Archive for the ‘Brazil’ Category

Bribery Of A Foreign Official On U.S. Soil

Thursday, April 17th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The core enforcement action described below highlights a rare instance of FCPA violations being charged along with violations of the U.S. domestic bribery statute.  The enforcement action is also a rare instance of the United States being the location where the foreign official was allegedly bribed.

Control Systems Specialist / Darrold Crites

In this 1998 criminal information, the DOJ alleged that Control Systems Specialist, Inc. (“Control Systems” a company engaged in the purchase, repair, and resale of surplus military equipment) and its President Darrold Crites made improper payments to a Brazilian Air Force Lt. Colonel (“Col. Z”) stationed at Wright Patterson Air Force Based in Ohio.  The information describes Col. Z  as follows.

“Col. Z was the Foreign Liaison Officer for the Air Force of the Republic of Brazil … and was authorized to make purchases of military equipment on behalf of the Brazilian Aeronautical Commission (“BAC”), the purchasing agent of the Brazilian Air Force.  The BAC was an “instrumentality” of the Government of Brazil.”

The DOJ alleged that Crites met with a civilian employee of the United States Air Force who worked at Wright Patterson Air Force Base as the Command Country Manager (“Country Manager”) for Brazil and was responsible for representing the United States Air Force in dealings with Col. Z.

According to the DOJ, “Country Manager agreed to provide Crites with surplus part numbers, model numbers, and U.S. military sources of surplus parts in exchange for the promise of payments of money, using information he would obtain through his position as a civilian employee of the United States Air Force.”

In turn, the DOJ alleged that “Crites would thereafter purchase the surplus equipment identified by the Country Manager, recondition it, and resell the same to the BAC.”  According to the DOJ, Col. Z would approve the BAC’s purchase from Control Systems in exchange for payments of money.  Specifically, the DOJ alleged that Crites paid Col. Z “a series of bribes, disguised as ‘consultant fees,’ for each bid accepted by Col. Z on behalf of the BAC.”

The DOJ also alleged that Crites formed a separate company (“Company Y”) with the assistance of an Ohio businessman (“Businessman X”) to pay bribes to Col. Z “in exchange for his approval of Company Y’s bids to sell surplus U.S. military equipment to the BAC.”

According to the DOJ, Crites and Businessman X, as officers of Company Y “arranged not less than forty-four purchases of surplus U.S. military equipment for repair and resale to the BAC.”  The DOJ alleged as follows.

“Some of the surplus equipment was obtained by the BAC through the Defense Reutilization and Marketing Service (DRMS) under the Foreign Military Sales (FMS) program and then provided to Control Systems for repair.  Other equipment was purchased directly by Control Systems or Company Y, repaired, and then sold to the BAC.  In all cases, after each purchase was effected, Col. Z was paid for his approval of the transactions.”

According to the DOJ, Crites, Control Systems and others “paid a total of $99,000 to the Country Manager and a total of $257,139 to Col. Z.”

Based on the above allegations, the DOJ charged Control Systems and Crites with conspiracy to violate the FCPA’s anti-bribery provisions and a substantive violation of the FCPA’s anti-bribery provision.  Based on the allegations involving the Country Manager, the DOJ also charged Control Systems and Crites with violating 18 USC 201, the domestic bribery statute.

Pursuant to this plea agreement, Crites pleaded guilty to the three charges described above.  In the plea agreement, Crites agreed to cooperate with the DOJ.  According to the statement of facts in the plea agreement, “Crites and Control Systems received approximately $672,298 as a result of the contracts received from the government of Brazil.”  According to a docket entry, Crites was sentenced to three years probation (with the first six months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service.

Pursuant to this plea agreement, Control Systems also pleaded guilty to the three charges described above.  According to a docket entry, Control Systems was ordered to pay a $1,500 fine and was sentenced to one year probation.

International Materials Solutions Corp. / Thomas Qualey

Based on the same core allegations in the Control Systems / Crites enforcement action, in 1999 the DOJ also alleged in this criminal information that International Materials Solutions Corporation (“IMS” – like Control Systems an Ohio company that engaged in the purchase, repair, and resale of surplus military equipment) and Thomas Qualey (the President of IMS) conspired to violate the FCPA’s anti-bribery provisions and violated the FCPA’s anti-bribery provisions.  According to the information, IMS and Qualey paid a total of $67,563 to Col. Z to induce the approval by Col. Z of a bid by IMS for the acquisition and repair of ten fork lift trucks.

