Next up is Eli Lilly in a Foreign Corrupt Practices Act enforcement action announced last week by the SEC.   This post goes long and deep as to the SEC’s allegations which resulted in a $29 million settlement.

In summary, the SEC alleges in a civil complaint (here) as follows.

“Eli Lilly and Company violated the Foreign Corrupt Practices Act in connection with the activities of its subsidiaries in China, Brazil, Poland, and Russia.  Between 2006 and 2009, employees of Lilly’s China subsidiary falsified expense reports in order to provide improper gifts and cash payments to government-employed physicians. In 2007, a pharmaceutical distributor hired by Lilly in Brazil paid bribes to government health officials in a Brazilian state in order to assure sales of a Lilly product to state government institutions. In Poland, between 2000 and 2003, Lilly’s subsidiary made eight payments totaling approximately $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities at the same time that the subsidiary was seeking the official’s support for placing Lilly drugs on the government reimbursement list. Finally, Lilly’s subsidiary in Russia paid millions of dollars to off-shore entities for alleged “services” beginning as early as 1994 and continuing through 2005 in order for pharmaceutical distributors and government entities to purchase Lilly’s drugs. In some instances, the off-shore entities appear to have been used to funnel money to government officials or others with influence in the government in order to obtain business for the subsidiary. These off-shore entities rarely provided the contracted-for services. Moreover, between 2005 and 2008, contemporaneous with requests to government officials to support the government’s purchase or reimbursement of Lilly’s products, the subsidiary in Russia made proposals to government officials about how the company could donate to, or otherwise support, various initiatives that were affiliated with, or important to, the government officials.  As a result of this conduct, Lilly violated [the FCPA's internal controls provisions] by failing to have an adequate internal controls system in place to detect and prevent illicit payments.  Lilly violated [the FCPA's books and records provisions] by improperly recording each of those payments in its accounting books and records.  Lilly also violated the [FCPA's anti-bribery provisions] in connection with certain activities of its subsidiary in Russia.”

As indicated by the above paragraph, conduct in Poland, China, and Brazil gave rise to FCPA books and records and internal controls violations only.

Poland

The SEC’s allegations relating to Poland are substantively identical to allegations made against Schering-Plough in this 2004 FCPA enforcement action.

In pertinent part, the SEC alleges in its complaint against Eli Lilly as follows.

“During 2000 through 2003, Lilly’s wholly-owned subsidiary in Poland (“Lilly- Poland”) made eight payments totaling approximately $39,000 to the Chudow Castle Foundation (“Chudow Foundation”), a small charitable foundation in Poland that was founded and administered by the Director of the Silesian Health Fund (“Director”). The Director established the Chudow Foundation in 1995 to restore the Chudow Castle in the town of Chudow and other historic sites in the Silesian region of Poland.

The Silesian Health Fund (“Health Fund”) was one of sixteen regional government health authorities in Poland during the period. Among other things, the Health Fund reimbursed hospitals and healthcare providers for the purchase of certain approved products.  The Health Fund, through the allocation of public money, exercised considerable influence over which pharmaceutical products local hospitals and other healthcare providers in the region purchased.

Beginning in early 2000 and into 2002, Lilly-Poland was in negotiations with the Health Fund over, among other things, the Heath Fund’s financing of the purchase of Gemzar, one of Lilly’s cancer drugs, by public hospitals and other healthcare providers. Those negotiations occurred primarily between a team manager at Lilly-Poland (“Lilly Manager”) and the Director. Continuing at intervals throughout these negotiations, the Director asked that Lilly Poland contribute to the Chudow Foundation. The initial request came directly from the Director and the subsequent requests came from the Chudow Foundation.

The Lilly-Poland Manager knew that the Director had established the Chudow Foundation and that it was a project to which he was devoted and lent much effort. The Manager requested the approval of payments to the Chudow Foundation. The Manager falsely described the first payment as being for the purchase of computers for the Chudow Foundation. The second Lilly-Poland payment request falsely characterized the proposed payment as “[t]o support foundation in its goal to develop activities in [Chudow Castle].” That request documentation also noted that the “value of the request” was “[i]ndirect support of educational efforts of foundation settled by Silesia [Health Fund].” Similarly, the remaining payments were mischaracterized as monies paid by Lilly-Poland to secure the use of the Chudow Castle for conferences after its renovation. No such conferences took place.

Lilly-Poland eventually made a total of eight payments to the Chudow Foundation, starting in June 2000 and ending in January 2003.  [...]  The Manager requested the approval of the payments to the Chudow Foundation with the intent of inducing the Health-Fund Director to allocate public monies to hospitals and other health care providers in the Health Fund for the purpose of purchasing Gemzar.

China

As to China, the SEC alleges, in full, as follows.

“Lilly’s wholly-owned subsidiary through which it does business in China (“Lilly- China”) employs more than one-thousand sales representatives whose main focus is on marketing Lilly products to government-employed health-care providers. During the relevant period, the sales representatives worked from regional offices and traveled throughout the country, interacting with the health-care providers in order to convince them to prescribe Lilly products. The sales representatives were directly supervised by District Sales Managers who, in tum, were supervised by Regional Managers. Sales representatives paid out-of-pocket for their travel expenses and submitted receipts and other documentation to the company for reimbursement.

Between 2006 and 2009, various sales representatives and their supervisors abused the system by submitting, or instructing subordinates to submit, false expense reports. In some instances, Lilly-China personnel used reimbursements from those false reports to purchase gifts and entertainment for government-employed physicians in order to encourage the physicians to look favorably upon Lilly and prescribe Lilly products.

In one sales area, in 2006 and 2007, a District Sales Manager for Lilly’s diabetes products instructed subordinates to submit false expenses reports and provide the reimbursement money to her. She then used the reimbursements to purchase gifts, such as wine, specialty foods and a jade bracelet, for government-employed physicians. At least five sales representatives in the oncology sales group submitted false expense reports and then used those reimbursements to provide meals, visits to bath houses, and card games to government-employed physicians.

Similarly, in three other provinces, three sales representatives submitted false expense reports and then used the reimbursements to provide government-employed physicians with visits to bath houses and karaoke bars. In another city, five sales representatives submitted false reimbursements and then their Regional Manager used the money to provide door prizes and publication fees to government-employed physicians. In another city, seven sales representatives and the District Sales Manager for the diabetes sales team used reimbursements to buy meals and cosmetics for government-employed physicians.

Between 2008 and 2009, members of Lilly-China’s “Access Group,” which was responsible for expanding access to Lilly products in China by, among other things, convincing government officials to list Lilly products on government reimbursement lists, engaged in similar misconduct. At least six members of the sixteen-member Access Group, including two associate access directors, falsified expense reports and used the proceeds to provide gifts and entertainment to government officials in China. The gifts included: spa treatments, meals, and cigarettes.

Although the dollar amount of each gift was generally small, the improper payments were wide-spread throughout the subsidiary. Lilly has terminated, or otherwise disciplined, the various employees who submitted false expense reports and/or used the proceeds to provide gifts and services to government officials.”

Brazil

As to Brazil, the SEC alleges, in full, as follows.

“Between 2007 and 2009, Lilly-Brazil distributed drugs in Brazil through third party distributors who then resold those products to both private and government entities. As a general rule, Lilly-Brazil sold the drugs to the distributors at a discount; the distributors then resold the drugs to the end users at a higher price and took the discount as their compensation.  Lilly-Brazil negotiated the amount of the discount with the distributor based on the distributor’s anticipated sale. The discount to the distributors generally ranged between 6.5% and 15%, with the majority of distributors in Brazil receiving a 10% discount.

In early 2007, at the request of one of Lilly-Brazil’s sales and marketing managers at the time, Lilly-Brazil granted a nationwide pharmaceutical distributor, unusually large discounts of 17% and 19% for two of the distributor’s purchases of a Lilly drug, which the distributor then sold to the government of one of the Brazilian states. Lilly-Brazil’s pricing committee approved the discounts without further inquiry. The policies and procedures in place to flag unusual distributor discounts were deficient. They relied on the representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions. In May 2007, Lilly sold 3,200 milligrams of the drug to the distributor for resale to the Brazilian state; in August 2007, Lilly-Brazil sold 13,500 milligrams of the drug to the distributor for resale to the Brazilian state. Together the sales were valued at approximately $1.2 million.

The distributor used approximately 6% of the purchase price (approximately $70,000) to bribe government officials from the Brazilian state so that the state would purchase the Lilly product. The Lilly-Brazil sales and marketing manager who requested the discount knew about this arrangement.”

Russia

As to Russia, in pertinent part, the SEC complaint alleges as follows.

“From 1994 through 2005, Lilly-Vostok, a wholly-owned subsidiary of Lilly, sold pharmaceutical products either directly to government entities in the former Soviet Union or through various distributors, often selected by the government, who would then resell the products to the government entities. Along with the underlying purchase contract with the government entity or distributor, Lilly-Vostok sometimes entered into another agreement with a third-party selected by a government official or by the government-chosen pharmaceutical distributor. Generally, these third-parties, which had addresses and bank accounts located outside of Russia, were paid a flat fee or a percentage of the sale. These agreements were referred to as “marketing” or “service” agreements.  In total, Lilly-Vostok entered into over 96 such agreements with over 42 third-party entities between 1994 and 2004.

Lilly-Vostok had little information about these third-party entities, beyond their addresses and bank accounts. Rarely did Lilly-Vostok know who owned them or whether the entities were actual businesses that could provide legitimate services. Senior management employees in Lilly-Vostok’s Moscow branch assisted in the negotiation of these agreements. The contracts themselves were derived from a Lilly-Vostok-created template and enumerated various broadly-defined services, such as ensuring “immediate customs clearance” or “immediate delivery” of the products; or assisting Lilly-Vostok in “obtaining payment for the sales transaction,” “the promotion of the products,” and “marketing research.”

Contrary to what was recorded in the company’s books and records, there is little evidence that any services were actually provided under any of these third-party agreements. Indeed, in many instances, the “services” identified in the contract were already being provided by the distributor, a third-party handler (such as an international shipping handler) or Lilly itself. To the extent services such as expedited customs clearance or other services requiring interaction with government officials were provided, Lilly-Vostok did not know or inquire how the third party intended to perform their services.

Contemporaneous documents reflect that Lilly-Vostok employees viewed the payments as necessary to obtain the business from the distributor or government entity, and not as payment for legitimate services.

The SEC also alleges that in 1997 and in 1999 Lilly conducted a business review of Lilly-Vostok.  According to the SEC, the reports raised concerns about Lilly-Vostok’s business practices and the reports “recommended that Lilly-Vostok modify its internal controls to ensure that [certain third-party] services were documented” and to “assure itself that [certain third-party] agreements accurately and fairly reflect the services to be provided.”

However, the SEC alleged as follows.

“Lilly did not curtail the use of marketing agreements by its subsidiary or make any meaningful efforts to ensure that the marketing agreements were not being used as a method to funnel money to government officials, despite recognition that the marketing agreements were being used to “create sales potential” or “to ‘support’ activities leading to agreement-signing” with government entities. In fact, during the 2000-2004 period — after the above-described reports, but prior to the company ending use of the agreements– Lilly-Vostok entered into the three most expensive of these arrangements.”

The three arrangements are as follows.

First, the SEC alleged that in response to a 2002 Russian Ministry of Health tender, the ministry selected a “large Russian pharmaceutical distributor” for which to purchase the products and the distributor in turn negotiated with Lilly-Vostok for the purchase of diabetes products.  According to the SEC, the distributor required Lilly-Vostok, “as a condition of their agreement” to enter into various agreements with an entity incorporated in Cyprus.

According to the SEC.

“Lilly’s due diligence regarding the entity in Cyprus was limited to ordering a Dun and Bradstreet report and conducting a search using an internet service to scan publicly available information. Neither the Dun and Bradstreet report nor the internet search revealed the Cyprus entity’s beneficial owner or anything about its business. Nonetheless, pursuant to the terms of its arrangement with the distributor, Lilly-Vostok paid the entity in Cyprus over $3.8 million in early 2003.

The Cyprus entity was, in fact, owned by the Russian businessman who was the owner of the distributor. There is no evidence of services provided to Lilly-Vostok by the Cyprus entity in consideration for Lilly-Vostok’s $3.8 million in payments. Lilly’s books and records improperly reflected these payments as payments for services.”

Second, the SEC alleges “at least two instances” involving foreign government officials and alleges as follows.

“Between 2000 and 2005, Lilly-Vostok sold significant amounts of pharmaceutical products to a major Russian pharmaceutical distributor for resale to the Russian Ministry of Health. The pharmaceutical distributor was owned and controlled by an individual who, at the beginning of the distributor’s relationship with Lilly-Vostok, was a close adviser to a member of Russia’s Parliament. In 2003, this official became a member of the upper house of Russia’s Parliament. Throughout the period, this official exercised considerable influence over government decisions relating to the pharmaceutical industry in Russia.

As part of most of the sales arrangements with the distributor, the official demanded that Lilly-Vostok enter into separate “marketing” agreements with entities with addresses and bank accounts in Cyprus. Under the arrangement, Lilly-Vostok paid the Cypriot entities up to thirty percent of the sales price of the underlying sales contracts in return for the Cypriot entities entering into an agreement “to offer all assistance necessary” in various areas like storage, importation and payment.

In conjunction with outside counsel, Lilly-Vostok conducted limited due diligence on these third-parties. However, the due diligence did not identify the beneficial owners of these third-parties or determine whether the third-parties were able to provide the contracted-for assistance. Nonetheless, Lilly-Vostok concluded that it could proceed with the transactions and paid the Cypriot entities over $5.2 million. In fact, the Cypriot entities were owned by an individual associated with the distributor controlled by the member of the upper house of Russia Parliament. The Cypriot entity transferred the payments from Lilly-Vostok to other off-shore entities.”

Third, the SEC alleges “in connection another series of contracts, from 2000 through 2004, Lilly-Vostok sold products to a distributor, headquartered in Moscow, which was wholly-owned by a Russian government entity.

The SEC alleged as follows.

 ”The purchase agreements were signed on the government-owned distributor’s behalf by its General Director. As part of the arrangement, the government-owned distributor selected a third-party entity with an address in the British Virgin Islands (“the BVI entity”) with which Lilly-Vostok entered into agreements for the broadly defined “services” enumerated in the Lilly-Vostok template (see above). Under the terms of the agreements between Lilly-Vostok and the BVI entity, Lilly-Vostok was to pay the BVI entity up to 15% of the price of the product purchased by the government-owned distributor. Accordingly, from 2000 through 2005, Lilly-Vostok made approximately 65 payments to the BVI entity totaling approximately $2 million.

