with U.S. practices and expect
[sic] done overnight at that.
* * *
Plus, the current sales model/cycle (sales guys act as
distributors, heavily dependent on relationships to sell, incentive
scheme, sales guy is AR [accounts receivable] and collection management)
is the
heart of what makes KLH tick so if you do major surgery too quick,
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the patient will die, whole acquisition
value falls apart real quick. . . .so we need to be careful how we say what needs to be said to XXX
XXX.
13. Following
these exchanges, RAE Systems personnel did provide some FCPA training
to RAE-KLH personnel and did tell RAE-KLH personnel to stop paying bribes and providing other
improper benefits, but such steps were half-measures. RAE Systems did not impose sufficient
internal controls or make sufficient changes to high-risk practices, such as sales personnel
obtaining cash advances. Indeed, in the middle of 2006, the former manager of XXX-XXX, who had
recently been terminated for reasons unrelated to
corruption, emailed certain members of RAE Systems’s senior management at its U.S.
headquarters. In this email, the manager reported that XXX-XXX had been entering into certain
arrangements to hide the fact that it had been paying bribes to government officials for the
purposes of retaining or obtaining business. Once again, RAE Systems’s senior management
directed that such arrangements should stop, but there was no effective efforts made
to actually stop this practice. In fact, while RAE Systems’s financial controller in China was
directed to perform an internal audit to provide findings and to recommend how to keep such
issues from occurring in the future, he never provided any findings or recommendations on
these issues.
14. RAE Systems did not conduct pre-acquisition corruption due diligence of XXX
Xxxxxx. Given RAE Systems’s experience with KLH described above, the high-risk nature of the
location, and the existence of numerous government customers, pre-acquisition
corruption-focused due diligence was merited. Indeed, as was later confirmed, improper
business practices had occurred at RAE Fushun before the acquisition and continued
post-acquisition, as RAE Systems failed to implement an effective system of internal controls at
RAE Fushun.
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15. In light of the foregoing facts and circumstances, RAE Systems knowingly failed
to
implement a system of effective internal accounting controls at
RAE-KLH and RAE Fushun
sufficient to provide reasonable assurances that: (i) transactions were executed in accordance
with management’s general or specific authorization; (ii) transactions were recorded as necessary
to (I)
permit preparation of financial statements in conformity with
generally accepted accounting principles or any other criteria applicable to such statements, and (II) maintain
accountability for assets; (iii) access to assets were permitted only in accordance with
management’s general or specific authorization; and (iv) the recorded accountability for assets was
compared with the existing assets at reasonable intervals, and appropriate action taken with
respect to any differences.
| IV. | Lack of Effective Internal Accounting Controls Permitted Improper Payments to Continue at RAE-KLH and RAE Fushun After Acquisition |
16. RAE-KLH and RAE Fushun primarily utilize a direct sales force for their sales
operations in mainland China.
17. The
direct sales representatives at RAE- KLH and RAE Fushun historically financed
their sales activities and sales-related travel throughout mainland China using cash advances
and reimbursements. XXX-XXX and XXX Xxxxxx each had policies and procedures for cash advances and
reimbursements requiring different levels of management approval depending on the amount of money
the salesperson sought to have advanced or reimbursed. Finance staff generally did not
question the propriety of cash advance or reimbursement requests that appeared to have the
requisite management approvals.
18. In
order to write off sales expenses for tax accounting purposes, both RAE-KLH
and
XXX Xxxxxx required sales representatives to obtain government-issued tax receipts (known as
“fapiao”) for all sales expenses. When fapiao were unavailable or insufficient to cover the
expenses
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incurred,
salespeople from both RAE-KLH and XXX Xxxxxx often submitted “substitute”
fapiao, that is, fapiao that were genuine but that were not issued for the specific expense
incurred. As a result, the records of cash advances and reimbursements at both XXX-XXX and
XXX Xxxxxx often lacked adequate support for the purported business purpose.
| X. | XXX-KLH |
19. From 2004 through 2008, certain sales representatives at XXX-XXX used cash
advances and reimbursements for improper purposes, including the corrupt giving of gifts and
paying
for entertainment, as well as direct or indirect payments, to customers. Some customers who
received gifts, money, or entertainment from XXX- XXX sales representatives were foreign
officials who worked at the agencies, instrumentalities, and departments of the PRC government
that were
RAE-KLH’s customers. The expenditures were made as part of corrupt efforts to obtain or retain
business from those entities. The gifts provided included, among other things, a notebook computer
for the son of the deputy director of a state-owned chemical plant as part of efforts to
obtain business from that entity.