Pursuant to this plea agreement, Qualey pleaded guilty to the two charges described above.  According to the Statement of Facts in the plea agreement, Qualey and IMS “received approximately $392,250 as a result of the contracts received from the Government of Brazil.”  According to this judgment, Qualey was sentenced to three years probation ((with the first four months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service and ordered to pay a $5,000 fine.

Pursuant to this plea agreement, IMS pleaded guilty to the two charges described above.  According to this judgment, IMS was ordered to pay a $1,000 fine plus and was sentenced to one year probation.

See this prior post for another FCPA enforcement in connection with the U.S. Foreign Military Sales program.

Friday Roundup

Friday, January 31st, 2014

What others are saying, more candy, seriously out-of-whack, not first hand, and for the reading stack.  It’s all here in the Friday Roundup.

What Others Are Saying

Last week, I published this article “Why You Should Be Alarmed By The ADM FCPA Enforcement Action.”  I’ve received a higher than norm amount of feedback – all positive - about the article via e-mail and social media.  Below is what others are saying about the article.

“For many reasons this is a terrific article.  [You are] very brave to write this necessary and timely analysis.”

“Just wanted to say thank you for keeping me updated on your FCPA-related work.  It looks like your 2010 Facade article is still holding up pretty well, despite the DOJ’s “Guidance” from last year.  It will be interesting to see how long the agencies can continue with their relatively unconstrained enforcement practices.”

Thanks for sharing Mike. And don’t change: you are as good as ever!

“Excellent article, Mike!  Readable even by those of us who are not lawyers.  The conclusion about why ADM chose settlement is undoubtedly true of many others who are charged, but leads to a question of the [conduct] of those who are charged to extract “easy takings” rather than have to justify themselves to the SEC or DOJ.  On whose behalf are they acting?”

Also a thank you for the many positive and encouraging comments I’ve received since publishing two posts (here and here) concerning the recent departure of the DOJ’s FCPA Unit Chief.

In other news on that front, White & Case recently announced here that Kathleen Hamann will join the firm as a partner “from the DOJ where she was an anticorruption policy counsel and trial lawyer assigned to the Foreign Corrupt Practices Act (FCPA) Team in the Criminal Division’s Fraud Section.”  The head of White & Case’s Global White Collar Practice stated: “Kathleen’s experience at the DOJ gives her a strong understanding of the complexities of the FCPA and the federal government’s anticorruption policies.  Kathleen is a wonderful addition to our global white collar team, and will further strengthen our ability to represent and defend clients around the world in all phases of investigations, and criminal and civil enforcement proceedings.”

More Candy

This previous post “Like a Kid In A Candy Store” highlighted the abundant offerings of FCPA year in reviews this time of year.

There is more candy to digest.

See here for the slick Global Bribery and Corruption Review 2013 from Hogan Lovells.

See here for Mayer Brown’s FCPA Update:  Year-End 2013.

But again, be warned - the divergent enforcement statistics are likely to make you dizzy at times and as to certain issues.  [Given the increase in FCPA Inc. statistical information and the growing interest in empirical FCPA-related research, I again highlight the need for an FCPA lingua franca (see here for the prior post), including adoption of the “core” approach to FCPA enforcement statistics (see here for the prior post), an approach endorsed by even the DOJ (see here), as well as commonly used by others outside the FCPA context (see here)]

Seriously Out-Of-Whack

One could have either of the following positions.

DOJ enforcement of criminal laws is more about leverage against public companies and risk aversion by corporate leaders rather than facts and law.  Therefore, even if a company settles various enforcement actions for approximately $20 billion in a year, it is not surprising that a company’s profits and stock price are up and that the company’s CEO is therefore given a substantial raise.

DOJ enforcement of criminal laws is about facts and law and if a company settles various enforcement actions for approximately $20 billion in a year, it is just not right that the company’s CEO is given a substantial raise.

Regardless of your position (I know where I fall), you would have to agree that things are seriously out-of-whack these days.

See here and here for articles regarding the compensation of James Dimon (CEO of JPMorgan).  As highlighted in the Wall Street Journal article.

“J.P. Morgan Chase’s board delivered a strong endorsement of Chief Executive James Dimon, boosting his pay 74% for a year in which the nation’s largest bank agreed to more than $20 billion in legal payouts …”  [...] The raise reflects the view among the board that most shareholders believe Mr. Dimon is doing a good job protecting the bank’s earnings power and driving the stock price higher despite the high-profile legal settlements, according to people familiar with the board’s conversations. [...] Many large shareholders seem comfortable with the bank’s leadership, too. The company’s stock price rose 33% during 2013, outpacing the 30% increase in the S&P 500 stock index. If not for its billions in legal expenses, J.P. Morgan likely would have earned record profits.  [...]   Warren Buffett, the billionaire investor who personally owns an undisclosed number of shares in J.P. Morgan, described Mr. Dimon as a “bargain.” “If I owned J.P. Morgan Chase, he would be running it, and he would be making more money than the directors are paying him,” said Mr. Buffett, who has publicly defended the bank executive before.”

