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Olympus Investigation Shows Ethical Lapses and a Caterer With Clout

By JONATHAN SOBLEAPRIL 9, 2016

The Olympus campus in Shenzhen, China. The company hired its cafeteria operator to act as a go-between with the government in a thorny customs case. Credit Lam Yik Fei for The New York Times

TOKYO — Managers at an Olympus factory in southern China struggled for years to resolve a thorny dispute with local customs authorities. The problem risked incurring millions of dollars in fines and harming a crucial manufacturing hub that churned out 50 million camera lenses a year.

Then Olympus found an unlikely helper: an obscure Chinese company that ran the factory’s cafeteria.

The caterer had connections. In 2013, Olympus hired the company, Anyuan, to be a fixer, acting as a go-between with government officials in the customs case, according to an internal investigation into the matter. Soon after, the eight-year-old case was inexplicably dropped, and with it demands that Olympus pay at least $9 million in penalties and uncollected import duties.

The activities in China, laid bare in a confidential 57-page report on the investigation, as well as internal memos and emails that were reviewed by The New York Times, exposed a series of ethical lapses and a corporate culture undermined by weak oversight. The documents said there was a nearly $700 million bookkeeping discrepancy, dubious real estate deals, “top secret” emails and a hidden “slush fund.” While Olympus found no legal violations in its investigation, the previously unreported documents detailed “sloppy due diligence,” “major problems” with corporate controls and instances where Olympus managers “concealed” payments to Anyuan.

Olympus’s dealings with a shadowy middleman took place just two years after it faced a major ethical crisis, admitting in 2011 to a $1.7 billion accounting fraud. Those failings stretched to the top, and senior executives eventually pleaded guilty to hiding huge investment losses for decades. Afterward, the company overhauled the senior management team, vowing to change its ways.

That pledge makes the company’s activities in China all the more glaring, since they did not involve the old guard. They were approved by its new leadership, including the president and the chairman. Senior executives signed off on millions of dollars in payments to the Chinese company, according to the internal investigation.

And they did so despite the knowledge that Anyuan’s chairman was linked to prominent bribery cases that were reported by China’s state-run media. Some Olympus executives, the report said, understood that Chinese fixers “could commit bribery.”

The situation in China has drawn attention from the authorities in the United States. Olympus briefed the Justice Department on the results of its internal inquiry. The Justice Department’s foreign corporate bribery unit is monitoring developments, though it has not opened a formal investigation, according to an American official with knowledge of the matter who spoke on the condition of anonymity because he was not authorized to discuss it.

Olympus is on the department’s radar for the 2011 accounting fraud, which involved financial transactions in the United States, as well as a separate investigation into accusations that Olympus paid kickbacks to doctors in order to sell medical equipment. Olympus paid $623 million to settle the medical equipment case and admitted wrongdoing in the matter.
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The Olympus campus in Shenzhen, China, which can produce millions of camera lenses a year. Credit Lam Yik Fei for The New York Times

Olympus acknowledged an investigation into its Chinese operations, which was conducted by three board members and a law professor, with assistance from outside law firms. But the company declined to elaborate, saying that the inquiry had found no evidence of legal violations. A spokesman for the company, Osamu Kobayashi, said of details described in internal documents: “We don’t deny them, and we don’t confirm them.”

The company, which presented the findings of the China investigation to the board late last year, has taken some action.

In February, Olympus quietly disciplined five managers who were directly involved in dealings with Anyuan. Two were demoted, one received a two-day suspension and two others received written reprimands.

Olympus announced the actions on an internal notice board accessible by employees, without giving reasons. The inquiry’s report recommended that the same managers be punished for violating company policies, although it said their actions fell short of legal wrongdoing.

Mr. Kobayashi, the spokesman, called the actions an internal human resources matter and declined to comment further.

Anyuan declined to comment. The company operates out of a building with a polished stone lobby in Shenzhen, an industrial city on the Chinese mainland a few miles from Hong Kong, where Olympus has its camera factory. In response to a visit by a reporter, a receptionist said the chairman, Chen Zuyuan was away. The company did not respond to multiple requests for interviews with Mr. Chen or other representatives.

Anyuan did not cooperate with the Olympus inquiry, the investigators said in their report, beyond giving a short statement claiming it had “used only legal means” to aid Olympus with the customs issue.
Fixing More Than Lunch

Olympus built its first plant in Shenzhen in the early 1990s, at a time when global companies were piling into China’s rapidly developing coastal cities, looking to take advantage of the cheap labor force. It expanded a decade later, after the Chinese government set up a duty-free zone for overseas manufacturers in the city.