20. In 2006 and 2007, XXX-XXX made payments under two contracts with a purported
consultant located in Beijing, China. The 2006 contract purported to be for technical
services
rendered in connection with a single government-affiliated oil project contract, for which
RAE-KLH
paid RMB 688,000 (approximately $86,195). Some or all of the payments under the 2006
contract
were funneled to officials of a state-owned enterprise doing business in the Dagang Oil Field.
21. Under the second contract purporting to be for general consulting services throughout
the 2007 calendar year, RAE-KLH paid a total of RMB 2 million (approximately $262,564).
Some or all of the money for these alleged consulting services was improperly used to help RAE-KLH
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obtain or retain business from customers, including large state-owned enterprises and government
departments, by directly and indirectly making payments and providing things of value to
foreign
officials.
| X. | XXX Fushun |
22. From
2007 though 2008, certain sales representatives at XXX Xxxxxx used cash
advances and reimbursements for improper purposes including the corrupt giving of gifts and
paying for entertainment, as well as making direct or indirect payments, to officers and
employees of customers. Some who received gifts, money, or entertainment from XXX Xxxxxx
sales
representatives were foreign officials who worked at the agencies, instrumentalities, and
departments
of the PRC government that were XXX Xxxxxx’s customers. The expenditures were made as
part of corrupt efforts to obtain or retain business from those entities. These gifts to
certain officials of state-owned enterprises and government departments included, among
other things, a variety of
luxury items, such as jade, fur coats, kitchen appliances, business suits, and high-priced
liquor.
| V. | Lack of Effective Internal Controls and Continued Improper Payments Led to Inaccurate Books and Records |
23. The above-described payments identified by RAE Systems were typically recorded
on the books of RAE-KLH and XXX Xxxxxx as “business fees” or “travel and entertainment”
(“T&E”) expenses. They appear to have been classified for U.S. Generally Accepted Accounting Principles (“GAAP”) purposes as T&E expenses.
24. During
the relevant time period, both RAE-KLH and XXX Xxxxxx had internal
accounting staff that maintained records for each respective subsidiary. The accounting
staff at both
RAE-KLH and RAE Fushun were required to make certain periodic adjustments to conform their
financials with U.S. GAAP standards. They then provided those conformed numbers to the U.S.
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accounting staff for integration into the consolidated financials for U.S. reporting
purposes. As such, during the relevant time period, XXX-XXX and XXX Xxxxxx’s respective
financial results were included in the consolidated financial statements that RAE Systems
filed with the SEC.
25. As
an issuer, RAE Systems was — and is — required, among other things, to make
and
keep books, records, and accounts, which, in reasonable detail, accurately and fairly
reflected the
transactions and dispositions of the assets of the issuer. RAE Systems was aware that
XXX-XXX
and XXX Xxxxxx were failing to properly classify the above-described payments in their
respective books, records, and accounts, and thus, RAE Systems knowingly permitted its books,
records, and accounts to be falsified.
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APPENDIX B
CORPORATE COMPLIANCE PROGRAM
In order to address any deficiencies in its internal controls, policies, and
procedures regarding
compliance with the Foreign Corrupt Practices Act (“FCPA”), Title 15, United States
Code, Sections
78dd-1, et seq., and other applicable anti-corruption laws, RAE Systems Inc., and its
subsidiaries
(collectively, “RAE Systems” or the “company”) agree to continue to conduct, in a manner
consistent with all of its obligations under this Agreement, appropriate reviews of its
existing internal controls, policies, and procedures.
Where necessary and appropriate, RAE Systems agrees to adopt new or to modify existing
internal controls, policies, and procedures in order to ensure that it maintains: (a) a
system of internal accounting controls designed to ensure that RAE Systems makes and keeps
fair and accurate books, records, and accounts; and (b) a rigorous anti-corruption compliance
code, standards, and procedures designed to detect and deter violations of the FCPA and other
applicable anti-corruption laws. At a minimum, this should include, but not be limited to,
the following elements to the extent they are not already part of the company’s existing internal
controls, policies, and procedures:
1. RAE Systems will develop and promulgate a clearly articulated and visible corporate
policy against violations of the FCPA, including its anti-bribery, books and records, and
internal controls provisions, and other applicable foreign law counterparts (collectively, the
“anti-corruption laws,”), which policy shall be memorialized in a written compliance code.