There is no evidence that the BVI entity performed any of the services listed in its agreement with Lilly-Vostok. There is also no evidence that Lilly-Vostok performed any due diligence or inquiry as to whether the BVI entity was able or did perform the contracted-for services. Lastly, there is no evidence that Lilly-Vostok performed any due diligence or inquiry into the identity of the beneficial owner of the BVI entity. In fact, the beneficial owner of the BVI entity was the General Director of the government-owned distributor, and he ultimately received the payments from the BVI entity.”

As to these various arrangements, the SEC alleges as follows.  “Lilly did not direct Lilly-Vostok to cease entering into these third-party agreements until 2004. However, Lilly permitted the subsidiary to continue making payments under already existing third-party contracts as late as 2005.”

As to the above Russian conduct, the complaint charges violations of the FCPA’s anti-bribery provisions.  Of note, the complaints specifically pleads as follows regarding knowledge.  “When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstances, unless the person actually believes that the circumstance does not exist.”

The SEC complaint also contains the following allegation.

“From 2005 through 2008, Lilly-Vostok made various proposals to government officials in Russia regarding how Lilly-Vostok could donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials. Examples included their personal participation or the participation of people from their institutions in clinical trials and international and regional conferences and the support of charities and educational events associated with the institutes. At times, these proposals to government officials were made in a communication that also included a request for assistance in getting a product reimbursed or purchased by the government. Generally, Lilly-Vostok personnel believed these proposals were proper because of their relevance to public health issues and many of the proposals were reviewed by counsel. Nonetheless, Lilly-Vostok did not have in place internal controls through which such proposals were vetted to ascertain whether Lilly-Vostok was offering something of value to a government official for a purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”

As to Lilly’s books and records, the SEC alleges as follows.

“[S]ubsidiaries of Eli Lilly made numerous payments that were incorrectly described in the company’s books and records. In China, payments were falsely described as reimbursement of expenses when, in fact, the money was used to provide gifts to government-employed physicians. In Brazil, money that was described in company records as a “discount” for a pharmaceutical distributor was, in actuality, a bribe for government officials. In Poland, payments classified as charitable donations were not intended for a genuine charitable purpose but rather to induce a government official to assent to the purchase of a Lilly product. Finally, in Russia, millions of dollars in payments, described in the company’s books and records as for various services, were actually payments to assure that Lilly was able to conduct business with certain pharmaceutical distributors.”

As to Lilly’s internal controls, the SEC alleges as follows.

“During the relevant period, Lilly and its subsidiaries failed to devise and maintain an adequate system of internal accounting sufficient to provide reasonable assurance that the company maintained accountability for its assets and transactions were executed in accordance with management’s authorization. Particularly, Lilly did not adequately verify that intermediaries with which the company was doing government-related business would not provide a benefit to a government official on Lilly’s behalf in order to obtain or retain business. Lilly and its subsidiaries primarily relied on assurances and information provided in the paperwork by these intermediaries or by Lilly personnel rather than engaging in adequate verification and analyzing the surrounding circumstances of the transaction. Lilly and its subsidiaries’ employees considered and offered benefits to government officials at the same time they were asking those government officials to assist with the reimbursement or purchase of Lilly’s products with inadequate safeguards to assure that its employees were not offering items of values to a government official with a purpose to assist Lilly in retaining or obtaining business.

Moreover, despite an understanding that certain emerging markets were most vulnerable to FCPA violations, Lilly’s audit department, based out of Indianapolis, had no procedures specifically designed to assess the FCPA or bribery risks of sales and purchases. Accordingly, transactions with off-shore entities or with government-affiliated entities did not receive specialized or closer review for possible FCPA violations.  In assessing these transactions, the auditors relied upon the standard accounting controls which primarily assured the soundness of the paperwork. There was little done to assess whether, despite the existence of facially acceptable paperwork, the surrounding circumstances or terms of a transaction suggested the possibility of an FCPA violation or bribery.

As to Lilly’s remedial efforts, the SEC complaint states as follows.

“Since the time of the conduct noted in this Complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anticorruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

As noted in this SEC release,  Lilly, without admitting or denying the allegations, agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8.7 million for a total payment of $29,398,734.  The release also notes that “Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures.”

In Lilly’s release (below) the retention period of the consultant is identified as 60 days and in the SEC’s proposed final judgement, the consultant is identified as FTI Consulting which has been assisting Lilly in connection with a previous Corporate Integrity Agreement.

The case has been assigned to Judge Beryl A. Howell (U.S. District Court, District of Columbia).

William Baker III (Latham & Watkins) represented Lilly.

In the SEC’s release, Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit) stated as follows. “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.”  In the same release, Antonia Chion (Associate Director in the SEC Enforcement Division) stated as follows.  “When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated.  We strongly caution company officials from averting their eyes from what they do not wish to see.”

This Lilly release quotes Anne Nobles (Lilly’s Chief Ethics and Compliance Officer and Senior VP of Enterprise Risk Management) as follows.  “Lilly requires our employees to act with integrity with all external parties and in accordance with all applicable laws and regulations.  Since ours is a business based on trust, we strive to conduct ourselves in an ethical way that is beyond reproach. We have cooperated with the U.S. government throughout this investigation and have strengthened our internal controls and compliance program globally, including significant investment in our global anti-corruption program.”  The Lilly release further states as follows.  “The SEC noted that since the time of the conduct alleged in its complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anti-corruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”  The release further notes that “Lilly was first notified of the investigation in August 2003″ and describes the independent compliance consultant as conducting a ”60-day review of the company’s internal controls and compliance program related to the FCPA.”

Why?

Because a German company used to have shares and bonds registered with the SEC.   The German company had a German subsidiary that invested in an Indonesian joint venture.  The Indonesian joint venture made, without any apparent knowledge or approval of the German company, alleged improper payments to employees of state-owned entities in Indonesia between seven to eleven years ago.  When the German company learned of suspicious account activity at the Indonesian joint venture seven years ago, it directed the joint venture to close the suspicious account.  The joint venture agreed to close the account and stop making the payments, even though it continued to make the payments through 2008.

The above paragraph pretty much explains the SEC’s Foreign Corrupt Practices Act enforcement action earlier this week against Allianz SE , a German company engaged in property and casualty insurance, life and health insurance, and asset management businesses around the world.

From November 2000 to October 2009, Allianz’s American Depositary Shares and bonds were registered with the SEC and it was thus an “issuer” under the Foreign Corrupt Practices Act.

In 1989 PT Asuransi Allianz Utama Indonesia (“Utama”) was formed as a joint venture.  JV members included Allianz of Asia-Pacific and Africa GmbH (AZAP - a German company and a wholly-owned subsidiary of Allianz), PT Asuransi Jasa Indonesia (“Jasindo”) (“an Indonesian state-owned entity) and PT Asuransi Wuwungan.  According to the SEC, during the relevant time period, AZAP owned 75% of Utama.

In the administrative cease and desist order (here) announced (here) earlier this week, the SEC found improper payments by Utama to employees of state-owned entities in Indonesia in order to obtain or retain business.  The order also found that the payments were improperly recorded and that Allianz failed to devise and maintain a sufficient system of internal controls.

The SEC order states, in summary, as follows.

“These proceedings arise out of violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Allianz SE (“Allianz” or the “Company”), through its Indonesian majority-owned subsidiary, PT Asuransi Allianz Utama (“Utama”). Between 2001 and 2008, Utama managers made improper payments to employees of state-owned entities in Indonesia in order to obtain and retain business. Allianz learned of the improper payments from two complaints made several years apart. The first complaint was submitted in 2005 alleging significant misconduct, including unsupported payments to agents. A subsequent audit of Utama’s accounting records uncovered that managers at Utama were using “special purpose accounts” to make illicit payments, many to government officials, in order to secure business in Indonesia. Despite the audit, the conduct continued. The second complaint was lodged in 2009 to Allianz’s external auditors and alleged that Allianz created illicit off-the-books accounts. In response, Allianz began an internal investigation. The Commission staff opened an investigation in April 2010 after receiving an anonymous complaint of possible FCPA violations. The investigation determined that from at least 2001 through December 2008, the Utama managers, with the assistance of others in the Indonesian office, made payments to employees of state-owned entities in Indonesia to procure or retain insurance contracts related to large government projects in Indonesia. As a result of improper payments of approximately $650,626 to agents and employees of state-owned entities and others, Allianz realized $5,315,649 in profits.  The payments were improperly recorded as legitimate transaction costs, thereby causing Allianz’s books and records to be inaccurate. Allianz failed to devise and maintain a system of internal controls sufficient to provide reasonable assurances to detect and prevent such payments.”

The order contains the following additional facts.

“In 1989, Allianz established Utama and continued the practice of using special purpose accounts for paying commissions to agents that generated business for Allianz. However, in February 2001, Indonesian Agent, an agent for Utama, Utama CEO 1 [a German citizen who was the Utama CEO from 1998 to 2001] and Utama’s Chief Financial Officer opened a separate, off-the-books account in the Indonesian Agent’s name (the “Agent special purpose account”). The Agent special purpose account was used to make improper payments to employees of Indonesian state-owned entities and others for the purpose of obtaining and retaining insurance contracts. In February 2001, Indonesian Agent and Utama CEO 1 executed a “Paying Agency Agreement” that set up the scheme to make the payments to employees of state-owned entities. This agreement established the off-the-books account that served as a slush fund to make bribe payments to foreign officials and others as instructed by Utama.”

Under the heading “Utama’s 2001-2005 Improper Payments” the order states, in pertinent part, as follows.

“During the period 2001 to 2005, Utama Marketing Manager [an Indonesian citizen] made payments from the Agent special purpose account to account introducers employed by state-owned entities to secure insurance contracts on large government projects in Indonesia.  Utama Marketing Manager received approval from Utama management to use the Agent special purpose account for improper purposes.  Utama CEO 2, the CEO from 2003-2006, was aware of the Agent special purpose account and the improper payments to foreign officials.  [...]  The improper payments made to foreign officials were disguised in the Utama insurance contracts as “overriding commissions.”  Despite the fact that Allianz has a majority share of Utama and consolidated the subsidiary’s accounts into its own books and records, Utama’s accounting system was maintained in Indonesia and Allianz did not have effective controls over the accounting.   Allianz did not have the ability to access Utama’s accounting system and, therefore, did not detect the movement of funds to the Agent special purpose account. In addition, the Agent special purpose account was maintained in the name of the Indonesian Agent to make it appear that all movement of funds to this account was for legitimate commission payments. Likewise, Allianz did not have effective controls over the commission payment request process, which allowed payments to go to the Agent special purpose account without supporting documentation.  [...]  On December 1, 2005, a whistleblower complaint concerning the special purpose account was submitted to both the Allianz whistleblower hotline and Utama’s joint venture partner Jasindo, and then forwarded to the head of AZAP. The complaint itemized a number of control weaknesses, most notably, the existence of the Agent special purpose account and its lack of transparency. On December 8, 2005, Allianz Group Audit initiated an audit of the Indonesian office; however, the review was limited to embezzlement from the Company.  [...]  However, no additional steps were taken to determine the nature and purpose of the accounts or to identify the recipients of payments from the accounts. On December 12, 2005, based on the audit findings Allianz directed the Utama management to close the Agent special purpose account. Although the Utama management agreed to close the account and to stop making the payments, it continued making improper payments to secure business for Allianz through 2008.”

Under the heading “Utama’s Post-2005 Improper Payments” the order states, in pertinent part, as follows.

“Despite the directive to close the account and to stop making payments, Utama Marketing Manager continued to use the Agent special purpose account to make improper payments to foreign officials from 2005 to 2008.  [...]  Utama CEO 2 approved the continued use of the Agent special purpose account to make payments on the two government insurance contracts at issue. Later, Utama Marketing Manager and his staff expanded the improper payments to numerous other foreign officials on government insurance contracts.  From 2005 to 2008, Utama Marketing Manager employed various methods to make payments to foreign officials. In addition to booking payments through the Agent special purpose account, Utama Marketing Manager made payments by either: 1) booking commissions to an agent that was not associated with the account for the government insurance contract and then withdrawing the funds booked to the agent’s account as cash to pay the foreign official; or 2) overstating the amount of a client’s insurance premium, booking the excess amount to an unallocated account and then “reimbursing” the excess funds to the foreign officials, who were responsible for procuring the government insurance contracts.  Similar to the Agent special purpose account, Allianz did not have effective controls over the Utama accounting system or the commission payment process, which allowed payments to be made to an agent’s account without supporting documentation. Allianz did not have any controls over the use of the unallocated account that was maintained at Utama. As a result, Utama Marketing Manager was able to take funds from Utama to pay foreign officials without detection. In March 2009, Allianz’s outside auditor received an anonymous complaint alleging that an Allianz executive created or initiated slush funds during his tenure with AZAP. Between December 2005, when the Allianz Executive Vice-President of the Asia-Pacific Division directed Utama to close the Agent special purpose account and the March 2009 Whistleblower complaint, Allianz took no steps to ensure that the Agent special purpose account was closed and that similar improper payments were not being made.”

Under the heading “Investigation and Remediation” the order states, in full, as follows.

“In response to the March 2009 Whistleblower complaint, Allianz convened a Whistleblower Committee to do an internal investigation and retained counsel to conduct an internal investigation of Utama’s payment practices in Indonesia. Allianz did not report the conduct to the Commission staff.  In April 2010, the staff opened an investigation after receiving an anonymous complaint of possible FCPA violations. The staff contacted Allianz concerning the allegations. Allianz’s cooperation in the staff’s investigation and the timeliness of its response to the Commission’s requests for documents and information improved over time. Allianz hired new counsel and took steps to further its cooperation and remedial efforts.  The staff’s investigation uncovered 295 government insurance contracts that were obtained or retained by improper payments of approximately $650,626 to Indonesian government officials and others from 2001 through 2008. As stated above, in some instances the nature of the improper payments was disguised in invoices as an “overriding commission” or as a commission for an agent that was not associated with the government insurance contract. In other instances the improper payments were structured as an overpayment by the government insurance contract holder, who was later “reimbursed” for the overpayment. The excess funds were then paid to foreign officials, who were responsible for procuring the government insurance contracts.  Allianz took various remedial measures, including employment action against several individuals who were involved in the conduct or failed to stop the conduct. Allianz issued new or enhanced FCPA compliance and internal accounting control policies and procedures, including mandating strict scrutiny of payments to third party intermediaries. Allianz also updated the anti-corruption clause in its third-party contracts to specifically refer to the FCPA.  Allianz provided enhanced FCPA compliance training to its employees and improved its current global anti-corruption compliance program.”

Under the heading, “FCPA Violations” the order states, in pertinent part, as follows.

