3M employees bribed Chinese government officials, SEC says

3M invited a dozen Chinese government officials to St. Paul in 2017, ostensibly to attend a conference.

But a secret itinerary established by some of 3M's employees had the officials on a company-funded vacation, federal regulators say, in a scheme meant to "improperly induce the officials to purchase 3M products."

From 2014 to 2017, 3M spent nearly $1 million on overseas shopping and sightseeing trips for Chinese health care officials that were masked as educational events, according to the U.S. Securities and Exchange Commission.

It paid off in the short term, according to the SEC.

"3M improperly benefited by at least $3.5 million from increased sales," the SEC said in charging Maplewood-based 3M with violating the Foreign Corrupt Practices Act.

The allegations — which 3M settled last month for $6.5 million without admitting or denying the SEC's findings — highlight the risk multinational companies face if its oversight of foreign subsidiaries is too lax.

"Upon learning of this situation, 3M promptly self-reported these matters to the U.S. government and fully cooperated with its investigation," the company said in a statement. "3M has also taken appropriate action to address this violation of company policy with those involved, and enhanced our internal controls to help prevent similar instances from occurring in the future."

The U.S. government alleges a now-former marketing manager for 3M's Chinese subsidiary colluded with two travel agencies and "was aided in the scheme by several employees in 3M-China's sales, marketing and professional services departments."

The St. Paul visit was one of 24 overseas trips employees arranged for "influential" officials from state-owned enterprises, the SEC said. Alternate itineraries for the trips included guided tours, shopping visits and other "leisure activities."

"The 3M-China employees circulated the alternate itineraries through hand delivery or personal WeChat accounts and asked the participants to keep the agenda hidden," the SEC alleges. "The costs of these trips were improperly recorded in 3M's books and records as legitimate business expenses, without any indication that they included tourism activities."

The case is a cautionary tale for any business with overseas operations: Make sure everyone plays by the rules or pay the price.

"One of the real challenges for a multinational is how they exert control over and govern their foreign subsidiaries," said Paul Vaaler, a professor at the University of Minnesota's law school and Carlson School of Management. "The price of giving more discretion to subsidiaries is less control over activities like you see here."

The head of the SEC's Foreign Corrupt Practices Act unit had a similar takeaway.

"This matter highlights the dangers to companies with global operations posed by inadequate internal accounting controls," Charles Cain said in a statement about the 3M settlement. "Those dangers were exacerbated here by complicit third-party vendors" — Chinese travel agencies.

Vaaler pointed out the SEC's investigation included a forensic accountant. It was a record-keeping provision that the agency ultimately charged 3M with violating.

"That's the issue: They have to have the right corporate controls," he said. "It's not so much that companies are violating this every day. It's about how much they invest in education and prevention."

The Foreign Corrupt Practices Act generally outlaws paying bribes to foreign government officials. The law was passed in 1977 following major corporate bribery scandals and their fallout.

"Some of the most sensational disclosures involved corrupt payments by Northrop, Lockheed, United Brands, Gulf Oil and Mobile in Saudi Arabia, Japan, Honduras, Korea, Italy and the Netherlands," former State Department official Mark Feldman told an oral historian in 2021. "The headlines were punctuated by suicides of corporate executives and foreign officials."

In the years since, most developed economies have enacted anti-bribery legislation. The Organization for Economic Cooperation and Development (OECD) now counts 44 countries as signatories to its Anti-Bribery Convention. The world's two most populous countries, China and India, are not among them.

China recently increased penalties for official bribery, but some experts say enforcement is spotty.

"In China, gift-giving and hospitality are often seen as essential to build relationships," according to a report from the law firm Herbert Smith Freehills LLP. "It is unlikely that reasonable, bona fide business hospitality will violate China's bribery laws where there is no quid pro quo and the benefits are properly recorded in the accounts. However, China's anti-bribery laws are broad … and enforcement is inconsistent."

The SEC settlement could snowball into bigger problems for 3M, Vaaler said, underscoring the risks multinationals face for not keeping foreign subsidiary operations in check.

Shareholders may try to hold the company responsible for the lapse with a lawsuit, though the $6.5 million payout is small enough it has not warranted a securities filing from 3M.

The Department of Justice could also take action. When asked Friday, the department and the company did not say if there was an ongoing criminal investigation.

The DOJ has launched eight enforcement actions regarding the Foreign Corrupt Practices Act this year, including a case against former cryptocurrency titan Sam Bankman-Fried.

3M's cooperation with the civil investigation could help prevent criminal charges.

"Our existing policy provides that if a company voluntarily self-discloses, fully cooperates and timely and appropriately remediates, there is a presumption that we will decline to prosecute absent certain aggravating circumstances involving the seriousness of the offense or the nature of the offender," Assistant U.S. Attorney General Kenneth A. Polite Jr. said in January. "When a company has uncovered criminal misconduct in its operations, the clearest path to avoiding a guilty plea or an indictment is voluntary self-disclosure."

3M says it went to the SEC in 2018 as soon as it found out "certain employees had circumvented established procedural controls and company ethics policy to arrange prohibited entertainment activities."

The SEC said 3M disciplined or terminated employees, severed ties with the travel agencies and made "further enhancements to its internal controls environment and compliance program including additional controls over is cross-border fund transfers."

As a result of what the agency calls "significant remedial measures," it does not appear the SEC will require 3M to pay for ongoing compliance monitoring, which Vaaler said can be another costly penalty for violating anti-bribery laws.

3M employees and customers can submit anonymous ethics complaints via the third-party website 3MEthics.com.

(Editor's note: On Tuesday, 3M told the Star Tribune it has received a letter from the DOJ informing the company that the investigation is now closed and the agency will take no further action at this time.)