2. RAE Systems will ensure that its senior management provide strong, explicit, and
visible support and commitment to its corporate policy against violations of the anti-corruption laws
and its compliance code.
3. RAE Systems will develop and promulgate compliance standards and procedures
designed to reduce the prospect of violations of the anti-corruption laws and RAE Systems’s
compliance code, and RAE Systems will take appropriate measures to encourage and support the
observance of ethics and compliance standards and procedures against foreign bribery by
personnel at all levels of the company. These anti-corruption standards and procedures shall
apply to all directors, officers, and employees and, where necessary and appropriate, outside
parties acting on behalf of RAE Systems in a foreign jurisdiction, including but not limited
to, agents and intermediaries, consultants, representatives, distributors, teaming partners,
contractors and suppliers, consortia, and joint venture partners (collectively, “agents and
business partners”), to the extent that agents and business partners may be employed under
RAE Systems’s corporate policy. RAE
Systems shall notify all employees that compliance with the standards and procedures is the
duty of
individuals at all levels of the company. Such standards and procedures shall include
policies
governing:
a. gifts;
b. hospitality, entertainment, and expenses;
c. customer travel;
d. political contributions;
e. charitable donations and sponsorships;
f. facilitation payments; and
g. solicitation and extortion.
4. RAE Systems will develop these compliance standards and procedures, including
internal controls, ethics, and compliance programs on the basis of a risk assessment
addressing the
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individual circumstances of the company, in particular the foreign bribery
risks facing the company,
including, but not limited to, its geographical organization, interactions with various types and
levels
of government officials, industrial sectors of operation, involvement in joint venture
arrangements,
importance of licenses and permits in the company’s operations, degree of governmental
oversight and inspection, and volume and importance of goods and personnel clearing through customs
and immigration.
5. RAE Systems shall review its anti-corruption compliance standards and procedures,
including internal controls, ethics, and compliance programs, no less than annually, and
update them as appropriate, taking into account relevant developments in the field and evolving
international and industry standards, and update and adapt them as necessary to ensure their
continued effectiveness.
6. RAE Systems will assign responsibility to one or more senior corporate executives
of RAE Systems for the implementation and oversight of RAE Systems’s anti-corruption
policies,
standards, and procedures. In addition to any other direct reporting required by the company,
such
corporate official(s) shall have direct reporting obligations to independent monitoring
bodies,
including internal audit, RAE Systems’s Board of Directors, or any appropriate committee of
the
Board of Directors, and shall have an adequate level of autonomy from management as well as
sufficient resources and authority to maintain such autonomy.
7. RAE Systems will ensure that it has a system of financial and accounting
procedures,
including a system of internal controls, reasonably designed to ensure the maintenance of fair
and
accurate books, records, and accounts to ensure that they cannot be used for the purpose of
foreign
bribery or concealing such bribery.
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8. RAE Systems will implement mechanisms designed to ensure that its anti-corruption
policies, standards, aid procedures are effectively communicated to all directors, officers,
employees, and, where appropriate, agents and business partners. These mechanisms shall
include:
(a) periodic training for all directors, officers, and employees, and, where necessary and
appropriate, agents and business partners; and (b) annual certifications by all such
directors, officers, and employees, and, where necessary and appropriate, agents, and
business partners, certifying compliance with the training requirements.
9. RAE Systems will maintain, or where necessary establish, an effective system for:
a. Providing guidance and advice to directors, officers, employees, and,
where
appropriate, agents and business partners, on complying with RAE Systems’s anti-corruption
compliance policies, standards, and procedures, including when they need advice on an urgent
basis or in any foreign jurisdiction in which the company operates;
b. Internal and, where possible, confidential reporting by, and protection
of,
directors, officers, employees, and, where appropriate, agents and business partners, not
willing to
violate professional standards or ethics under instructions or pressure from hierarchical
superiors, as well as for directors, officers, employee, and, where appropriate, agents and
business partners, willing to report breaches of the law or professional standards or ethics
concerning anti-corruption occurring within the company, suspected criminal conduct, and/or
violations of the compliance policies, standards, and procedures regarding the anti-corruption
laws for directors, officers,
employees, and, where necessary and appropriate, agents and business partners; and
c. Responding to such requests and undertaking appropriate action in response
to such reports.