“Utama, a majority-owned subsidiary of Allianz, made improper payments to foreign officials to obtain or retain government insurance contracts. Utama improperly recorded the payments as legitimate transaction costs. Utama’s financial statements were consolidated into Allianz’s financial statements. As a result of the conduct described above, Allianz violated Section 13(b)(2)(A) of the Exchange Act, which requires issuers to keep accurate books, records and accounts. Further, as evidenced by the extent and duration of Utama’s improper payments and their improper recordation, and the fact that Allianz was not aware that Utama’s commission payment request process allowed funds to be diverted for improper payments, Allianz failed to recognize the compliance risks posed by Utama. Allianz also failed to devise and maintain an effective system of internal controls sufficient to provide reasonable assurances that improper payments were not being made by its subsidiary. As a result of the conduct described above, Allianz violated Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a sufficient system of internal accounting controls.  [...]  Section 13(b)(2)(A) of the Exchange Act does not require that the amounts involved be “material,” nor is it necessary to prove “scienter” under its provisions. SEC v. World-Wide Coin Invs. Ltd., 567 F. Supp. 724, 749-51 (N.D. Ga. 1983). Similarly, there is no scienter requirement for establishing a violation of Section 13(b)(2)(B).

According to the SEC release, “without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.”

See here for a prior guest post discussing the Dodd-Frank provision granting the SEC authority to impose civil monetary penalties in administrative proceedings such as the Allianz matter.

There is much to analyze in the nine-page cease and desist order.

For starters, the SEC required disgorgement even though no FCPA anti-bribery violations were alleged or asserted.  This prior post highlighted an article concerning ”no-charged bribery disgorgement” by various Debevoise & Plimpton attorneys, including Paul Berger (here) a former Associate Director of the SEC Division of Enforcement.  The article concluded that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” The article noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Your first reaction might be – the SEC could have charged Allianz with FCPA anti-bribery violations given the findings of the cease and desist order, but choose not to.  If that is your reaction, based on the information in the cease and desist order, you are wrong.

Contrary to popular misperception, the FCPA’s anti-bribery provisions apply to foreign issuers only to the extent “mails or any means or instrumentality of interstate commerce” are used in connection with the improper payments.  The SEC’s order does not contain any findings concerning any U.S. nexus in regards to the payments at issue.

The above paragraph, in addition to the notion that the SEC’s order does not contain any findings to suggest willful violations of the FCPA’s books and records or internal control provisions, helps explain the lack of DOJ involvement in the matter.   Nevertheless, some (see here) used the “d” word (as in declination) in describing the DOJ’s decision not to bring charges against Allianz.  However, for the reasons explained above, there appears to have been no criminal charges to bring against Allianz.  This is not a declination.

In this regard, the Allianz enforcement action is similar to the 2011 enforcement action against Diageo (see here for the prior post).

According to this Wall Street Journal Corruption Currents post, “Claudius Sokenu of Arnold & Porter LLP conducted the company’s internal investigation and Joel Cohen of Gibson Dunn & Crutcher LLP was brought in subsequently to assist as the company neared a resolution.”

This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 85 pages in total).  Tomorrow’s post will discuss various items of note from the enforcement actions.

DOJ

The DOJ enforcement action involved a criminal information (here) against Tyco Valves & Controls Middle East Inc., (an indirect subsidiary of Tyco) resolved through a plea agreement (here) and a non-prosecution agreement (here) entered into between the DOJ and Tyco.

Criminal Information

The criminal information begins by identifying Tyco Valves & Controls Middle East Inc. (TVC ME) as a Delaware company headquartered in Dubai that “sells and markets valves and actuators manufactured by other entities throughout the Middle East for the oil, gas, petrochemical, commercial construction, water treatment,and desalination industries.”

According to the information, Tyco Flow Control Inc. (“TFC) was TVC ME’s direct parent company and TFC was a wholly-owned indirect subsidiary of Tyco.  According to the information, “TVC ME’s financials were consolidated into the books and records of TFC for the purposes of preparing TFC’s year-end financial statements, and in turn, TFC’s financials were consolidated into the books and records of Tyco for the purposes of preparing Tyco’s year-end financial results.”

The information alleges a conspiracy as follows.

Between 2003 and 2006 TVC ME conspired with others to ”obtain and retain business from foreign government customers, including Aramco, ENOC, Vopak, NIGC, and other customers by paying bribes to foreign officials employed by such customers.”

The information alleges: that Saudi Aramco (“Aramco”) was a Saudi Arabian oil and gas company that was wholly-owned, controlled, and managed by the government, and an ”agency” and “instrumentality” of a foreign government; that Emirates National Oil Company (“ENOC”) was a state-owned entity in Dubai and an “agency” and “instrumentality” of a foreign government; that Vopak Horizon Fujairah (“Vopak”) was a subsidiary of ENOC based in the U.A.E. and an “agency” and “instrumentality” of a foreign government; and that the National Iranian Gas Company (“NIGC”) was a state-owned entity in Iran and an “agency” and “instrumentality” of a foreign government.

Under the heading “manner and means of the conspiracy” the information alleges in pertinent part as follows.

“TVC ME, together with others, decided to pay bribes to employees of end-customers in Saudi Arabia, the U.A.E., and Iran, including to employees at Aramco, ENOC, Vopak, and NIGC, in order to obtain or retain business.  TVE ME, together with others, found ways to obtain cash in order to make the bribe payments.  TVE ME, together with others, made payments through Local Sponsor [a company in Saudi Arabia that acted as a distributor for TVC ME in Saudi Arabia].  Local Sponsor provided TVC ME with false documentation, such as fictitious invoices for consultancy costs, bills for fictitious commissions, or ‘unanticipated costs for equipment,’ to justify the payments to Local Sponsor that were intended to be used for bribes.  TVE ME, together with others, approved and made payments to Local Sponsor for the purpose of paying bribes.  TVC ME, together with others, paid bribes to employees of foreign government customers in order to remove TVC manufacturing plans from various Aramco ‘blacklists’ or ‘holds’; win specific bids; and/or obtain specific product approval.  TVC ME, together with others, improperly recorded the bribe payments in TVC ME’s books, records, and accounts, and instead falsely described the payments, including as consultancy costs, commissions, or equipment costs.  TVC ME earned approximately $1.153,500 in gross margin as a result of the bribe payments.”

Based on the above conduct, the information charges conspiracy to violate the FCPA’s anti-bribery provisions.

Plea Agreement

The plea agreements sets forth a Sentencing Guidelines range of $2.1 million – $4.2 million.  In the plea agreement, the parties agreed that $2.1 million was “appropriate.”  Pursuant to the plea agreement, TVC ME agreed “to work with its parent company in fulfilling the obligations” described in Corporate Compliance Program attached to the plea agreement.

NPA

The DOJ also entered into an NPA with Tyco in which the DOJ agreed “not to criminally prosecute [Tyco] related to violations of the books and records provisions of the FCPA … arising from and related to the knowing and willful falsification of books, records, and accounts by a number of the Company’s subsidiaries and affiliates …”.

The NPA contains a Statement of Facts.

Under the heading, “details of the illegal conduct” the NPA states as follows.

“[From 1999 through 2009] certain Tyco subsidiaries falsified books, records, and accounts in connection with transactions involving customers of Tyco’s subsidiaries, including government customers, in order to secure business in various countries, including China, India, Thailand, Laos, Indonesia, Bosnia, Croatia, Serbia, Slovenia, Slovakia, Iran, Saudia Arabia, Libya, Syria, the United Arab Emirates, Mauritania, Congo, Niger, Madagascar, and Turkey.  During that time period, certain Tyco subsidiaries made payments, both directly and indirectly, to government officials and falsely described the payments to government officials in Tyco’s corporate books, records, and accounts as legitimate charges, including as ‘consulting fees,’ ‘commissions,’ ‘unanticipated costs for equipment,’ ‘technical consultation and marketing promotion expenses,’ ‘conveyance expenses,’ ‘cost of goods sold,’ ‘promotional expenses,’ and ‘sales development’ expenses.  As early as 2004, Tyco alerted the Securities and Exchange Commission to payments at certain of Tyco’s subsidiaries that could violate the FCPA.  In 2006, Tyco acknowledged that ‘prior to 2003 Tyco did not have a uniform, company-wide FCPA compliance program in place or a system of internal controls sufficient to detect and prevent FCPA misconduct at is globally dispersed business units’ and that ‘employees at two Tyco subsidiaries in Brazil and South Korea did not receive adequate instruction regarding compliance with the FCPA, despite Tyco’s knowledge and awareness that illicit payments to government officials were a common practice in the Brazilian and South Korean construction and contracting industries.’  However, despite Tyco’s knowing of a high probability of the existence of improper payments and false books, records, and accounts, the improper payments and falsification of books, records, and accounts continued until 2009.”

As to Thailand, the Statement of Facts states a follows.

“[Between 2004 and 2005] ET Thailand [Earth Tech (Thailand) Ltd. - a Thai corporation that was approximately 49% indirectly owned by Tyco] made payments in the amount of approximately $292,286 to a consultant and recorded those amounts as fictitious disbursements related to the NBIA project [New Bangkok International Airport].  In connection with these improper payments, ET Thailand earned approximately $879,258 in gross profit.”

“[Between 2000 to 2006] ADT Thailand [ADT Sensormatic Thailand an indirect wholly owned subsidiary of Tyco] recorded payments in the amount of approximately $78,000 to one of its subcontractors as payments for site surveys for a government traffic project in Laos, but the payments instead were channeled to other recipients in connection with ADT Thailand’s business in Laos.  During the same time period, ADT Thailand made payments to one of its consultants related to a contract for the installation of a CCTV system in the Thai Parliament House, and ADT Thailand and the consultant created invoices that stated that the payments were for ‘renovation work’ when no renovation work was actually performed.  During that same time period, ADT Thailand made three payments in connection with a design and traffic survey that ADT Thailand provided from the city of Pattaya, in Southern Thailand, but the payments were issued pursuant to falsified invoices without any evidence that work was ever performed.  In connection with these improper transactions, ADT Thailand earned approximately $473,262 in gross profit.”

As to China, the Statement of Facts state as follows.

“[Between 2003 and 2005] TTC Huzhou [Tyco Thermal Controls (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] authorized approximately 112 payments in the amount of $196,267 to designers at design institutes owned or controlled by the Chinese government, and falsely described the payments in company books, records, and accounts as ‘technical consultation’ or ‘marketing promotion’ expenses.  In 2005, in connection with a contract with China’s Ministry of Public Security, TTC Huzhou paid a commission to one of its sales agents that was used, in part, to pay the ‘site project team’ of a state-owned corporation, and that was improperly recorded in the company’s books and records.  In connection with these improper transactions, TTC Huzhou earned approximately $3,470,180 in gross profit.”

“TFCT Shanghai [Tyco Flow Control Trading (Shanghai) Ltd. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $24,000 to employees of design institutes, engineering companies, subcontractors and distributors which were inaccurately described in its books and records.  In connection with these improper transaction, TFCT Shanghai earned approximately $59,412 in gross profit.”

“[Between 2005 and 2006] TFC HK  [Tyco Flow Control Hong Kong Limited] and Keystone [Beijing Valve Co. Ltd.] [both indirect wholly owned subsidiaries of Tyco] made payments in the amount of approximately $137,000 to agencies owned by approximately eight Keystone employees, who in turn gave cash or gifts to employees of design institutes or commercial customers, and then improperly recorded these payments.  [From 2005 to 2006] Keystone made payments to one of its sales agents in connection with sales to Sinopec, for which no legitimate services were actually provided, and then improperly recorded the payments as ‘commissions.’  In connection with these improper transactions, Keystone earned approximately $378,088 in gross profits.”

“[Between 2001 to 2002] THC China [Tyco Healthcare International Trading (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] gave publicly-employed healthcare professionals (HCPs) approximately $250,00o in meals, entertainment, domestic travel, gifts and sponsorships.  [Between 2004 to 2007] employees of THC China submitted expenses claims related to entertaining HCPs that were supported by fictitious receipts, including references to a non-existent company, in order to circumvent Tyco’s internal guidelines.  In connection with medical conferences involving HCPs, THC China employees submitted false itineraries and other documentation that did not properly identify trip expenses in order to circumvent internal controls and policies.  Approximately $353,800 in expenses was improperly recorded as a result of the false documentation relating to these improper expenditures.”

As to Slovakia, the Statement of Facts state as follows.

“[Between 2004 to 2006] Tatra [a Slovakian joint venture that was approximately 90 percent indirectly owned by Tyco] made payments in the amount of approximately $96,000 to one of its sales agents in exchange for the sale agent’s attempt to have Tatra products included in the specifications for tenders to a government customer, while at the same time the sales agent was getting paid by the government customer to draw up the technical specifications for the tenders.  Tatra improperly recorded the payments to the sales agent as ‘commissions’ in Tatra’s books and records.  In connection with these improper transactions, Tatra earned approximately $226,863 in gross profit.”

As to Indonesia, the Statement of Facts state as follows.

“[Between 2003 and 2005] Eurapipe [Tyco Eurapipe Indonesia Pt. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $358,000 to a former employee of Banjarmasin provincial level public water company (PDAM) and two payments to the project manager for PDAM Banjarmasin in connection with the Banjarmasin Project.  During the same time period, Eurapipe made payments in the amount of approximately $23,000 to sales agents who then passed some or all of the payments on to employees of government entities in connection withe projects other than the Banjarmasin Project.  Eurapipe improperly recorded the payments as ‘commissions payable’ in Eurapipe’s books and records. In connection with these improper transactions, Eurapipe earned approximately $1,298,453 in gross profit.”

“[Between 2002 and 2005] PT Dulmision Indonesia [an Indonesia corporation 99% indirectly owned by Tyco] made payments to third parties, a portion of which went to employees of PLN [a state-owned electricity company in Indonesia], including approximately seven payments one of PT Dulmison’s sales agents, who in turn passed money on to the PLN employees.  PT Dulmison Indonesia improperly recorded the payments in PT Dulmison Indonesia’s books, records and accounts.  In addition, PT Dulmison Indonesia improperly recorded travel expenses in company books and records, including payments for non-business entertainment in connection with visits by PLN employees to TE Dulmision Thailand’s factory and paid hotel costs incurred as part of a social trip to Paris for PLN employees following a factory visit to Germany, as ‘cost of goods sold’ in PT Dulmison Indonesia’s and TE Dulmison Thailand’s records.  In connection with these improper transactions, PT Dulmision Indonesia and TE Dulmison Thailand earned approximately $109,259 in gross profit.”

As to Vietnam, the Statement of Facts state as follows.

“[Between 2001 and 2005] TE Dulmison Thailand [a Thai corporation approximately 66% indirectly owned by Tyco] made nine payments in the amount of approximately $68,426, either directly or through intermediaries, to employees of a public utility owned by the Government of Vietnam and recorded these payments in the books and records of the relevant subsidiaries as ‘cost of goods sold.’”

As to Mauritania, Congo, Niger and Madagascar, the Statement of Facts state as follows.