“Not First Hand”

JPMorgan of course is under FCPA scrutiny for its alleged hiring practices in China.  (See here among other posts).

In this video interview, Goldman Sach’s CEO Lloyd Blankfein talks about hiring issues at his company.  As noted in the related article, “asked whether he had seen any hiring that looked like a bribe, Mr. Blankfein paused for a moment” and said “not first hand.”

Reading Stack

From BalkanInsight, an in-depth piece regarding the Magyar Telecom enforcement action (see here for the prior post).

From the Economist regarding Brazil’s new FCPA-like law.

*****

A good weekend to all.

Friday Roundup

Friday, August 23rd, 2013

In the classroom, what if, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

In the Classroom

I am pleased to share this release concerning a new Foreign Corrupt Practices Act class I am teaching this semester at Southern Illinois University School of Law.  As noted in the release, the course is believed to be one of the first specific FCPA law school classes offered that is exclusively devoted to the FCPA, FCPA enforcement and FCPA compliance.

I am grateful for the media coverage the class has attracted.  See here from Corporate Counsel, here from Main Justice, and here from Corporate Crime Reporter.

What If?

As highlighted in this previous post concerning JPMorgan’s scrutiny in China,  the conduct at issue in the front-page New York Times article was disclosed (sort of) in the company’s August 7th quarterly filing.  That filing identified, under the heading “Regulatory Developments” the following.

“A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.”

In the disclosure context, it has been noted by various courts that once a company “speaks” on an issue, its statements to the market can not be so incomplete as to be misleading.  Was JPMorgan’s August 7th disclosure misleading?  If not misleading, a bit “too cute?”  If JPMorgan’s August 7th disclosure mentioned the reason for the SEC’s request for information and that the request was in connection with an FCPA inquiry, would there even have been a front-page article in the NY Times on August 18th?  And if there was no front-page NY Times article would JPMorgan’s FCPA scrutiny have dominated the news this week?

Scrutiny Alerts and Updates

Entertainment Gaming Asia

Entertainment Gaming Asia, Inc., a company with shares listed on NASDAQ, is the focus of this article in the Cambodia Daily which states:

“Venturing into Cambodia’s casino market in May 2011, Macau-backed gambling firm Entertainment Gaming Asia (EGA) promised tens of thousands of dollars to the wife of Pailin’s provincial governor in order to lease land for the construction of a new casino … [...]   There is no suggestion that the land lease arrangement breaks any laws.  But EGA’s registration with the SEC means the company is subject to the U.S. Foreign Corrupt Practices Act (FCPA). [...] EGA senior vice president Traci Mangini declined to comment on the land-lease arrangement.“We are not available for comment,” Ms. Mangini said in an email. Contacted this week, Mr. Chhean [who has held the powerful local position of governor in Pailin for more than a decade] insisted there was nothing improper about the land being rented from his wife. “It is correct that they hire the land [from my wife], they have hired it for two years already,” he said. He said the casino was fully approved by the government in Phnom Penh, and that he had no role in the licensing decision. Mr. Chhean said there was nothing inappropriate about the wife of a governor having business interests.”

Microsoft

This March 2013 post highlighted Microsoft’s FCPA scrutiny and how the DOJ and SEC “are examining kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy.”  Add Pakistan and Russia to the list.  As reported in this Wall Street Journal article:

“In Russia, an anonymous tipster told Microsoft that resellers of its software allegedly funneled kickbacks to executives of a state-owned company to win a deal, the people familiar with the matter said. In Pakistan, a tipster alleged that Microsoft authorized a consulting firm to pay for a five day trip to Egypt for a government official and his wife in order to win a tender, the people familiar with the matter said. The two contacted Microsoft directly in the last eight months, the people said.”

Eli Lilly

In December 2012, Eli Lilly agreed to pay $29 million to resolve an SEC FCPA enforcement action concerning alleged conduct in China, Brazil, Poland and Russia (see here for the prior post).