Soon, Shenzhen became the source of most lenses that Olympus uses in its cameras. The plant, which employed several thousand workers, could produce more than 50 million lenses a year, as well as other camera components.
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The Olympus factory in Shenzhen, an industrial city on the Chinese mainland a few miles from Hong Kong. Credit Lam Yik Fei for The New York Times

The expansion in Shenzhen was not trouble-free. In 2011, fire inspectors found safety violations at the factory, including faults with “emergency passages, smoke ventilation, doors and windows,” two managers later wrote in a memo.
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It was then that Chinese public security officials introduced Olympus to Anyuan, according to one of the memos reviewed by The Times. The officials said that Anyuan could facilitate “a smooth resolution” to the fire-safety problem, the managers wrote.

In China, such middlemen have played an invaluable, if sometimes dubious, role for overseas companies. Government officials hold significant sway over the Chinese economy, requiring companies to navigate a labyrinth of bureaucratic approvals and regulations to secure access, orders and licenses, or negotiate taxes and fees. Often operating out of view, the middlemen, who have connections to government and Communist Party officials, can help lubricate the process.

Managers at Olympus described Anyuan in the internal memos as an influential fixer, with vaguely defined interests in a variety of industries like construction, mining and pharmaceuticals. Most important, they said, the company could be counted on to solve problems with Chinese officials, by using what they called “strong connections with the central government, the city and the security services.”

The managers agreed to let Anyuan deal with the fire inspectors on Olympus’s behalf, multiple Olympus documents show. They later reported that, as a result of Anyuan’s intervention, the factory was certified as safe “without any fines or line stoppages whatsoever.” Olympus declined to comment on the matter.

Olympus turned to Anyuan for help, despite hints of impropriety.

In 2007, state-controlled media reported that Anyuan’s chairman, Mr. Chen, paid a senior transportation official in Yunnan Province 32 million renminbi, or $4.9 million, to obtain roadway-related contracts — an amount one news report described as the largest bribe ever paid to a Chinese public official. The official, Hu Xing, was arrested in Singapore and extradited to China, where he was sentenced to life in prison for taking bribes.

Mr. Chen has also been connected to a more recent corruption case involving Wan Qingliang, the former Communist Party chief of Guangzhou, one of China’s wealthiest and most populous cities and a close neighbor to Shenzhen. The official, who was arrested in 2014, faces charges that he took 111 million renminbi, or $17.2 million, in bribes from Mr. Chen and other businessmen, the official Xinhua news agency reported in December. (It was unclear whether Mr. Chen of Anyuan has been charged with wrongdoing in either bribery case.)

For its help with the fire-safety problem, Anyuan requested an unusual form of payment.

In October 2011, Olympus hired an Anyuan-affiliated company as a contractor at the factory, according to multiple Olympus documents. The affiliate’s official job was to to provide catering, cleaning and security services to the employee cafeteria. But the affiliate, called An Ping Tai, was established just three days before it took on the contract, and it listed a nonexistent office as its address, the internal inquiry found. The affiliate appeared to exist only on paper.

“An Ping Tai seems to be a shell company without substantial operations,” lawyers at a Western law firm said in a confidential report prepared for Olympus in 2014, before the company decided to open a formal inquiry.
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Workers at the Olympus factory in Shenzhen, China. Credit Lam Yik Fei for The New York Times

According to the internal investigation, Olympus paid the affiliate at least 1.2 million renminbi, or about $180,000, in several upfront payments, followed by unspecified monthly service fees and other compensation. Some of the money was drawn from what the inquiry called a “slush fund” that was hidden from Olympus’s official accounts.

Olympus made other off-the-books payments to Anyuan, the internal inquiry found. In 2014, managers in Shenzhen diverted to An Ping Tai rent money that Olympus had collected from employees who lived in company dormitories. The managers then “covered up” the payments by describing them in financial reports as maintenance fees, the inquiry found.
The $694 Million Discrepancy

The customs dispute at Olympus stretched back to 2006, when inspectors in Shenzhen found discrepancies with the factory’s inventory records, according to the internal inquiry and managers’ memos reviewed by The Times.

Foreign companies in the city’s special manufacturing zone are allowed to import duty-free raw materials on the condition that the products they assemble there are exported to other countries. They must not be sold in China, where they would compete unfairly with local goods.

The customs inspectors discovered that the volume of materials that Olympus was importing into the zone did not match the finished components that it was shipping out. Such discrepancies can indicate that a company is violating the no-selling-in-China rule.