“[Between 2002 to 2007] Isogard [a branch of Tyco Fire & Integrated Solutions France (TFIS France0, an indrect wholly owned subsidiary of Tyco] made payments to a security officer employed by a government-owned mining company in Mauritania involved in the technical aspects of sales projects for the purpose of introducing Isogard to local buyers in Africa.  Isogard made the payments to the security officer’s personal bank account in France without any written contract or invoice and improperly recorded the payments in Isogard’s books and records.  Isogard paid sham ‘commissions’ to approximately twelve other intermediaries in Mauritania, Congo, Niger and Madagascar, half of which were to employees, or family members of employees, of Isogard customers.  In total, TFIS France made paments in the amount of approximately $363,839 since 2005.”

As to Saudi Arabia, in addition to the conduct at issue in TVC ME’s criminal information, the Statement of Facts state as follows.

“[Between 2004 through 2006] Saudi Distributor maintained a ‘control account’ from which a number of payments were made at THC Saudi Arabia’s [an operational entity within Tyco Healthcare AG, a indirect wholly owned subsidiary of Tyco] direction to Saudi hospitals and doctors, some of whom were publicly employed HCPs.  Several expenses from the control account were booked improperly as ‘promotional expenses’ and ‘sales development’ expenses.  In connection with these improper transactions, THC Saudi earned approximately $1,960,000 in gross profit.”

As to Turkey, the Statement of Facts state as follows.

“[Between 2001 and 2006] SigInt [a division of M/A-Com, an indirect, wholly owned subsidiary of Tyco] products were sold through a sales representative to government entities in Turkey.  The sales representatives sold the SigInt equipment in Turkey at an approximately twelve to forty percent mark-up over the price at which he purchased the equipment from M/A-Com and also received a commission on one of the sales.  The sales representative transferred part of his commission and part of his mark-up to a government official in Turkey to obtain orders.  In connection with these improper transactions, M/A-Com earned approximately $71,770 in gross proft.”

The Statement of Facts also states as follows.

“[Between 2004 and 2009] Erhard [a subsidiary of Tyco Waterworks Deutschland GmBH (TWW Germany), an indirect wholly owned subsidiary of Tyco] made payments in the amount of approximately $2,371,094 to at least thirteen of its sales agents in China, Croatia, India, Libya, Saudi Arabia, Serbia, Syria, and the United Arab Emirates for the purpose of making payments to employees of government customers, and improperly booked the payments as ‘commissions.’  In connection with these improper transactions, TWW Germany earned approximately $4,684,966 in gross profits.”

In the NPA, Tyco admitted, accepted and acknowledged responsiblity for the above conduct and agreed not to make any public statement contradicting the above conduct.

The NPA has a term of three years and states as follows.

“The Department enters into this Non-Prosecution Agreement based, in part, on the following factors:  (a) the Company’s timely, voluntary, and complete disclosure of the conduct; (b) the Company’s global internal investigation concerning bribery and related misconduct; (c) the Company’s extensive remediation, including the implementation of an enhanced compliance program, the termination of employees responsible for the improper payments and falsification of books and records, severing contracts with the responsible third-party agents, the closing of subsidiaries due to compliance failures, and the agreement to undertake further compliance enhancements ….; and (d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures …”.

Pursuant to the NPA, the company agreed to pay a penalty of $13.68 million (the $2.1 million TVC ME agreed to pay pursuant to the plea agreement is included in this figure).  Pursuant to the NPA, Tyco also agreed to a host of compliance undertakings and agreed to report to the DOJ (at no less than 12 month intervals) during the three year term of the NPA regarding “remediation and implementation of the compliance program and internal controls, policies, and procedures” required pursuant to the NPA.

In this DOJ release, Assistant Attorney General Lanny Breuer stated as follows.  “Together with the SEC, we are leading a fight against corruption around the globe.”

SEC

In a related enforcement action, the SEC brought a civil complaint (here) against Tyco.

The introductory paragraph of the complaint states as follows.  “This matter concerns violations by Tyco of the books and records, internal controls, and anti-bribery provisions of the FCPA.”

The complaint then states as follows.

“In April 2006, the Commission filed a settled accounting fraud, disclosure, and FCPA injunctive action against Tyco, pursuant to which the company consented to entry of a final judgment enjoining it from violations of the anti-fraud, periodic reporting, books and records, internal controls, proxy disclosure, and anti-bribery provisions of the federal securities laws and ordering it to pay $1 in disgorgement and a $50 million civil penalty. The U.S. District Court for the Southern District of New York entered the settled Final Judgment against Tyco on May 1, 2006. At the time of settlement, Tyco had already committed to and commenced a review of its FCPA compliance and a global, comprehensive internal investigation of possible additional FCPA violations. As a result of that review and investigation, certain FCPA violations have come to light for which the misconduct occurred, or the benefit to Tyco continued, after the 2006 injunction. Those are the violations that are alleged in this Complaint.  [...]  The FCPA misconduct reported by Tyco showed that Tyco’s books and records were misstated as a result of at least twelve different, post-injunction illicit payment schemes occurring at Tyco subsidiaries across the globe. The schemes frequently entailed illicit payments to foreign officials that were inaccurately recorded so as to conceal the nature of the payments. Those inaccurate entries were incorporated into Tyco’ s books and records.   Tyco also failed to devise and maintain internal controls sufficient to provide reasonable assurances that all transactions were properly recorded in the company’s books, records, and accounts. [...] As reflected in this Complaint, numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time and continued even after the 2006 injunction.  Through one of the illicit payment schemes, Tyco violated the FCPA anti-bribery provisions. Specifically, through the acts of its then-subsidiary and agent, TE M/A-Com, Inc. Tyco violated [the FCPA's anti-bribery provisions] by corruptly making illicit payments to foreign government officials to obtain or retain business.”

As to the SEC’s anti-bribery charge based on the conduct of TE M/A-Com, Inc. the complaint alleges that M/A Com retained a New York sales agent who made illicit payments in connection with a 2006 sale of microwave equipment to an instrumentality of the Turkish government.  The complaint alleges that “employees of M/A-Com were aware that the agent was paying foreign government customers to obtain orders” and cites an internal e-mail which states as follows – “hell, everyone knows you have to bribe somebody to do business in Turkey.”  The complaint then alleges as follows.  “Tyco exerted control over M/A-COM in part by utilizing dual roles for its officers. At the time of the September 2006 transaction, four high-level Tyco officers were also officers of M/A-COM, including one who was M/A-COM’s president. Additionally, one of those Tyco officers served as one of five members of M/A-COM’s board of directors. While there is no indication that any of these individuals knew of the illegal conduct described herein, through the corporate structure used to hold M/ A-COM and through the dual roles of these officers, Tyco controlled M/A-COM. As a result, M/A-COM was Tyco’s agent for purposes of the September 2006 transaction, and the transaction was squarely within the scope of M/ACOM’s agency.  The benefit obtained by Tyco as a result of the September 2006 deal was $44,513.”

The SEC’s complaint contains substantially similar allegations compared to the NPA Statement of Facts.  In addition, the SEC complaint alleges additional improper conduct in Malaysia, Egypt, and Poland.

As to Malaysia, the complaint alleges as follows.

“[Between 2000 to 2007] TFS Malaysia [an indirect wholly owned subsidiary of Tyco] used intermediaries to pay the employees of its customers when bidding on contracts.  Payments were made to approximately twenty-six employees of customers, and one of those payees was an employee of a government-controlled entity.  TFS Malaysia inaccurately described these expenses as ‘commissions’ and failed to maintain policies sufficient to prohibit such payments.  As a result, Tyco’s books and records were misstated.  Tyco’s benefit as a result of these illicit payments was $45,972.”

As to Egypt, the complaint alleges as follows.

“[Between 2004 to 2008] an Egyptian agent of TFIS UK [a indirect wholly owned subsidiary] wired approximately $282,022 to a former employee’s personal bank account with the understanding that the money would be used in connection with entertainment expenses for representatives of a company majority-owned by the Egyptian government.  A portion of the funds was used to pay for lodging, meals, transportation, spending money, and entertainment expenses for that company’s officials on two trips to the United Kingdom and two trips to the U.S.  TFIS UK made payments pursuant to inflated invoices submitted by the company’s Egyptian agent, who wired funds to the former employees to be used to entertain foreign officials.  TFIS U.K. books and records did not accurately reflect TFIS’s U.K.’s understanding that the funds would be used for entertainment of government officials, and TFIS UK did not maintain sufficient internal controls over its payments to agents.  As a result, Tyco’s books and records were misstated.  Tyco’s benefits as a result of these illicit payments was $1,589,374.”

As to Poland, the complaint alleges as follows.

“[Between 2005 to 2007] THC Polska [an indirect wholly owned subsidiary] used ‘service contracts’ to hire public healthcare professionals in Poland for various purposes, including conducting training sessions, performing clinical studies, and distributing marketing materials.  Approximately five such service contracts involved falsified records and approximately twenty-six other service contracts involved incomplete and inaccurate records, including some related expenses paid by THC Polska to family members of healthcare professionals.  As a result, Tyco’s books and records were misstated.  In connection with the transactions related to these inaccurate books and records, Tyco’s benefit was approximately $14,673.

As to the SEC’s internal controls charge, the complaint contains the following allegation.  “Tyco failed to devise and maintain … a system of internal controls and was therefore unable to detect the violations …  Numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time, and it continued even after the 2006 injunction.”

The SEC complaint contains the following paragraph.

“As its global review and investigation progressed, Tyco voluntarily disclosed this conduct to the Commission and took significant, broad-spectrum remedial measures. Those remedial measures include: the initial FCPA review of every Tyco legal operating entity ultimately including 454 entities in 50 separate countries; active monitoring and evaluation of all of Tyco’s agents and other relevant third-party relationships; quarterly ethics and compliance training by over 4,000 middle-managers; FCPA-focused on-site reviews of higher risk entities; creation of a corporate Ombudsman’s office and numerous segment-specific compliance counsel positions; exit from several business operations in high-risk areas; and the termination of over 90 employees, including supervisors, because of FCPA compliance concerns.”

As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest.  Tyco also agreed to be permanently enjoined from violating the FCPA.

In this release, SEC Associate Director of Enforcement Scott Friestad stated as follows.  “Tyco’s subsidiaries operating in Asia and the Middle East saw illicit payment schemes as a typical way of doing business in some countries, and the company illictly reaped substantial financial benefits as a result.”

Martin Weinstin (Willkie Farr & Gallagher - here) represented the Tyco entities.

With the enforcement action, the dilution of FCPA enforcement has reached a new level.   The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors.  It is common for large multi-national companies to have hundreds, if not thousands, of distributors.  Because of this, audits Oracle was held liable for not conducting are not practical or cost-effective absent red flags suggesting improper conduct. The SEC did not allege any such red flag issues.  In fact, the SEC alleges that Oracle’s Indian subsidiary “concealed” and kept “secret” the conduct from Oracle.  Congress did not intend for the FCPA’s books and records and internal control provisions to be a strict liability statute.  The SEC used to recognize this.  However, it no longer does as once again demonstrated by the Oracle action.

In reading the Oracle action, I was reminded of a 1981 speech by Harold Williams (Chairman of the SEC) regarding the FCPA books and records and internal control provisions.  See here for the prior post.  Williams stated that the provisions are not “independent unrestrained mandate[s] to the Commission to establish novel or unprecedented corporate recordkeeping standards.”  Williams further stated as follows.  “Depending on the circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”

Back to the SEC’s enforcement action against Oracle.

The SEC complaint (here) states in summary fashion as follows.

“This matter involves violations of the books and records and internal controls provisions of the FCPA by Oracle Corporation.  From 2005 to 2007, certain employees of Oracle’s Indian subsidiary Oracle India Private Limited (“Oracle India”) secretly ‘parked’ a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement.  These Oracle India employes structured more than a dozen transactions so that a total of around $2.2 million was held by the Company’s distributors and kept off Oracle India’s corporate books.  The Oracle India employes would then direct its distributor to disburse payments out of the unauthorized side funds to purported local ‘vendors.’  Several of the ‘vendors’ were merely storefronts that did not provide any services.  Oracle failed to accurately record these side funds on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent improper side funds in violation of the FCPA, which requires public companies to keep books and records that accurately reflect their operations.”

Specifically, the SEC complaint states as follows.

“On approximately 14 occasions related to 8 different government contracts between 2005 and 2007, certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin in side funds. Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties. At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, purportedly for marketing and development expenses. Some of the recipients of these payments were not on Oracle’s approved local vendor list; indeed, some of the third parties did not exist and were merely storefronts.  Because the Oracle India employees concealed the existence of the side fund, Oracle did not properly account for these side funds. These funds constituted prepaid marketing expenses incurred by Oracle India and should have been recorded as an asset and rolled up to Oracle’s corporate books and records. These marketing expenses should then have been reflected in the income statement once they were used. Instead, the parked funds were not reflected on Oracle India’s books and were not properly recorded as prepaid marketing expenses. This incorrect accounting in turn affected Oracle’s books and records.  Between 2005 and 2007, government customers paid Oracle India’s distributors at least $6.7 million on these sales, with Oracle receiving approximately $4.5 million in revenue, resulting in about $2.2 million in funds improperly ‘parked’ with the Company’s distributors.”

The SEC further alleged as follows.

“Oracle lacked the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds.  For example, Oracle knew distributor discounts created a margin of cash from which distributors received payments for their services.  Before 2009, however, the company failed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure.  In addition, although Oracle maintained corporate policies requiring approvals for payment of marketing expenses, Oracle failed to seek transparency in or audit third party payments made by distributors on Oracle India’s behalf.  This control would have enabled Oracle to check that payments wer made to appropriate recipients.”

Based on the above conduct, the SEC charged Oracle with FCPA books and records and internal controls violations.

In the SEC’s release, Marc Fagel (Director of the SEC’s San Francisco Regional Office) stated as follows.  “Through its subsidiary’s use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use.  It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds.”  As noted in the release, without admitting or denying the SEC’s allegations, Oracle consented to the entry of a final judgment ordering the company to pay a $2 million penalty and permanently enjoining it from future books and records and internal control violations.  The release further states as follows.  “The settlement takes into account Oracle’s voluntary disclosure of the conduct in India and its cooperation with the SEC’s investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its FCPA compliance program.”

It is typical for the DOJ and SEC to announce FCPA enforcement actions on the same day.  Thus, the absence of a parallel DOJ enforcement action as to the alleged conduct at issue suggests that there will be no DOJ enforcement action, a good result given the SEC’s allegations and for the reasons stated above.

However, it may be premature to conclude that Oracle’s FCPA scrutiny is over.  As noted in this prior post, in September 2011, the Wall Street Journal reported that the DOJ was investigating ”whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”

*****

The SEC’s enforcement action against Oracle  is not the first time distributor margin payments have served as the basis of an FCPA enforcement action.  See here for the 2005 enforcement action against InVison, specifically the Thailand allegations.  However, in that action the SEC alleged that the company was aware of the “high probability” that the margin was being used for improper purposes.