Lilly is again under scrutiny.  As referenced here by Reuters:

“U.S. drugmaker Eli Lilly and Co said it was ‘deeply concerned’ about allegations published in a Chinese newspaper that it spent more than 30 million yuan ($4.90 million) to bribe doctors in China to prescribe the firm’s medicines instead of rival products. A former senior manager for the company, identified by the pseudonym Wang Wei, told the 21st Century Business Herald that bribery and illegal payments at Eli Lilly’s China operations were widespread. [...] Eli Lilly said in an emailed statement to Reuters that it was looking into the matter. ‘Although we have not been able to verify these allegations, we take them seriously, and we are continuing our investigation,’ the statement said. The U.S. firm said it had been made aware of “similar allegations” of kickbacks in 2012 by a former sales manager. It said the firm had opened an investigation at that time involving staff interviews, e-mail monitoring and expense report audits.”

For the Reading Stack

Informative posts here and here on the FCPAmericas blog on how Brazil’s new bribery law compares to the FCPA.  Also on the FCPAmericas blog, informative posts here and here regarding the unknows of the law.

In reference to JPMorgan’s FCPA scrutiny over its alleged hiring of family members of alleged “foreign officials,” this article in the Economist states:

“Connections also count in the West, of course. Following initial reports of the SEC’s investigation in the New York Times, a flood of stories have noted the jobs held in politically sensitive American firms by the sprogs of American politicians. Even when offspring are not involved, the revolving door between the public and private sectors raises questions about why people are hired. JPMorgan Chase did not hire Tony Blair as a senior adviser for his knowledge of risk weights, after all. Mary Schapiro, a former head of the SEC, recently joined Promontory, a consultancy packed with ex-regulators used by banks to cope with regulation (she has said she will not lobby any government body in her new role). If it is unfair to cite these names, it is only because there are so many others. If the regulators genuinely fret about why firms make hiring decisions, they may want to extend their inquiries to Washington, DC, and New York as well.”

In the context of GlaxoSmithKline’s scrutiny in China, this Wall Street Journal article highlights “China’s fast-growing but deeply underfunded medical system” where “doctors are widely seen as underpaid, which makes them prime recipients of honorariums, which are
legal, or illegal cuts of sales from drug companies …”.

*****

A good weekend to all.

New Brazilian Legislation Addresses Bribery By Corporate Entities

Wednesday, July 10th, 2013

Today’s post is from FCPA Professor’s Brazil Expert Gregory Paw (Pepper Hamilton) and Fabiola Emilin Rodrigues (Demarest Advogados)

*****

New Brazilian Legislation Addresses Bribery By Corporate Entities

The millions of Brazilians protesting in recent weeks in cities and towns across Brazil have brought important and far-reaching corruption reform to one of the world’s largest economies.  The implications for companies operating in Brazil will come fast, and will include incentives to operate an effective compliance program and establish a control environment that will detect potential wrongdoing inside a corporation.

Protests Highlight Corruption Concerns and Need for Reform          

Protesters initially cited a bus fare increase as the motive for their ire.  Yet as days passed, the root causes of the crowd’s anger turned to broader social issues such as economic fairness and the quality of civil services like health, education and transportation.  Corruption and the mismanagement that protesters say blights Brazil and its political system became a focal point.  Even as Brazil’s national football team struck a major win over defending World Cup champion Spain, cheers in the historic Maracanã Stadium were met with equally strong shouts outside the stadium walls calling for political reform.

The protesters supported the demands for reform by citing recent history, including last year’s trial of an elaborate vote-buying scheme that allegedly included congressmen, judges and a high-level advisor to the former president yet resulted, in the eyes of skeptical protesters, in little tangible punishment or political reform.  Instead of change, protesters pointed to the fact that almost a third of Brazil’s Congress is facing charges in trials overseen by the Supreme Federal Tribunal, according to a prominent watchdog group.

As protests spread and grew, political leaders of all suits suffered swift declines in popularity and scrambled to find measures to meet the public demands.  Municipal officials rolled back transit fare increases, and President Dilma Rousseff pledged additional investments in public transit projects.  Congressional leaders began to move legislation that had languished for years to earmark oil royalties to education and public healthcare.

Corruption also became a key reform point.  As initial measures, Brazil’s Senate approved a bill establishing stiffer sentencing for certain corruption convictions, and the congressional lower house rejected a constitutional amendment intended to limit investigations into legislative corruption.  In the midst of this activity, the Supreme Federal Tribunal ordered the arrest of a lower house deputy convicted on corruption charges three years ago, marking the first time under Brazil’s modern constitution that the court ordered the arrest of a sitting congressman.

