Faro Technologies Inc: The Bribery Warning Became a Concealment Plan

In the Faro Technologies Inc FCPA case, the Securities and Exchange Commission ordered the company to give up $1,411,306 in profits from alleged bribes to employees of Chinese state-owned customers. Its account traced sales approvals, altered accounting descriptions and a warning about bribery that prompted a plan to hide the payments. For someone inside sales or finance, the revealing detail is what management wanted changed on paper while the money kept moving.

The Measurement Business and Its Chinese Customers

Faro sold portable computerized measurement devices and software used for three-dimensional inspections of parts, assemblies and machines. The Justice Department’s description of the business identifies automotive, aerospace and consumer-goods manufacturers among its markets. Headquartered in Lake Mary, Florida, the company began selling directly in China through its Shanghai subsidiary in 2003.

The SEC’s order describes the change from relying on a distributor to running a wholly owned sales operation. Faro promoted its Asia-Pacific sales vice president to regional sales director, and he recommended a former employee of the Chinese distributor to become the subsidiary’s country sales manager. That put someone familiar with the existing sales channel in charge of the new operation.

The SEC alleged that the country manager sought permission to pay kickbacks after receiving his proposed employment contract. He sent his request to three Faro officers, and the sales director explained what it meant: payments or other benefits to potential customers to obtain contracts. Management learned that the proposed payments likely violated Chinese anti-bribery law and orally told both managers not to make them.

The customer-side employees mattered because they worked for state-owned companies. In this case, the SEC treated the recipients as foreign officials under the Foreign Corrupt Practices Act. The business at stake was an equipment sale, and the person receiving the money could help the seller get the order.

Cash to Get the Order

The SEC alleged that Faro-China paid $444,492 in bribes from 2004 through 2006, generating approximately $4.5 million in sales. Its order tied the payments to sales contracts with state-owned customers and said the regional sales director authorized them. We see the sales incentive plainly: buy influence inside the customer, then book the resulting orders as business won.

One email made the exchange explicit. According to the SEC, the country manager asked in November 2004 for approval of a $13,300 payment to an employee of a state-owned company. He explained that dinners and travel were insufficient: the customer’s employees wanted money to help Faro secure the order. The director approved the payment.

In the SEC’s account, the director continued approving payments and worried about their discovery. We see concealment built into the sales approval: the warning was about getting caught, while the instruction still allowed payment whenever the country manager thought it necessary.

Deleting the Customer From the Books

The SEC alleged that the sales director told staff to change accounting entries so they concealed who received the money. An April 2004 email gave the instruction in his own words:

Deleting the customer removed the part of the description that explained the conflict. The SEC’s account places the recipient inside the buyer’s business, where the payment could influence a sale. Calling it a referral fee made that relationship less visible in the ledger.

The order also alleged that the company recorded the payments as legitimate selling expenses. That is why the books-and-records and internal-controls issues belong in the same story as the bribes: the approval authorized the money, and the entry concealed its purpose.

A Warning Followed by Intermediaries

A company warning about bribery became the occasion for changing the payment route, according to the SEC. In February 2005, a Faro officer circulated an article about another American company’s prosecution for bribes in China. The officer specifically told the sales director to have it translated for the China staff.

After reading the translated warning, the country manager asked to continue the payments through intermediaries or distributors. The SEC’s order says the director approved that proposal in an email on February 16, describing the purpose as “to avoid exposure.” It alleged that the payments continued through intermediaries until early 2006. We see an absurd response to a bribery warning: a plan to hide the same payments. Lesson learned, apparently.

The Justice Department’s announcement describes the conduct Faro admitted in the statement of facts accompanying its non-prosecution agreement in the criminal case. The company admitted that Faro-China used a bogus services contract with an intermediary to pay bribes on its behalf. The intermediary combined those payments and sent Faro regular invoices under the services contract. The announcement also describes at least $238,000 in improper payments falsely recorded as referral fees.

That arrangement gave the payments an apparent commercial explanation. A services contract and recurring invoices could describe a supplier relationship while the money bought influence inside the customer. For an employee familiar with the work, the useful question is what service the intermediary actually performed and who ultimately received the funds.

The Approval Was Part of the Problem

The SEC alleged that Faro’s accounting controls failed to prevent or detect the payments. It also said Faro provided no training on the Foreign Corrupt Practices Act to its employees, agents or subsidiaries during the period and had no program to monitor their compliance. Yet the order’s emails show a problem beyond missing instruction: the person approving payments allegedly knew enough to change how they appeared in the accounts.

An approval can therefore be part of the evidence of a scheme. In Faro’s case, the SEC connected requests from the country manager to the director’s responses and the descriptions used in the books. The question for an insider is what the approver knew about the recipient and the purpose of the expense.

A different accounting disguise appeared in the SEC’s complaint against RAE Systems. The SEC alleged that sales personnel in a Chinese joint venture supported expenses with genuine receipts, known as fapiao, that belonged to other transactions:

The comparison is about what the paperwork conceals. In the Faro order, an accounting description allegedly lost the word identifying the recipient. In the RAE complaint, an authentic receipt allegedly supported the wrong expense. Someone who knows the underlying transaction can explain the gap that a neat expense file leaves hidden.

The Company’s Civil Resolution

The SEC’s June 5, 2008 order required Faro to surrender the profits from sales tied to the alleged bribes. In its announcement that day, the Justice Department credited Faro’s voluntary disclosure, review of the payments, cooperation and compliance improvements when explaining the company’s separate non-prosecution agreement. The sales approvals and changed accounting descriptions show the conduct behind those resolutions.

The Later Case Against the Sales Director

The SEC brought a separate civil action against Faro’s former director of Asia-Pacific sales on August 28, 2009. Its announcement of that action alleged that he authorized the payments and directed staff to alter account entries to conceal them. The agency charged him over both his own conduct and his assistance in the company’s violations.

The SEC announced that the former director had consented to a final judgment requiring a $30,000 civil penalty. The allegations make the approval emails central to the account of his role, as well as to the company’s payment trail.

What Your Knowledge of the Payments Can Show

Faro’s case makes whistleblower evidence concrete: an employee may understand the sales request, the approval, the intermediary’s invoice or the reason someone changed an expense description. We connect that knowledge to the customer decision and the movement of money. A finance employee who saw the wording change and a salesperson who understood the customer’s demand may hold different parts of the same transaction.

Research also gives a reason to take insider knowledge seriously before an accounting problem is exposed. The March 2019 study Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, examined companies exposed to state False Claims Acts through state pension-fund ownership. It estimated a 5% to 9% reduction in accounting-fraud likelihood after that exposure.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Foreign-bribery reporting involves separate agency programs, including SEC whistleblower awards, which our experts assess with you against the payments and accounting you know.

You Know Why the Description Changed

If you know why a customer payment became a referral fee or why an intermediary started sending invoices, tell our whistleblower experts what happened inside the business. We bring in FCPA whistleblower lawyers who know overseas sales and accounting cases, and stay beside you as we build your strongest foreign bribery whistleblower case around the decisions and transactions you understand.