Total fines and penalties in the Pfizer / Wyeth enforcement action are approximately $60 million ($15 million via a DOJ deferred prosecution agreement, and $45 million via separate settled SEC civil complaints against Pfizer and Wyeth).  This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 100 pages in total).

DOJ

The DOJ enforcement action involved a criminal information (here) against Pfizer H.C.P. Corp. (an indirectly wholly owned subsidiary of Pfizer Inc.) resolved through a deferred prosecution agreement (here).

Criminal Information

The criminal information begins with a description of Pfizer HCP and notes that during the relevant time period it “operated in several international markets through representative officers, including offices in Bulgaria, Croatia, and Kazakhstan, as well as through contracts with Russian distributors and employees of a representative officer of Pfizer HCP’s parent company in Moscow (‘Pfizer Russia’).”  According to the information, “books and records of Pfizer HCP … were consolidated into the books and records of Pfizer for purposes of preparing Pfizer’s year-end financial statements” filed with the SEC.

The information alleges, in summary fashion, as follows.

“The manufacture, registration, distribution, sale, and prescription of pharmaceuticals were highly-regulated activities throughout the world. While there were multinational regulatory schemes, it was typical that each country established its own regulatory structure at a local, regional, and/or national level. These regulatory structures generally required the registration of pharmaceuticals and regulated labeling and advertising. Additionally, in certain countries, the government established lists of pharmaceuticals. that were approved for government reimbursement or otherwise determined those pharmaceuticals that might be purchased by government institutions. Moreover, countries often regulated the interactions between pharmaceutical companies and hospitals, pharmacies, and healthcare professionals. In those countries with national healthcare system, hospitals, clinics, and pharmacies were generally agencies or instrumentalities of foreign governments, and, thus, many of the healthcare professionals employed by these agencies and instrumentalities were foreign officials within the meaning of the FCPA. During the relevant period, for the purpose of improperly influencing foreign officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance, employees of Pfizer HCP and Pfizer Russia made and authorized the making of payments of cash and the provision of other things of value both directly and through third parties. Funds for these payments were often generated by employees of Pfizer HCP and Pfizer Russia through the use of collusive vendors to create fraudulent invoices.”

The information charges two counts: (i) conspiracy to violate the FCPA’s anti-bribery and books and records provisions and (ii) substantive FCPA anti-bribery violations.  The conduct at issue took place between 1997 and 2006 and focuses on payments to alleged “foreign officials” as listed below “in exchange for improper business advantages for Pfizer HCP, including the approval of pharmaceutical products and increased sales of pharmaceutical products.”

Croatian Official (a citizen of the Republic of Croatia who held official positions on government committees in Croatia and had influence over decisions concerning the registration and reimbursement of Pfizer products marketed and sold in the country).

Russian Official 1 (a citizen of the Russian Federation who was a medical doctor employed by a public hospital who had influence over the Russian government’s purchase and prescription of Pfizer products marketed and sold in the country).

Russian Official 2 (a citizen of the Russian Federation who was a high-ranking government official who held official positions on government committees in Russia and had influence over decisions concerning the reimbursement of Pfizer products marketed and sold in the country).

Russian Official 3 (a citizen of the Russian Federation who had influence over decisions concerning the treatment algorithms involving Pfizer products marketed and sold in the country).

In addition to the above alleged “foreign officials” the information describes “other foreign officials in various countries, including Bulgaria, Croatia, Kazakhstan and Russia.”

Under the heading “Manners and Means of the Conspiracy” the information alleges as follows.

“Pfizer HCP through its employees and agents agreed to make improper payments and provide benefits (including kickbacks, cash payments, gifts, entertainment and support for domestic and international travel) to numerous government officials, including physicians, pharmacologists and senior government officials, who were employed by foreign governments or instrumentalities of foreign governments, including in Bulgaria, Croatia, Kazakhstan, and Russia.  During the relevant time period, Pfizer HCP, through its employees and agents, corruptly authorized the payment, directly or indirectly, of at least $2,000,000 to intermediary companies, government officials, and others, to corruptly induce the prescription and purchase of Pfizer products and to obtain regulatory approvals for Pfizer products.  Pfizer HCP through its employees falsely recorded the improper transactions by booking them in a variety of ways, including as educational or charitable support, “Travel and Entertainment,” “Convention and Trade Meetings and Conferences,” “Distribution Freight,” “Clinical Grants/Clinical Trials,” “Gifts,” and “Professional Services —Non Consultant,” in order to conceal the improper nature of the transactions in the books and records of Pfizer HCP.”

As to “Corrupt Payments in Bulgaria” the information alleges as follows.

“On or about January 24, 2003, a District Manager in Pfizer HCP’s representative office in Bulgaria (“Pfizer HCP Bulgaria”) sent an email to his subordinates that discussed marketing programs and “various possibilities to stimulate the prescribers” and instructed them to give individual doctors employed in Bulgarian public hospitals “a specific target as to how many packs (or new patients) per month he should achieve” and then provide support for international travel on the basis of the promises to prescribe made by the doctors.  On or about October 14, 2003, a Pfizer HCP Bulgaria sales department manager sent an electronic message to multiple sales representatives containing instructions for submitting sponsorship requests. The manager wrote, “[e]ach representative wanting to sponsor someone …must very precisely state the grounds for recommending the sponsorship, and also what the doctor in question is expected to do or has already done (which is the better option).”

As to “Corrupt Payments in Croatia” the information alleges as follows.

“On or about July 9, 2003, employees of Pfizer HCP’s representative office in Croatia (“Pfizer HCP Croatia”) caused a wire transfer of $1,200 to be made from a bank account in Belgium to an account in Austria controlled by Croatian Official, which wire transfer was part of more than $85,000 paid to Croatian Official between 1997 and 2003, and which was for a purpose described by the country manager as follows: “as [Croatian Official] is a member of the Registration Committee regarding pharmaceuticals, I do expect that all products which are to be registered, will pass the regular procedure by his assistance. On or about February 18, 2004, a Pfizer HCP Croatia sales representative drafted a memorandum reporting on her discussions with doctors at Croatian public hospitals regarding bonus agreements for purchases of a Pfizer product, which reflected an agreement with the chief doctor who promised purchases of the product in exchange for Pfizer HCP providing various things of value, including travel benefits and bonuses based on a percentage of sales.”

As to “Corrupt Payments in Kazakhstan” the information alleges as follows.

“On or about May 5, 2000, Pfizer HCP entered into an exclusive distribution contract for a Pfizer product with Kazakh Company [a Kazakh company that contracted with Pfizer HCP to provide distribution services and related services in the Republic of Kazakhstan] that was valued at a minimum of $500,000 believing that all or part of the value of the contract would be provided to a high-level Kazakh government official. On or about September 23, 2003, a regional supervisor responsible for Pfizer HCP’s representative office in Kazakhstan sent a memorandum to his supervisor memorializing a conversation held in Kazakhstan, in which he indicated that the controller of Kazakh Company was “very close to government officials,” and that Kazakh Company was likely responsible for Pfizer HCP’s past problems with the registration of a Pfizer product in Kazakhstan.”

As to “Corrupt Payments in Russia” the information alleges as follows.

“On or about September 8, -2003, a Pfizer Russia. employee emailed colleagues that a Russian government doctor, Russian Official 1, requested funds to attend a conference and, in return, “has pledged to prescribe at least 20 packs of [a Pfizer product] per month, and 20 [] packs [of another Pfizer product].  On or about November 19, 2003 in an invoice cover letter, a Pfizer Russia employee requested “payment for the (motivational) trip of [Russian Official 2] for the inclusion of [a Pfizer product] into the list … of medications refundable by the state” in order to influence Russian Official 2 to add the product to the regional formulary list.  On or about April 7, 2004, a Pfizer Russia employee requested that a payment be made to a Russian government official “who took an active part in getting [a Pfizer product] into the bidding.”  On or about July 26, 2004, a Pfizer Russia employee sent an email to his supervisors stating that Russia Company 1 [a Russian company that bid on tenders issued by Russian healthcare institutions and worked with Pfizer HCP and Pfizer Russia to fill tenders using Pfizer products] had won a tender for the use of a Pfizer product, and that Russian Company 1′s costs included “10% – Motivation of Officials.”  On or about December 2, 2004, a Pfizer Russia employee requested sponsorship for a local department of health employee who was assisting the chief pharmacologist of a regional pediatric hospital, Russian Official 3, who was compiling algarithms for antibiotic therapy and wanted “to be financially compensated” for this work. The Pfizer Russia employee noted that, “in return for this,” the pharmacologist “will include our product’s in the treatment algorithms” to be used in government hospitals.  On or about June 9, 2005, a Pfizer Russia employee sent an email to her supervisor stating that a cash payment had been made to an individual government doctor, which represented 5% of the value of the purchases of a Pfizer product made by a certain government hospital during the month of March 2005.  On or about June 27, 2005, a Pfizer Russia employee emailed that a government doctor “should be assigned the task of stretching the amount of the purchases … to US $100 thousand” as an “obligation” in exchange for a trip to a conference in the Netherlands or Germany.  On or about September 14, 2005, a Pfizer Russia employee emailed that an”agreement on cooperation” had been reached with a government doctor, and that Pfizer Russia’s requirements were the “purchase quantities,” and the government doctor’s requirement was “a trip to a conference.”  In or around October 2005 through on or about December 8, 2005, Pfizer Russia caused payments totaling at least $69,000 to be made to Russian Company 2 [a Russian company that provided certain services to Pfizer HCP and Pfizer Russia, including making improper payments to Russian government officials and other companies on Pfizer HCP's behalf, in order to conceal the payments]  with the understanding that the payments would be provided to individual Russian doctors employed in public hospitals, and that the payments represented 5% of the value of the purchases of Pfizer products in the doctors’ respective government hospitals.  In or around October 2005, Pfizer Russia employees discussed how a regional distributor would provide Pfizer Russia with companies that have “neutral names,” to which Pfizer Russia could make improper payments that would be booked as conferences to provide benefits to government doctors.”

DPA

The DOJ’s charges against Pfizer HCP were resolved via a deferred  prosecution agreement.  Pursuant to the DPA, Pfizer HCP admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agents” as set forth in the information.  As is customary in DOJ FCPA corporate enforcement actions, Pfizer HCP agreed not to make any public statement contradicting the acceptance of responsibility for the conduct set forth in the resolution documents.

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) the extraordinary cooperation of Pfizer HCP’s parent company, Pfizer Inc., (“Pfizer”}, with the Department and the U.S. Securities and Exchange Commission (“SEC”), including thorough and responsive reporting of potential violations, including the conduct of other companies and individuals; (b) Pfizer’s initial voluntary disclosure of potential improper payments and the timely and complete disclosure of the facts [described in the DPA] as well as facts relating to potential improper payments in various countries that had been identified by its compliance program, internal audit function and global internal investigations concealing bribery and related misconduct; (c) the early and extensive remedial efforts undertaken by Pfizer, including the substantial and continuing improvements Pfizer has made to its global anticorruption compliance procedures; (d) Pfizer’s agreement to maintain an anti-corruption compliance program for all of its subsidiaries worldwide, including Pfizer HCP, to continue in its efforts to implement enhanced compliance measures [as required by the DPA] and to provide to the Department written reports on its progress and experience in maintaining and enhancing its compliance policies and procedures [as described in the DPA].”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $22.8 – $45.6 million.  The DPA specifically states that a downward departure “is warranted for substantial assistance in the investigation or prosecution of others.”  The DPA then states as follows. ”The Government and Pfizer HCP agree that $15 million is the appropriate monetary penalty, which is a 34% reduction off the bottom of the recommended Guidelines fine range.  Pfizer HCP and the Department agree that this fine is appropriate given the nature and extent of Pfizer’s voluntary, prompt and thorough disclosure of the misconduct at issue, the nature and extent of Pfizer’s extensive cooperation in this matter, Pfizer’s cooperation … in the Department’s investigation into other misconduct in the industry, and Pfizer’s extraordinary and ongoing remediation.”

Pursuant to the DPA, Pfizer’s HCP’s parent company, Pfizer, agreed that it will report to the DOJ during the term of the DPA regarding remediation and implementation of certain compliance measures required under the agreement.

The DPA contains a section titled “Origin of the Investigation and Cooperation with the authorities” and states as follows.

“In May 2004, Pfizer’s Corporate Compliance Division learned of potentially improper payments by the Croatian representative office of Pfizer HCP (“Pfizer HCP Croatia”). After conducting a preliminary investigation using external counsel, Pfizer made a voluntary disclosure to the Department and to the Commission. At the time, neither agency was aware of the allegations of improper payments or had any open investigation involving the overseas operations of Pfizer or any of its subsidiaries. From 2004 to the present, Pfizer, using external counsel and forensic accountants, internal Legal, Compliance, and Corporate Audit personnel, conducted an extensive, global review of its operations regarding allegations of improper payments to government officials and government doctors, including in Pfizer HCP markets and those of other Pfizer subsidiaries. This included a review of allegations that were identified by Pfizer’s own internal investigations and compliance controls, including its system of proactive FCPA reviews and enhanced audits. Pfizer reported to the Department and the Commission on the results of these investigations on a regular basis. At the request of the Department and the Commission, Pfizer agreed to periodically toll the statute of limitations on its own behalf and on behalf of its subsidiaries.  In addition, starting immediately in 2004, Pfizer launched extensive remedial actions including: undertaking a comprehensive review of its compliance program, implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis, developing global systems to support employee compliance with the enhanced procedures, adding FCPA-specific reviews to its internal audits, performing proactive anti-corruption compliance reviews in approximately ten markets annually, and conducting comprehensive anti-corruption training throughout the organization. Pfizer regularly reported to the Department and the Commission on these activities and sought their input concerning the scope and focus of these remedial activities.”

In a release (here) DOJ representatives stated as follows.  “Pfizer took short cuts to boost its business in several Eurasian countries, bribing government officials in Bulgaria, Croatia, Kazakhstan and Russia to the tune of millions of dollars.” “Corrupt pay-offs to foreign officials in order to secure lucrative contracts creates an inherently uneven marketplace and puts honest companies at a disadvantage.  Those that attempt to make these illegal backroom deals to influence contract procurement can expect to be investigated by the FBI and appropriately held responsible for their actions.”

SEC

The SEC enforcement action includes separate settled civil complaints against Pfizer and Wyeth.

Pfizer Complaint

The settled civil complaint (here) against Pfizer alleges, in summary, as follows.