The Clean Companies Act

In Brazil, criminal liability is personal.  With the exception of environmental crimes, corporations face only civil and administrative liability under a complex maze of regulations.  After entering international treaties concerning corporate liability for crimes, Brazil has struggled for several years to pass legislation holding companies accountable for acts of corruption.  Legislation introduced in 2010 went through study and several hearings, yet ­numerous attempts to bring the bill to vote failed.

This April, a bill establishing civil and administrative corporate liability finally passed the lower house of Congress.  The bill appeared to languish until July 4, 2013, when the Senate took up and passed the legislation.  The new law goes to President Rousseff for approval, and will come into force 180 days after it is published in the official gazette.  The law is expected to take force in early 2014.

The bill addressing corruption by legal entities will complement existing laws in the Brazilian Criminal Code addressing bribery by individuals, which apply where criminal intent can be demonstrated that a person offered or promised any benefit to public employees that relates to an express or implied request or suggestion that the public employee perform or refrain from performing, or delay any act within the scope of his duties.  Thus, if the new bill becomes law, individuals will face criminal liability and legal entities will face civil and administrative sanctions for bribery.

Foreign and Domestic Corporate Liability

The new law establishes strict liability for Brazilian legal entities, as well as foreign legal entities with a “registered office, branch or representation in the Brazilian territory.”  The law prohibits bribery of public officials relating to local and foreign public administration.  Specifically, the law establishes civil and administrative liability for corporate entities that “promise, offer or give, directly or indirectly, an undue advantage to a public agent, or third person related to him.”  The law also prohibits bid rigging and other ­frauds in the public procurement process, as well as efforts to hinder investigations or audits by public agencies.

Sanctions for offenses, which the Organisation for Economic Co-operation and Development directed should be “effective, proportionate and dissuasive,” can range from one percent to 20 percent of the entity’s gross revenue from the prior year or R$ 6,000 (about US$3,000) to R$ 60 million (about US$30 million) if the revenue is too difficult to calculate.  Firms found liable can be dissolved or suspended, or face forfeiture, debarment, loss of public contracts and prohibition on incentives and public financing.  Offending firms can find information about the nature of the misconduct published in newspapers, providing a powerful incentive against misconduct.

Voluntary Disclosure and Cooperation

The bill encourages the cooperation of firms under investigation , including by voluntary reporting to the authorities, before the initiation of a proceeding, as well as the disclosure of information during the course of the investigations.  The bill also provides a leniency program for companies that first disclose wrongdoing and cease involvement in the unlawful practice.  Fines can be reduced by up to 2/3 under the leniency program, and other sanctions may also be relieved.

Compliance Programs

­Critically, the bill provides that a legal entity that has an effective compliance program in place will get credit for this effort.  Specifically, “the existence of mechanisms and internal integrity procedures, audit and incentive denunciation of irregularities in applying the code of conduct and ethics within the legal entity” will be considered when applying any sanction, with criteria to be set by the federal government.  The extent of credit is not yet known, but this incentive is similar to efforts by regulators in the United States and United Kingdom to encourage responsible corporate citizenship.

One of the bill’s lower house sponsors, Mr. Carlos Zarattini (PT-SP), emphasized that the legislation is important not only for its punitive aspect but also because it encourages companies to adopt good administrative practices in order to avoid infringing the laws, and also to correct errors through leniency agreements.  “Now we not only have established a way to punish as induce companies to a correct practice,” Mr. Zarattini explained.   Another sponsor, Mr. John Arruda (PMDB-PR), summarized that “[f]rom this law we are creating goals for that in Brazil to establish a culture of best practice in the private sector.”

Addressing Risk under the Clean Companies Act

Companies operating in Brazil will have a strong incentive to establish and strengthen compliance efforts when the Clean Companies Act takes effect. Establishing and operating compliance programs – and building off of international standards of compliance that have developed under other major anti-corruption laws — will be the best line of defense under the new law.  The law’s effectiveness will depend in large part on how the Brazilian business community embraces the concepts of effective compliance.   This “essential engine” in the fight against corruption, as Senate President Renan Calheiros  observed, carries a number of benefits to Brazil, including generating renewed interest in Brazilian investments by multi-national companies that will appreciate the greater transparency and legal certainty afforded by the new law.

Next Up – Eli Lilly

Thursday, December 27th, 2012

First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011).  Then it was Smith & Nephew (see here - $22 million in combined fines and penalties in February 2012).  Then it was Biomet (see here – $22.8 million in combined fines and penalties in March 2012).  Then it was Pfizer / Wyeth (see here  – $60 million in combined fines and penalties in August 2012).

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.”