The value of the discrepancy, $694 million, was so large that Olympus said it could only be explained by data-entry error. By way of comparison, Olympus sold only about $600 million worth of digital cameras worldwide last year. The internal inquiry blamed the problem on “simple operational mistakes” by workers logging inventory in record-keeping software.

The customs authorities were unpersuaded.

After years of back-and-forth with Olympus, officials threatened to levy at least 60 million renminbi, or $9.2 million, in fines and unpaid import tariffs, according the Olympus documents. In one memo, managers in Shenzhen said the fine could end up being 40 times as large, though the Western law firm’s report questioned the legal basis for that estimate in its 2014 report.

Customs authorities in Shenzhen declined to comment. The General Administration of Customs in Beijing, which oversees customs affairs nationally, said it did not comment on investigations.

Managers also suggested in the memo that Olympus could lose its duty-free trading privileges in Shenzhen, a blow that would add costs to the already unprofitable camera business. Global digital camera sales have plunged by half in the last decade, hurt by the spread of camera-equipped smartphones.
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The Olympus president Shuichi Takayama, left, and Nobuyuki Onishi, an accounting executive, briefed reporters on a scandal in 2011. Credit Franck Robichon/European Pressphoto Agency

Olympus employees had previously tried to curry favor with Chinese officials, the inquiry’s report suggested. Investigators found a proposal by a Chinese employee at the plant dated August 2011 to offer cash and cameras worth 20,000 renminbi, or about $3,000, to the head of the customs office’s antismuggling department. The report does not make clear if the plan was approved or carried out.

Anyuan proposed a more decisive intervention.

The company told Olympus that it could resolve the problem quickly and relatively cheaply, the Shenzhen managers reported in mid-2013. Anyuan, they said, estimated it would cost Olympus half the amount that the customs authorities were threatening to impose in penalties.

It was still a significant payment — equivalent to several million dollars. One manager in Shenzhen, the head of the accounting department at the factory, told the company inquiry that he suspected Anyuan would use part of the money to bribe Chinese officials. Discussions with Anyuan were handled by a Chinese Olympus employee, according to the inquiry.

“My interpretation at the time, and still a possible interpretation now,” the accounting manager is quoted in the inquiry’s report as saying, was that the Chinese employee “was negotiating to deliver 100 million to 140 million renminbi in bribes to the government through Anyuan.”

The confidential inquiry said there was no documentary evidence to prove the manager’s claim. Other managers told investigators they had no reason to think Anyuan was bribing Chinese officials.

Once again, the plan involved an unorthodox form of payment.

Olympus, the documents show, proposed a real estate transaction. Olympus would sell two dormitory buildings in Shenzhen to the Anyuan affiliate. The sale price would be set well below the buildings’ market value, according to the confidential report from the Western law firm. The deal would reward Anyuan, but more discreetly than a cash payment.

Senior Olympus executives would have to sign off, and they were nervous. The reports and memos showed a debate ensued between Tokyo executives and the Asia-Pacific office, based in Hong Kong, over who would bear responsibility for the decision. Executives knew about the bribery accusations against Mr. Chen and were concerned about legal risks, according to the documents.

At one point, the Olympus president, Hiroyuki Sasa; chairman, Yasuyuki Kimoto, who retired last year; and two other board members in Tokyo told subordinates in Hong Kong and Shenzhen to move forward with the real estate deal, according to the report by the Western law firm. Managers in Shenzhen were instructed “not to leave any written evidence of the purpose behind the transaction,” the law firm found. Email memos on the matter were labeled “top secret.”

There are conflicting accounts of what happened next. According to the inquiry, Olympus balked at the dormitory sale at the last minute, judging it too risky. But managers in Shenzhen had already signed a deal, which Anyuan claimed contained clauses promising the sale.

In the end, Olympus paid Anyuan 24 million renminbi, or $3.7 million, in cash, through its affiliate An Ping Tai, according the inquiry. Olympus declined to comment on details of its arrangement with Anyuan, beyond saying it was “one of many contractual relationships” it maintained in the normal course of its business.

In August 2014, eight months after its managers signed the deal with Anyuan, Olympus was informed that it would not be fined or otherwise punished for the inventory-recording discrepancy, according to the inquiry.

“In the end, a fine that had been estimated at least 60 million renminbi was not levied at all,” the inquiry found.

Chris Buckley contributed reporting from Shenzhen and Ben Protess from New York. Owen Guo contributed research.

A version of this article appears in print on April 10, 2016, on page BU1 of the New York edition with the headline: The Caterer With Clout. Order Reprints| Today’s Paper|Subscribe

Reprinted from the NY Times

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