“This action arises from violations of the books and records and internal controls provisions of the [FCPA by Pfizer] relating to improper payments made to foreign officials in numerous countries by the employees and agents of Pfizer’s subsidiaries in order to assist Pfizer in obtaining or retaining business.  At various times from at least 2001 through 2007, employees and agents of subsidiaries of Pfizer, conducting business in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia, engaged in transactions for the purpose of improperly influencing foreign officials, including doctors and other healthcare professionals employed by foreign governments. These improper payments were variously made to influence regulatory and formulary approvals, purchase decisions, prescription decisions, and to clear customs. Employees in each of the involved subsidiaries attempted to conceal the true nature of the transactions by improperly recording the transactions on the books and records of the respective subsidiaries. Examples included falsely recording the payments as legitimate expenses for promotional activities, marketing, training, travel and entertainment, clinical trials, freight, conferences and advertising.  These improper payments were made without the knowledge or approval of officers or employees of Pfizer, but the inaccurate books and records of Pfizer’s subsidiaries were consolidated in the financial reports of Pfizer, and Pfizer failed to devise and maintain an appropriate system of internal accounting controls.”

The SEC’s allegations concerning conduct in Bulgaria, Croatia, Kazakhstan and Russia are substantively similar to the DOJ’s allegations described above.

As to Russia, the SEC complaint contains the following additional allegations concerning customs related payments. “During the relevant period, Russian Federation customs officials would not clear pharmaceutical products for importation unless the importer provided an official certification indicating that the products conformed to the specific terms of the product registration and packaging requirements filed by the manufacturer with the Ministry of Health. The Russian government licensed a private certification company (the “Certification Center”) to perform this governmental function, which performed inspections and furnished the necessary certificates.  In the spring of 2005, Pfizer Russia began to experience increasing difficulty in obtaining the necessary certificates because the Pfizer products did not conform to the precise terms of the product registration and packaging requirements filed with the Ministry of Health.  On or about September or October 2005, a Certification Center employee proposed that the Certification Center would overlook the non-compliance of Pfizer Russia’s products in exchange for monthly payments of approximately $3,000. With the approval of the then-Pfizer Russia Country Manager, between October and December 2005 Pfizer Russia made payments of over $13,000 through an intermediary company, which then forwarded the payments to a company Pfizer Russia employees believed to be controlled by the Certification Center’s employees.  The customs clearing problems ceased after Pfizer Russia started making payments, but they resumed when Pfizer Russia stopped the payments in 2006 after Pfizer began a Corporate Compliance review in Russia.”

As to conduct in China, the SEC alleges as follows as to Pfizer subsidiary Pfizer Investment Co. Ltd. (Pfizer China).  “From at least 2003 through 2007, Pfizer China, through its employees and agents, provided cash payments, hospitality, gifts, and support for international travel to doctors employed by Chinese government healthcare institutions. The payments of cash and other things of value were intended to influence these government officials to prescribe Pfizer products, provide hospital formulary listing, and otherwise use their influence to grant Pfizer China an unfair advantage.”  The SEC further alleged as follows.  “Pfizer China employees took steps to conceal the true nature of the cash payments, gifts, and travel support made to Chinese government doctors by failing to accurately record the transactions.”

As to conduct in the Czech Republic, the SEC alleges as follows as to Pfizer subsidiary Pfizer spol. s.r.o. (Pfizer Czech).  “From at least 2003 and through 2004, Pfizer Czech, through its employees and agents, provided support for international travel and recreational opportunities to doctors employed by the Czech government with the intent to influence these government officials to prescribe Pfizer products.”  The SEC further alleged as follows.  “Pfizer Czech employees took steps to conceal the true nature of these transactions, and failed to accurately record these transactions by falsely booking them as “Conventions and Trade Meeting,” among other false and misleading descriptions.”

As to conduct in Italy, the SEC alleges as follows as to Pfizer subsidiary Pfizer Italia S.r.l (Pfizer Italy).  “From at least 2001 and continuing through early 2004, Pfizer Italy provided, directly or through vendors, cash payments, gifts, support for domestic and international travel, and other benefits to doctors employed by Italian government healthcare institutions. The payments of cash and other things of value were intended to influence these government officials to prescribe Pfizer products.”  The SEC further alleged as follows. ”Pfizer Italy employees took steps to conceal the true nature of these transactions and failed to accurately record these transactions by falsely booking them as “Marketing Expenses,” “Professional Training,” and “Advertising in Scientific Journals,” among other false and misleading descriptions.”

As to conduct in Serbia, the SEC alleges as follows as to a representative office of Pfizer HCP (Pfizer HCP Serbia).  “Pfizer HCP Serbia, through one of its sales representatives, paid for a government employed doctor to attend a conference in Chile in exchange for the doctor’s agreement to increase his department’s purchases of Pfizer products. Although Pfizer HCP Serbia management discovered the improper agreement and terminated the responsible sales representative, it still provided the support after the doctor threatened to spread negative information about Pfizer’s reputation as a company.”

Under the heading “accounting and internal controls” the SEC alleged as follows.  “[F]our Pfizer subsidiaries engaged in transactions in eight countries which were intended to improperly influence foreign government officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance. Through the four subsidiaries, Pfizer earned aggregate profits of $16,032,676 as a result of these improper transactions. [D]uring the relevant period the Pfizer subsidiaries recorded transactions associated with the improper payments in a manner that did not accurately reflect their true nature and purpose. The false entries in the subsidiaries’ books and records were consolidated into the books and records of Pfizer, which reported the results of its subsidiaries’ operations in its consolidated financial statements.  [D]uring the relevant period Pfizer failed to devise and maintain an effective system of internal controls sufficient to prevent or detect the above-described conduct.”

Based on the above conduct, the SEC charged Pfizer with violating the FCPA’s books and records and internal control provisions.

The SEC complaint further notes as follows.  “Pfizer made an initial voluntary disclosure of certain of these issues to the Commission and Department of Justice in October 2004, and thereafter diligently and thoroughly undertook a global internal investigation of its operations in no less than 19 countries, which identified additional potential violations, and regularly reported on the results of these investigations and fully cooperated with the staff of the Commission. Pfizer also undertook a comprehensive compliance review of its operations, enhanced its internal controls and compliance functions, engaged in significant disciplinary measures, and developed and implemented global FCPA compliance procedures, including the development and implementation of innovative proactive procedures, and sophisticated supporting systems.”

In addition, the SEC complaint contains a separate section titled “remedial efforts” that states as follows.

“Pfizer has taken extensive remedial actions including: undertaking a comprehensive worldwide review of its compliance program; implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis; developing global systems to support employee compliance with the enhanced procedures; adding FCPA-specific reviews to its internal audits; performing innovative and proactive anti-corruption compliance reviews in approximately 10 markets annually; and conducting comprehensive anti-corruption training throughout the organization.”

Wyeth Complaint

The SEC also brought a settled civil complaint (here) against Wyeth LLC.  According to the complaint, Wyeth was an issuer but in connection with its acquisition by Pfizer in October 2009, Wyeth delisted and became a wholly-owned subsidary of Pfizer.

The complaint alleges, in summary fashion, as follows.  “This action arises from violations of the books and records and internal controls provisions of the [by Wyeth], while an issuer, relating to improper payments made to foreign officials in numerous countries by the employees and agents of Wyeth’s subsidiaries in order to assist Wyeth in obtaining or retaining business. During the time relevant to this Complaint, Wyeth was a pharmaceutical company engaged in business throughout the world, and an issuer as that term is used under the FCPA.  At various times from at least 2005 through 2010, subsidiaries of Defendant Wyeth conducting business in several countries, including Indonesia, Pakistan, China, and Saudi Arabia, engaged in transactions for the purpose of improperly influencing foreign officials, including doctors and other healthcare professionals employed by foreign governments. Employees in each of the involved subsidiaries attempted to conceal the true nature of the transactions by improperly recording the transactions on the books and records of the respective subsidiaries. Examples include falsely recording the payments as legitimate expenses for promotional activities, marketing, training, travel and entertainment, conferences and advertising.  These improper payments were made without the knowledge or approval of officers or employees of Wyeth, but the inaccurate books and records of Wyeth’s subsidiaries were consolidated in the financial reports of Wyeth, and Wyeth failed to devise and maintain an appropriate system of internal accounting controls. Certain of these payments were made following the acquisition of Wyeth by Pfizer Inc. (“Pfizer”) without the knowledge or approval of officers or employees of Pfizer, and the inaccurate books and records of Wyeth’s subsidiaries regarding those payments were consolidated in the financial reports of Pfizer.”

As to Indonesia, the complaint alleges as follows.  “From at least 2005 until 2010, Wyeth Indonesia [an Indonesian company that was an indirect majority-owned subsidiary of Wyeth], through its employees and agents, provided cash payments and nutritional products to employees of Indonesian government-owned hospitals, including doctors employed by the Indonesian government. The cash payments and products were intended to influence the doctors’ recommendation of Wyeth nutritional products to their patients, to ensure that Wyeth products were made available to new mothers at the hospitals, and to obtain information about new births that could be used for marketing purposes.”  The SEC further alleged as follows. ”Wyeth Indonesia employees also took steps to conceal the true nature of the transactions by inaccurately recording them as “Miscellaneous Expenses – Joint Promotions,” “Medical Education – Promo,” “Trade Allowances,” and “Miscellaneous Selling Expenses,” among other false and misleading descriptions.”

As to Pakistan, the complaint alleges as follows.  “Starting at least in 2005 and continuing into 2009, Wyeth Pakistan [a Pakistani company that was an indirect majority-owned subsidiary of Wyeth] employees provided improper benefits to doctors who were employed by healthcare institutions owned or controlled by the Pakistani government. These improper benefits included cash payments, travel, office equipment and renovations, and were intended to influence the doctors to recommend Wyeth products to new mothers.”  The SEC further alleged as follows.  “Wyeth Pakistan employees and local management took steps to conceal the true nature of the transactions by inaccurately recording them as “Advertising and Sales Promotion,” “Film Show,” “Entertainment,” “Product Meetings,” and “Give Aways and Gifts,” among other false and misleading descriptions.”

As to China, the complaint alleges as follows.  “From at least 2005 through 2010 and until the conduct was stopped by Pfizer, Wyeth China [a Chinese company that was an indirect majority-owned subsidiary of Wyeth], through its employees and agents, provided cash payments to Chinese state-owned hospitals and healthcare providers (including doctors, nurses, and midwives) employed by the Chinese government that were intended to influence the healthcare providers’ recommendation of Wyeth nutritional products to their patients, to ensure that Wyeth products were made available to new mothers at the hospitals, and to obtain information about new births that could be used for marketing purposes.”  The SEC further alleged as follows.  “Wyeth China employees took steps to conceal the true nature of the payments by falsifying expense reimbursement requests and, in concert with local travel agencies, by submitting false or inflated invoices and other supporting documentation for large-scale consumer education events, resulting in those transactions being falsely recorded in Wyeth China’s books and records.

As to Saudi Arabia, the complaint alleges as follows.  “In June 2007, the local distributor, at the direction of Wyeth Saudi Arabia [a Delaware corporation that operated a representative office in Saudi Arabia], made a cash payment to a Saudi Arabian customs official to secure the release of a shipment of promotional items that were to be used in connection with the marketing and sale of Wyeth’s nutritional products. These promotional items were held in port because Wyeth Saudi Arabia had failed to secure a required Saudi Arabian Standards Organization Certificate of Conformity.  In July 2007, Wyeth Saudi Arabia reimbursed the distributor for this cash payment and improperly recorded it as a “facilitation expense” in its books and records.”

Under the heading ”accounting and internal controls,” the SEC alleged as follows. ”Wyeth Indonesia, Wyeth Pakistan, and Wyeth China engaged in transactions which were intended to improperly influence foreign government officials. Through these three subsidiaries Wyeth earned aggregate profits of approximately $17,217,831 as a result of these improper transactions. [...] During the relevant period, the Wyeth subsidiaries recorded transactions associated with the improper payments in a manner that did not accurately reflect their true nature and purpose. False entries in the subsidiaries’ books and records were consolidated into the books and records of Wyeth, which reported the results of its subsidiaries’ operations in its consolidated financial statements. [...] During the relevant period, Wyeth failed to devise and maintain an effective system of internal controls sufficient to prevent or detect the above-described conduct.

Based on the above conduct, the SEC charged Wyeth with violations of the FCPA’s books and records and internal control provisions.

The SEC complaint notes as follows.  “Following Pfizer’s acquisition of Wyeth, which was finalized on or about October 15, 2009, Pfizer undertook a risk-based FCPA due diligence review of Wyeth’s global operations and reported the results of that diligence review to the Commission staff within 180 days of the closing. Pfizer’s post-acquisition review identified potential improper payments, and it diligently and thoroughly undertook a global internal investigation of Wyeth’s operations and voluntarily disclosed the results to the Commission staff, which included identifying improper payments made by Wyeth’s Nutritional Products Division in Indonesia, Pakistan, China, and Saudi Arabia, as well as additional improper payments made by other Wyeth subsidiaries. Following the acquisition, Pfizer diligently and promptly integrated Wyeth’s legacy operations into its compliance program and cooperated fully with the Commission staff.”

In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states as follows.  “Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers.  These charges illustrate the pitfalls that exist for companies that fail to appropriately monitor potential risks in their global operations.”

As noted in the SEC release, in settling the charges Pfizer and Wyeth neither admitted nor denied the allegations.  The release states as follows.  “Pfizer consented to the entry of a final judgment ordering it to pay disgorgement of $16,032,676 in net profits and prejudgment interest of $10,307,268 for a total of $26,339,944. [Pfizer] also is required to report to the SEC on the status of its remediation and implementation of compliance measures over a two-year period, and is permanently enjoined from further violations” of the FCPA’s books and records and internal control provisions.  “Wyeth consented to the entry of a final judgment ordering it to pay disgorgement of $17,217,831 in net profits and prejudgment interest of $1,658,793, for a total of $18,876,624. As a Pfizer subsidiary, the status of Wyeth’s remediation and implementation of compliance measures will be subsumed in Pfizer’s two-year self-reporting period. Wyeth also is permanently enjoined from further violations” of the FCPA’s books and records and internal control provisions.

Brett Campbell and Peter Clark (Cadwalader, Wickersham & Taft – here and here) represented Pfizer.  Clark is a former head of the DOJ’s FCPA enforcement program.

See here for Pfizer’s press release.

The DOJ has previously stated that its DPAs and NPAs benefit the public and industries by “providing guidance on what constitutes improper conduct” (see this GAO report (Appendix III) and that it provides “clear guidance to companies with respect to FCPA enforcement through a variety of means” including “charging documents, plea agreements, deferred prosecution agreements and non-prosecution agreements, press releases, and relevant pleadings and orders” that “are lengthy and detailed.”

If the DOJ wants all to have full confidence in its FCPA enforcement program and if it is genuinely interested in providing transparent guidance through its enforcement actions, the DOJ can do much better than its effort in the NORDAM NPA.  It is not as bare-bones as the Lufthansa Technik NPA (see here for the prior post), but close.

The substantive statement of facts (here) (all two pages) state as follows.