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10. RAE Systems will institute appropriate disciplinary procedures to address, among other
things, violations of the anti-corruption laws and RAE Systems’s anti-corruption compliance
code, policies, and procedures by RAE Systems’s directors, officers, and employees. RAE
Systems shall implement procedures to ensure that where misconduct is discovered, reasonable
steps are taken to remedy the harm resulting from such misconduct, and to ensure that appropriate
steps are taken to prevent further similar misconduct, including assessing the internal
controls, ethics, and compliance program and making modifications necessary to ensure the program
is effective.
11. To
the extent that the use of agents and business partners is permitted at all by
RAE Systems, it will institute appropriate due diligence and compliance requirements pertaining to
the retention and oversight of all agents and business partners, including:
a. Properly documented risk-based due diligence pertaining to the hiring and
appropriate and regular oversight of agents and business partners;
b. Informing agents and business partners of RAE Systems’s commitment to
abiding by laws on the prohibitions against foreign bribery, and of
RAE Systems’s ethics and
compliance standards and procedures and other measures for preventing and detecting such
bribery; and
c. Seeking a reciprocal commitment from agents and business partners.
12. Where
necessary and appropriate, RAE Systems will include standard provisions in
agreements, contracts, and renewals thereof with all agents and business partners that are
reasonably
calculated to prevent violations of the anti-corruption laws, which may, depending upon the
circumstances, include: (a) anti-corruption representations and undertakings relating to
compliance with the anti-corruption laws; (b) rights to
conduct audits of the books and records of the agent or
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business partner to ensure compliance with the foregoing; and (c) rights to
terminate an agent or business partner as a result of any breach of anti-corruption laws, and
regulations or representations and undertakings related to such matters.
13. RAE Systems will conduct periodic review and testing of its anti-corruption
compliance code, standards, and procedures designed to evaluate and improve their
effectiveness in preventing and detecting violations of anti-corruption laws and RAE Systems’s
anti-corruption code, standards and procedures, taking into account relevant developments in
the field and evolving international and industry standards.
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APPENDIX C
CORPORATE COMPLIANCE REPORTING
1. RAE Systems Inc. (“RAE Systems”) agrees that it will report periodically, at no less
than 12-month intervals, in accordance with the schedule described in Paragraph 3 below,
during the three-year term of this Agreement, to the United States Department of Justice,
Criminal Division,
Fraud Section, and the U.S. Attorney’s Office for the Northern District of California
(collectively,
the “Department”) regarding remediation and implementation of the compliance program and
internal controls, policies, and procedures described in Appendix B.
2. Should RAE Systems discover credible evidence, not already reported to the
Department, that questionable or corrupt payments or questionable or corrupt transfers of
property or interests may have been offered, promised, paid, or authorized by any RAE Systems
entity or person, or any entity or person working directly for RAE Systems, or that related false
books and records have been maintained, RAE Systems shall promptly report such conduct to
the Department.
3. During the three-year term
of this Agreement, RAE Systems shall: (1) conduct an
initial review and prepare an initial report, and (2) conduct and prepare two
follow-up reviews and reports, as described below:
a.
By no later than May 1, 2011,
RAE Systems shall issue a written report
covering calendar year 2010 and setting forth a complete description of its remediation
efforts to
date, its proposals reasonably designed to improve the policies and procedures of RAE
Systems for
ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters
of the subsequent reviews. The report shall be transmitted to Deputy Chief — FCPA Unit, Fraud
Section, Criminal Division, U.S. Department of Justice, 0000 Xxx Xxxx Xxxxxx, X.X., Xxxx
Building, Fourth Floor, Washington, D.C. 20005. RAE Systems may extend the time period for
issuance of the report with prior written approval of the Department.
x. XXX Systems shall undertake two follow-up reviews, incorporating any comments
provided by the Department on its initial review and report, to further monitor and assess
whether the policies and procedures of RAE Systems are reasonably designed to detect and
prevent violations of the FCPA and other applicable anticorruption laws.
c. The first follow-up review and report shall be completed by no more
than one-year after the initial review. The second follow-up review and report shall be completed by
no more
than one-year after the completion of the first follow-up review.
x.
XXX Systems may extend the time period for submission of the follow-up
reports with prior written approval of the Department.
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