“NORDAM’s customers in China include state-owned and -controlled entities, including airlines created, controlled, and exclusively owned by the People’s Republic of China.  [...]  From 1999 until 2008, employees at NSPL [NORDAM Singapore Pte. Ltd., a wholly owned subsidiary of NORDAM that provides MRO services to customers in the Asia Pacific region, including China]  and WAAPL [World Aviation Associates Pte. Ltd., an affiliate of NORDAM that performs marketing and sales services for both NORDAM and NPSL in the Asia Pacific region, including in China] paid bribes to employees of state-owned and -controlled entities in China in order to obtain or retain MRO business with those customers. Several NORDAM employees in the United States were made aware of and approved these bribes. The bribes were referred to internally as “commissions” or “facilitator fees.” The facilitator fees were paid to “facilitators” who, in fact, were employees of customers. These facilitators were also referred to internally as “internal guys,” “internal ghosts,” or “our friends inside.”  The facilitator fees either were paid directly to the customer’s employee by wire transferring money to the employee’s bank account or were paid indirectly by first depositing the money into the personal bank accounts of WAAPL employees, who would then withdraw all or a portion of these fees to pay the customer employees in cash.  In or about 2002, in an effort to further disguise the payments to customer employees, three WAAPL employees created fictitious entities and entered into sales representation agreements with those entities. The commissions that NORDAM paid to these fictitious entities were used, at least in part, to pay employees of customers to assist in securing contracts for NORDAM and NSPL.  Although many of the bribe payments were paid out of NORDAM’s and NSPL’s gross profits, in some instances NORDAM, NSPL, and WAAPL artificially inflated the customer invoice to offset the bribes paid to those customers’ employees. As a result, in these instances, NORDAM’s customers were unknowingly reimbursing NORDAM for the bribes that NORDAM paid to customer employees to secure the projects.  On or about April 22, 2004, a NORDAM employee sent an e-mail to two WAAPL employees, stating, “[d]o what you have to do to get the business. If that means using an agent, then let’s make sure we are discrete when communicating the information in trip reports. I agree . . . that we should not require an agent at every account, however, I also understand the reality of doing business in Asia. I trust your judgment, it is your call.”  On or about December 30, 2004, an agent of WAAPL sent an e-mail to a NORDAM employee and two WAAPL employees, stating, “[o]n this deal we also need to cover our friends inside.”  On or about December 30, 2004, the NORDAM employee responded to the email …  stating, “I don’t see where our friends have done anything to help us here. If our friends can help us, I will agree to split 50/50 with you any amount we get over $160K.”  In all, NORDAM, NSPL, and WAAPL paid as high as $1.5 million in bribes to secure roughly $2.48 million in profits from state-owned and controlled customers in China.”

Who were the state-owned and controlled entities in China?  What attributes of those entities made them state-owned or controlled?.  As to the employees at NSPL and WAAPL, what types of employees, what was their job function?  As to the NORDAM employees in the U.S. “made aware of and approved these bribes” what types of employees, what was their job function?  How did they become aware of the bribes?  How did they approve the bribes?

Is it asking/expecting too much for the DOJ to set forth such information in its resolution documents?

The NPA (which has a term of three years) states as follows.

“The Department enters into this [NPA] based, in part, on the following factors:  (a) the Company’s timely, voluntary, and complete disclosure of the conduct; (b) the Company’s real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, and collecting and analyzing voluminous documents and information for the Department; (c) the Company’s remedial efforts already undertaken, including enhancing its internal audit function, its compliance program, and its due diligence protocol for third-party agents, and to be undertaken, [pursuant to the NPA]; (d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures [pursuant to the NPA]; and (e) the Company has agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to violations of the FCPA.

As noted in the DOJ’s release, the NPA “recognizes that a fine below the standard range under the U.S. Sentencing Guidelines is appropriate because NORDAM fully demonstrated to the department, and an independent accounting expert retained by the department verified, that a fine exceeding $2 million would substantially jeopardize the company’s continued viability.”  As to the fine reduction, the NPA further states as follows.  “This discount recognizes that, over a period of months, the Company fully cooperated with the Department and with an independent accounting expert that the Department retained to review the Company’s financial condition.  Following that review, the Department and its independent expert both concluded that this discount was appropriate under the Sentencing Guidelines.”

What was the discount?  There is no information in the NPA or associated documents that shed light on this issue.

This Tulsa World article states as follows.

“NORDAM executives said all but three of the employees involved in the bribery schemes had left the company when the scandal was discovered in 2008. The three employees still with the company were fired, they said.  NORDAM officials said three employees of World Aviation Associates created fictitious companies and entered into agreements with the companies under which the companies would be paid commissions for sales of NORDAM products and services to customers. The arrangements made it difficult to trace the money, company executives said.”

The article further states as follows.

“NORDAM CEO Meredith Siegfried said it is “disheartening” for a company that has prided itself on its values and integrity to discover the violations of federal law. “At the same time, our determination and efforts to make sure no such event would ever occur again have given us a significantly higher level of alertness and much improved procedures and processes,” she said. “We are striving to have a robust compliance program which is considered to be an industry benchmark.” In a letter to NORDAM employees, Siegfried said everybody at NORDAM is receiving training to comply with the Foreign Corrupt Practices Act. “Every stakeholder has also signed a statement that the requirements are understood and agreed to, and this statement is required to be signed annually by all of us,” Siegfried said. “We have also revised our policies and procedures regarding our use of agents and conducted a comprehensive review of the agents we use in other countries. These agents have also received training regarding the FCPA. “We also brought in outside counsel to conduct a comprehensive investigation of all the issues connected to these violations. It is important for you to know that the investigation concluded that no individual associated with NORDAM’s leadership or governance since 2008 was ever involved in, or approved of, any of the illegal activities.

Carlos Ortiz (LeClairRyan – here) represented NORDAM.

NORDAM has an active military aircraft business (see here) and has received, including recently and during the time period relevant to the conduct at issue, numerous federal government contracts.

Total fines and penalties in the Orthofix enforcement action were approximately $7.4 million ($2.2 million via a DOJ deferred prosecution agreement, and $5.2 million via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information against Orthofix resolved through a deferred prosecution agreement.

The specifics of the DOJ’s case against Orthofix are not known at this time as the Eastern District of Texas, where a criminal information has been filed, has a standing order that criminal informations remain sealed until a plea is entered in open court.  Nevertheless, Orthofix did file the deferred prosecution agreement as an exhibit (see here) to its recent SEC filing.  The DPA indicates that the information concerns one count of violating the FCPA’s internal control provisions.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: “(a) following reports of bribery by [Promeca] employees … Orthofix made a timely and voluntary disclosure to the Department and the United States Securities and Exchange Commission (“SEC”) about potential misconduct; (b) Orthofix conducted an investigation concerning bribery and related misconduct; (c) Orthofix reported its findings to the Department and the SEC; (d) the extent of the conduct; (e) Orthofix undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures, as may be necessary under [the DPA]; and (f) Orthofix agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Orthofix’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $2.22 – $4.44 million.  The DPA states as follows.  “Orthofix and the DOJ agree that this fine is appropriate given the nature and extent of Orthofix’s cooperation in this matter and the remediation undertaken by Orthofix.”  Of note, the guidelines calculation indicate that “an individual within high-level personnel condoned or was willfully ignorant of the offense.”  Although a compliance monitor was not required pursuant to the DPA, Orthofix did agree that it will report to the DOJ annually during the term of the DPA regarding remediation and implementation of the compliance measures required under the DPA.

As is customary in FCPA DPA’s, Orthofix agreed not to make any public statement contradicting its acceptance of responsibility for the conduct at issue in the DPA.

SEC

The SEC’s settled civil complaint (here) against Orthofix alleges, in summary fashion, as follows.

“This matter involves violations of the books and records and internal controls provisions of the FCPA by Orthofix, an orthopedic medical device company. From 2003 to 2010, [Promeca], repeatedly paid bribes totaling approximately $317,000 to Mexican officials in order to obtain and retain sales contracts from Instituto Mexicano del Seguro Social (“IMSS”) [here], the Mexican government-owned healthcare and social services institution. Promeca employees referred to these payments as ‘chocolates.’  These improper payments, falsely recorded on the company’s books as cash advances to Promeca executives or training and promotions expenses, generated approximately $8.7 million in gross revenues for Orthofix and resulted in illicit net profits of about $4.9 million.”

According to the SEC, Promeca sold Orthofix’s products to government and private hospitals in Mexico and “approximately 60% of Promeca’s revenues came from IMSS, the Mexican government-0wned medical care and social services provider.”

Under the heading “bribery scheme” the complaint alleges as follows.

“From at least 2003 to 2007, … Promeca, regularly paid bribes to IMSS hospital employees in the form of cash and/or gifts, in order to secure sales contracts from IMSS hospitals.  The bribe amounts, referred to internally at Promeca as ‘chocolates,’ ranged from 5% to 10% of the collected sales for the hospital in question.  In order to obtain cash for the illicit payments, Promeca executives wrote checks to themselves, which they justified as cash advances.  They later submitted falsified receipts for imaginary expenses including meals and new car tires, which were accounted for in Promeca’s books and records. As the bribes increased, it became difficult for Promeca executives to invent new receipts to justify the advances. Eventually, the bribes became too large, forcing the Promeca executives to devise another justification methodology, and hence they began falsely accounting for the payments as promotional and training expenses. Because of the bribery scheme, Promeca’s training and promotional expenses were significantly over budget. In one instance, Orthofix launched an inquiry into these expenses, but did not control them.  In 2008, IMSS began purchasing medical products under a new national tender system, where a special IMSS committee, rather than the individual hospitals, selected the winning bidder who would cover IMSS nationally. Promeca then established a new system of bribery to ensure that it was awarded the business under the national tender system. To achieve this, Promeca made payments to three front companies, which were controlled by certain IMSS officials. Promeca won the national tenders for 2008 and 2009 and paid the front companies 5% and 3%, respectively, of the collected sales from those tenders. The front companies concealed these bribes by submitting false invoices, characterizing them as training and other promotional expenses that Promeca never received. Promeca falsely recorded the bribes on its books as payments for training courses, meetings and congresses, and promotional costs.  In addition, between 2003 and 2010, Promeca expended approximately $80,050 on gifts and travel packages, some of which were intended to corruptly influence IMSS employees in order to retain their business. The various gifts included vacation packages, televisions, laptops, appliances, and in one case, the lease of a Volkswagen Jetta. These payments were falsely accounted for in Promeca’s books and records as promotional and training expenses.  In all, the improper payments, totaling about $317,000, generated approximately $8.7 million in gross revenues and resulted in illicit net profits to Orthofix of about $4.9 million.”

Under the heading, “Orthofix’s Remedial Measures to Prevent Corrupt Payments” the complaint states as follows.

“Prior to the discovery of the bribery schemes, Orthofix did not have an effective FCPA compliance policy or FCPA-related training.  Although Orthofix disseminated some code of ethics and anti-bribery training to Promeca, the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English. [For a recent FCPAmericas post on this issue, see here].  Additionally, even though Promeca’s training and promotional expenses, that included the improper payments, were often over budget, Orthofix did very little to investigate or diminish the excessive spending.  Upon discovery of the bribe payments through a Promeca executive, Orthofix immediately self-reported the matter to the Commission staff, and conducted an internal investigation.  Orthofix also implemented significant remedial measures. Specifically, it terminated the Promeca executives that orchestrated the bribery scheme, wound up Promeca’s operations, enhanced its overall FCPA compliance program with mandatory annual FCPA training for all employees and third-party agents, expanded internal audit functions, and implemented other internal control measures.”

Based on the above allegations, the SEC complaint charges violations of the FCPA’s books and records and internal controls provisions.  The SEC complaint states as follows.  “Orthofix’s subsidiary characterized their payments to IMSS as cash advances or training and promotional expenses even though those payments were used as bribes. Orthofix’s books and records did not reflect the true nature of those payments.  Orthofix failed to implement adequate internal controls to prevent the bribery or to ensure that transaction were properly recorded. Orthofix failed to implement an FCPA compliance and training program commensurate with the extent of its international operations and particularly its ownership of Promeca, a subsidiary that had substantial sales to government-owned enterprises. Further, even though Orthofix knew that Promeca’s training and promotional expenses were often over budget, it did nothing to act on the red flag.”

As stated in the SEC’s release (here), Orthofix consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest.  As noted in the release, the final judgment would permanently enjoin the company from violating the books and records and internal control provisions of the FCPA and Orthofix also agreed to certain undertakings, including monitoring its FCPA compliance program and reporting back to the SEC for a two-year period.

In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business.  Orthofix’s lax oversight allowed its subsidiary to illicitly spend more than $300,000 to sweeten the deals with Mexican officials.”

Perhaps the most notable aspect of the Orthofix enforcement action is that neither the DOJ or SEC charged the company with FCPA anti-bribery violations despite allegations that, given the enforcement agencies’ theories, have typically resulted in such violations.

Peter Spivack (Hogan Lovells – here) represented Orthofix.

DS&S’s business includes the design, installation, and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants, and other critical infrastructure facilities.  According to the information, “DS&S’s instrumentation and controls business customers included state-owned nuclear power plants in Eastern Europe.”  The charged conduct focuses on DS&S’s business with Ignalina Nuclear Power Plant (“INPP”) described as a “state-owned nuclear power plant in Lithuania and an ‘agency’ and ‘instrumentality’ of a foreign government, as that term is used in the FCPA.”  For more on INPP, see its website here.

According to the charging documents, payments were made by DS&S to various INPP employees primarily through subcontractors.  The INPP employees are described as follows.  Official 1 (the Deputy Head of the Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 2 (the Head of Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 3 (the Director General at INPP with influence over the award of contracts); Official 4 (the Head of International Projects Department at INPP with influence over the award of contracts); and Official A (the lead software engineer at INPP with influence over the award of contracts).  All officials are alleged to “foreign officials as that term is used in the FCPA.”

The DOJ enforcement action involved a criminal information (here) against DS&S resolved through a deferred prosecution agreement (here).

Criminal Information

The information charges conspiracy to violate the FCPA’s anti-bribery provisions and one substantive FCPA anti-bribery violation.  As to the conspiracy charge, the information alleges that between 1999 to 2004, DS&S and others conspired to “obtain and retain contracts for DS&S from INPP to design, install, and maintain INPP’s instrumentation and controls systems through the promise and payment of bribes to foreign officials employed by INPP.”

According to the information, DS&S would and did attempt to conceal the payments to foreign officials by using Subcontractor A Subcontractor B and Subcontractor C (an alleged U.S. shell company) to funnel bribes from DS&S to INPP officials.  The information further alleges that: (i) ”Subcontractor A would and did pay bribes to INPP officials on behalf of DS&S by issuing tens of thousands of dollars in checks to INPP officials for deposit into the officials’ bank accounts in the United States”; (ii) DS&S “would and did pay INPP employees who were also employed by Subcontractor B significantly above-market rates for services performed by Subcontractor B in connection with DS&S contracts with INPP in exchange for the INPP employees’ support for the award of contracts to DS&S” and in a manner designed to allow those employees to avoid taxes on the payments from DS&S; (iii) DS&S “would and did provide gifts, travel, and entertainment to employees of INPP in exchange for those foreign officials’ agreements to help DS&S secure contracts with INPP.  The travel alleged includes trips to Florida and Hawaii and gifts alleged include a Cartier watch.

Executive A (vice president of marketing and business development at DS&S during the relevant time period responsible for marketing and business development efforts in connection with DS&S’s nuclear services, including power plant customers in Eastern Europe) is alleged to have engaged in a variety of the improper conduct.

DPA

The DOJ’s charges against DS&S were resolved via a deferred  prosecution agreement.  Pursuant to the DPA, DS&S admitted, accepted and acknowledged that it is responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) following the receipt of subpoenas in connection with the government’s investigation, DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information; (b) DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the Department in a comprehensive report; and responding promptly and fully to the Department’s requests; (c) DS&S has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments; dissolving the joint venture and reorganizing and integrating the Company as a subsidiary with a more rigorous compliance program; enhancing its due diligence protocol for third-party agents and subcontractors, including CEO review and approval of the retention of any agent or subcontractor; strengthening its ethics policies, including the appointment of a Company Ethics Representative who reports directly to the CEO and provides regulator reports to the Members Committee at each Committee meeting; providing FCPA training for all agents and subcontractors; and establishing heightened review of most foreign transactions; (d) DS&S has committed to continue to enhance its compliance program and internal controls …; and (e) DS&S has agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents and subcontractors relating to violations of the FCPA.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $12.6 – $25.2 million.  The DPA states as follows.  “DS&S agrees to pay a monetary penalty in the amount of $8,820,000, an approximately thirty-percent reduction off the bottom of the fine range [...]  DS&S and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the nature and extent of DS&S’s extraordinary cooperation and extensive remediation in this matter.”

Pursuant to the DPA, DS&S agreed to report to the DOJ “periodically, at no less than twelve-month intervals during the two-year term, regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in an attachment to the DPA.    As is customary in FCPA DPA’s, DS&S agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release.  Given the allegation in the information that INPP officials received payments into their bank accounts in the U.S., it will be interesting to see whether the INPP officials are charged with non-FCPA offenses.  Such a U.S. nexus was used to prosecute certain of the “foreign officials” in the Haiti Teleco enforcement action (see here for a summary of those actions) as well as the Siriwan’s in connection with the Green matter (see here for the prior post).

Carl Rauh (Hogan Lovells – here)  represented DS&S.

Yesterday the DOJ and SEC announced a joint enforcement against Peterson.

DOJ

In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for ”conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”

The release states as follows.

“According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials.  Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment.  Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws.  Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times.  During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times.  Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments.  Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”

“According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship.  The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district.  Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney.  After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value.  As a result, the conspirators realized an immediate paper profit of more than $2.5 million.  Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned.  In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.”

Assistant Attorney General Lanny Breuer stated as follows.  “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.  As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit.  Because of his corrupt conduct, he now faces the prospect of prison time.”

Peterson is to be sentenced on July 17th.

As to Morgan Stanley, the release states as follows.

“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

Kudos to the DOJ.  Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?

SEC

In this complaint, the SEC alleged in summary as follows.

“From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. In exchange for offers and payments from Peterson, the Chinese Official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”

Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.

In this release, the SEC noted that Peterson agreed to a settlement of the SEC’s charges “in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct.”

Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows.  “Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients.  This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company’s internal controls.”

Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated as follows.  “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”

As to Yongye and the Chinese Official, the complaint states as follows.

“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China.  Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government.  Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”

“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”

The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.

“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:

(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.

(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.

(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.

(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.

(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.

Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA.  Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests.  Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”

Total fines and penalties in the Biomet enforcement action were approximately $22.8 million ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information (here) against Biomet resolved through a deferred prosecution agreement (here).

Criminal Information

In substance, the information begins as follows.  “Argentina has a public healthcare system wherein approximately half of hospitals are publicly owned and operated.  Health care providers (“HCPs”) who work in the public sector are government employees, providing health care services in their official capacities.  Therefore, such HCPs in Argentina are ‘foreign officials’ as that term is defined in the FCPA.”  “Brazil has a socialized public healthcare system that provides universal health care to all Brazilian citizens, and the majority of hospitals are publicly-controlled.  HCPs who work in the public sector are government employees, providing health care services in their official capacities.  Therefore, such HCPs in Brazil are ‘foreign officials’ as that term is defined in the FCPA.”  “China has a national healthcare system wherein most Chinese hospitals are publicly owned and operated.  HCPs who work at publicly-owned hospitals are government employees, providing health care services in their official capacities.”

The information charges one count of conspiracy to violate the FCPA, three substantive FCPA anti-bribery charges (one charge focused on conduct in Argentina, one charge focused on conduct in Brazil, and one charge focused on conduct in China) and one charge of violating the FCPA’s books and records provisions.

As to the conspiracy charge, the information alleges that between 2000 to 2009, Biomet and others conspired to “secure lucrative business with hospitals in the Argentine, Brazilian, and Chinese public health care systems by making and promising to make corrupt payments of money and things of value to publicly-employed HCPs.”

According to the information, it was part of the conspiracy that “Biomet, certain of its executives, employees, and subsidiaries” – (1) “agreed to pay publicly employed Argentine HCPs 15-20 percent commissions in exchange for the purchase of Biomet products” (2) “agreed to pay Brazilian HCPs 10-20 percent commissions through Brazilian Distributor [a Brazilian company that had exclusive distribution rights for Biomet reconstructive products in Brazil] in exchange for the purchase of Biomet products” and (3) “agreed to pay Chinese HCPs commissions through Chinese Distributor [a Chinese company that acted as a distributor of Biomet products in China], and paid for travel for Chinese HCPs, in exchange for the purchase of Biomet products.”

The information also alleges that it was further part of the conspiracy that at the end of Biomet’s fiscal year from 2000 to 2009 “Biomet, its executives, employees, and subsidiaries falsely recorded the payments on its books and records as ‘commissions,’ ‘royalties,’ ‘consulting fees,’ ‘other sales and marketing,’ and ‘scientific incentives,’ in order to conceal the true nature of the payments in the consolidated books and records of Biomet Argentina [a wholly-owned Argentine subsidiary of Biomet through which Biomet conducted business in Argentina], Biomet International [a wholly-owned Delaware subsidiary of Biomet through which Biomet sold products into Brazil], Scandimed [a wholly-owned Swedish subsidiary through which Biomet sold products into China and elsewhere], and Biomet China [a wholly-owned Chinese subsidiary through which Biomet sold products into China], which books and records were incorporated into the books and records of Biomet for purposes of preparing Biomet’s year-end financial statements, which were filed with the SEC …”.

The information alleges as follows.  “In total, from 2000 to 2008, Biomet, Biomet Argentina, Biomet International, Scandidmed, and Biomet China, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of at least $1.5 million, some or all of which was paid to publicly-employed HCPs to induce the purchase of Biomet products.”

As to Argentina, the information largely focuses on internal e-mails or memos which indicated that “royalties are paid to surgeons if requested” and that the payments “are disclosed in the accounting records as commissions.”  The information details a 2005 internal investigation into certain allegations of improper conduct, but alleges that thereafter problematic payments continued to be made.  For instance, a 2007 internal e-mail states as follows.  “Doctors receive a ‘consulting fee’ for every surgery.”  According to the information, in August 2008 “Biomet distributed new compliance guidelines that emphasized the FCPA and related issues, and the company’s managing director for Argentina sought advice from the company’s lawyers, causing Biomet to suspend payments to Argentine doctors.”

As to Brazil, the information largely focuses on internal e-mail or memos noting that the Brazilian Distributor was paying commissions to doctors and that the Brazlian Distributor admitted that it “paid doctors for buying Biomet products and described the payments as ‘scientific incentives.”

As to China, the information discusses various internal e-mails which reference: the China Distributor “paying a 10-15% ‘rebate’ to surgeons on the sale of Biomet artificial hips;” a Scandimed employee stating that, regarding commissions to surgeons, “Scandimed has no control over this … as we understand it, giving commissions or gifts of various kinds to surgeons is common in China;”the China Distributor stating that a “Doctor will become the most loyal customer of Biomet if we send him to Switzerland”;  and the China Distributor stating as follows – “Doctor is the department head of [public hospital] and that Doctor uses about 10 hips and knees a month and its on an uptrend, as he told us over dinner a week ago … Many key surgeons in Shanghai are buddies of his.  A kind word on Biomet from him goes a long way for us.  Dinner has been set for the evening of the 24th.  It will be nice.  But dinner aside, I’ve got to send him to Switzerland to visit his daughter.”  The information also references a distribution memo which states that “Chinese surgeons typically receive a commission on sales, which can range from 5% to 25% and that distributors are expected to hold banquets for surgeons and to sponsor meetings.”  Another internal e-mail discusses “consulting fees paid to doctors for conducting clinical trials” and a “proposal for a two week visit for Chinese doctors to the United Kingdom, with the second week being a ‘holiday’ paid for by Chinese Distributor.”  The information also alleges that in October 2007 “Biomet China sponsored the travel of 20 surgeons to Barcelona and Valencia for training, including a substantial portion of the trip being devoted to sightseeing and other entertainment at Biomet’s expense.”  According to the information, in 2005 “Director of Internal Audit [based in Warsaw, Indiana] instructed an auditor to classify improper payments being made to doctors in connection with certain clinical trials as ‘entertainment’ and in 2007, the product manager for Biomet China sent an e-mail to [an Associate Regional Manager based in Hong Kong] “discussing ways to evade efforts by the Chinese government to halt corruption in health care by requiring all international companies to declare actual cost for import to the government, noting, ‘obviously, China government doesn’t have ability to forbid the corruption from hospitals & surgeons …’ and proposing four methods for avoiding the regulation, including falsified invoices.

DPA

The DOJ’s charges against Biomet were resolved via a deferred  prosecution agreement.  Pursuant to the DPA, Biomet admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agent, and  wholly-owned subsidiaries” as set forth in the information.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: Biomet investigated and disclosed to the DOJ and SEC the misconduct, “a portion of which was voluntarily disclosed”; Biomet reported its findings to the DOJ and SEC; Biomet cooperated fully in the DOJ and SEC investigation; Biomet undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures as set forth in the DPA; Biomet agreed to continue to cooperate with the DOJ, SEC, and foreign authorities in any related investigations; “Biomet has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s investigations of other companies and individuals in connection with business practices overseas in various markets;” and “were the DOJ to initiate proseuction of Biomet and obtain a conviction, instead of entering into the agreement to defer prosecution, Biomet would potentially be subject to exclusion from participation in federal health care programs pursuant to 42 USC 1320a-7(a).”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $21.6 – $43.2 million.  The DPA states as follows.  “Biomet agrees to pay a monetary penalty in the amount of $17.28 million, a 20 percent reduction off the bottom of the fine range.  Biomet and the DOJ agree that this fine is appropriate given Biomet’s extensive internal investigation, the nature and extent of Biomet’s cooperation in this matter, Biomet’s cooperation in the DOJ’s investigation of other companies … and Biomet’s extraordinary remediation.”    The guidelines calculation notes that Biomet received a credit for “substantial assistance in the prosecution of others.”

Pursuant to the DPA, Biomet agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures as described in an attachment to the DPA.  As is customary in FCPA DPA’s, Biomet agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release.

SEC

The SEC’s settled civil complaint (here) against Biomet is based on the same core conduct as described above.  In summary it alleges “violations of the FCPA by Biomet and four of its subsidiaries to obtain sales for their medical device business” and that from “2000 through August 2008, Biomet and its four subsidiaries paid bribes to public doctors employed by public hospitals and agencies in Argentina, Brazil, and China.”

Among other things, the SEC’s complaint alleges that “executives and auditors at Biomet’s Indiana headquarters were aware of the Argentine payments to doctors as early as 2000.”    The SEC alleges as follows.  “Internal audit took no steps to determine why royalties were paid to doctors purchasing Biomet medical devices, or why the payments to the doctors were 15-20 percent of sales.  The internal auditors did not obtain any evidence of services provided for the payments.  In fact, the internal audit report concluded that there were adequate controls in place to properly account for royalties paid to surgeons without any supporting documentation.”  Elsewhere, the SEC alleges that “despite the bribery” [the] Latin America Auditor’s only recommendation was to change the journal entry from ‘commission expenses’ to ‘royalties.’”

The SEC complaint references the September 2007 letter “Commission staff” sent to Biomet ”inquiring of payments made to public doctors” but that “while the inquiry was underway in certain countries, additional conduct was occurring at Biomet Argentina.”  For instance, the complaint alleges that in March 2008, “Managing Director of Biomet Argentina again reported the payments to surgeons to internal compliance personnel but no efforts were made by compliance to stop the practice.”

As to Biomet’s FCPA anti-bribery violations, the SEC complaint alleges that “Biomet employees who were U.S. nationals approved the payments to Argentine doctors and the arrangements with the Brazilian Distributor and Chinese Distributor that included payments to doctors.”

As to Biomet’s failure to maintain adequate internal controls, the complaint alleges as follows.  “Biomet failed to implement internal controls to detect or prevent bribery.  Biomet and four subsidiaries were involved in bribery that lasted for over a decade.  The conduct involved employees and managers of all levels involved in Biomet’s sales in Argentina, Brazil and China.  False documents were routinely created or accepted that concealed the improper payments.”

Based on the above allegations, the SEC complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, Biomet consented to the entry of a court order requiring payment of approximately $4.4 million in disgorgement and approximately $1.1 million in prejudgment interest.

The SEC’s release states as follows.  “Biomet’s compliance and internal audit functions failed to stop the payments to doctors even after learning about the illegal pratices.”  Kara Brockmeyer (Head of the SEC’s FCPA Unit) stated as follows.  “A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem.”

In this release, Biomet’s President and Chief Executive Officer, Jeffrey R. Binder, stated: “Biomet has long been committed to upholding the highest standards of ethical and legal conduct both in the United States and abroad. Over the past several years, we have significantly enhanced our global compliance procedures and financial controls, and we fully intend to work with the independent monitor and the Department of Justice and Securities and Exchange Commission to bolster our FCPA compliance practices and procedures. Moving forward, we intend to continue to adhere to our enhanced global compliance procedures, and to promote the Company’s commitment to the highest ethical standards in all the markets that we serve.”

Laurence Urgenson (Kirkland & Ellis – here) and Asheesh Goel (Ropes & Gray – here) represented Biomet.

As to the origins of the FCPA inquiry, Biomet’s most recent quarterly filing stated as follows.  “On September 25, 2007, Biomet received a letter from the SEC informing the Company that it is conducting an informal investigation regarding possible violations of the Foreign Corrupt Practices Act in the sale of medical devices in certain foreign countries by companies in the medical devices industry. [...]  On November 9, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC be provided to the Department of Justice on a voluntary basis.”