Archive for the ‘Healthcare Providers As Foreign Officials’ Category

Next Up – Mead Johnson

Wednesday, July 29th, 2015

MeadFirst it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).

Then it was Smith & Nephew (see here - $22 million enforcement action in February 2012).

Then it was Biomet (see here – $22.8 million enforcement action in March 2012).

Then it was Pfizer / Wyeth (see here  – $60 million enforcement action in August 2012).

Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).

Then it was Stryker (see here – $13.2 million enforcement action in October 2013).

The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Mead Johnson Nutrition Company. Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”

Yesterday, the SEC announced that Mead Johnson (a leading pediatric nutrition products) agreed to pay approximately $12 million pursuant to an administrative cease and desist order in which the company neither admitted or denied the SEC’s findings.

The substance of the order is approximately four pages and states in summary fashion as follows.

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Mead Johnson. The violations, which occurred in connection with the operations of Mead Johnson’s subsidiary in China, took place up through 2013.

The conduct at issue relates primarily to the misuse of marketing and sales funds in China. Despite prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson’s majority-owned subsidiary in China, Mead Johnson Nutrition (China) Co., Ltd. (“Mead Johnson China”), made improper payments to certain health care professionals (“HCPs”) at state-owned hospitals in China to recommend Mead Johnson’s nutrition products to, and provide information about, expectant and new mothers. These payments were made to assist Mead Johnson China in developing its business. For the period from 2008 through 2013, Mead Johnson China paid approximately $2,070,000 to HCPs in improper payments and derived profits therefrom of approximately $7,770,000.

Mead Johnson China failed to accurately reflect the improper payments in its books and records. Mead Johnson China’s books and records were consolidated into Mead Johnson’s books and records, thereby causing Mead Johnson’s consolidated books and records to be inaccurate. Mead Johnson failed to devise and maintain an adequate system of internal accounting controls over Mead Johnson China’s operations sufficient to prevent and detect the improper payments that occurred over a period of years.”

Under the heading “Mead Johnson China’s Improper Payments to HCPs,” the order states in full as follows.

“A portion of Mead Johnson China’s marketing efforts during the 2008 to 2013 period was through the medical sector, which included marketing through healthcare facilities and HCPs. Despite the prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson China improperly compensated HCPs, who were foreign officials under the FCPA, to recommend Mead Johnson’s infant formula to, and to improperly provide contact information for, expectant and new mothers.

Funding for those payments came from funds generated by discounts provided to Mead Johnson China’s network of distributors.

Mead Johnson China uses third-party distributors to market, sell and distribute product in China. Some of Mead Johnson China’s funding of its marketing and sales practices were effected through discounts provided to the distributors. Pursuant to contracts between Mead Johnson China and its distributors, Mead Johnson China provided the distributors a discount for Mead Johnson’s products that was allocated for, among other purposes, funding certain marketing and sales efforts of Mead Johnson China. This form of funding was referred to as “Distributor Allowance.”

Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent, and certain Mead Johnson China employees provided specific guidance to distributors concerning the use of the funds. Mead Johnson China staff also maintained certain records related to Distributor Allowance expenditure by distributors. In addition, Mead Johnson China used some of the funds to reimburse Mead Johnson China’s sales personnel for a portion of their marketing and other expenditures on behalf of Mead Johnson China.

Mead Johnson China’s sales personnel marketed product through medical channels, including healthcare facilities. These sales personnel encouraged HCPs at the healthcare facilities to recommend Mead Johnson products to mothers and to collect contact information of the mothers for Mead Johnson China’s marketing purposes. To incentivize HCPs to recommend Mead Johnson product and collect information from the mothers, these sales personnel improperly paid HCPs, providing cash and other incentives, contrary to Mead Johnson’s internal policies. The Distributor Allowance was the funding source for the cash and other incentives paid to HCPs.”

Under the heading “Mead Johnson Failed to Make and Keep Accurate Books and Records and Devise and Maintain an Adequate Internal Control System,” the order states in full as follows.

“The Distributor Allowance funds contractually belonged to the distributors, but were in large part under Mead Johnson China’s control. Mead Johnson China’s employees maintained certain records related to the Distributor Allowance, including records reflecting payments to HCPs. However, those records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies.

Mead Johnson failed to devise and maintain an adequate system of internal controls over the operations of Mead Johnson China to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through its distributors was not used for unauthorized purposes, such as the improper compensation of HCPs. The use of the Distributor Allowance to improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies. Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.”

Notwithstanding the above, the order otherwise specifically states:

“Mead Johnson has established internal policies to comport with the FCPA and local laws, and to prevent related illegal and unethical conduct. Mead Johnson’s internal policies include prohibitions against providing improper payments and gifts to HCPs that would influence their recommendation of Mead Johnson’s products.”

Under the heading “Internal Investigation and Remedial Efforts,” the order states in full:

“In 2011, Mead Johnson received an allegation of possible violations of the FCPA in connection with the Distributor Allowance in China. In response, Mead Johnson conducted an internal investigation, but failed to find evidence that Distributor Allowance funds were being used to make improper payments to HCPs. Thereafter, Mead Johnson China discontinued Distributor Allowance funding to reduce the likelihood of improper payments to HCPs, and discontinued all practices related to compensating HCPs by 2013. Mead Johnson did not initially self-report the 2011 allegation of potential FCPA violations and did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.

As a result of its second internal investigation commenced in 2013, Mead Johnson undertook significant remedial measures including: termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, adding positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-going basis; and providing employees with a method to have immediate access the company’s policies and requirements.

Despite not self-reporting the 2011 allegation of potential FCPA violations or promptly disclosing the existence of this allegation in response to the Commission’s inquiry into this matter, Mead Johnson subsequently provided extensive and thorough cooperation. Mead Johnson voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents. These actions assisted the Commission staff in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

Based on the above findings, the order finds:

“Up through 2013, certain Mead Johnson China employees made payments to HCPs using funds maintained by third parties. These funds and payments from the funds were not accurately reflected on Mead Johnson China’s books and records. The books and records of Mead Johnson China were consolidated into Mead Johnson’s books and records. As a result of the misconduct of Mead Johnson China, Mead Johnson failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions as required by [the FCPA's books and records provisions].

Up through 2013, Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through third-party distributors was not used for unauthorized purposes, such as improperly compensating Chinese HCPs to recommend Mead Johnson’s products. As a result of such failure, the improper payments to HCPs occurred contrary to management’s authorizations, in violation of [the FCPA's internal controls provisions].”

In the SEC’s release Kara Brockmeyer (Chief of the SEC Enforcement Divisions’s FCPA Unit) stated:

“Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other health care professionals in China to recommend its baby formula and give the company marketing access to mothers.”

As noted in the release:

“The company consented to the order without admitting or denying the findings and agreed to pay $7.77 million in disgorgement, $1.26 million in prejudgment interest, and a $3 million penalty.”

In this press release, Mead Johnson’s CEO Kasper Jakobsen stated:

“We are pleased to have reached this final resolution with the SEC. Integrity and compliance with laws and regulations are central to the success of our operations around the world. We will continue to reinforce these operating principles in all our interactions with customers and business partners. Our China business is one of Mead Johnson’s most important operations, and we remain confident in its continued long-term growth.”

Yesterday Mead Johnson’s stock closed up .64%.

According to reports, Mead Johnson was represented by F. Joseph Warin, Michael S. Diamant and Christopher W.H. Sullivan of Gibson Dunn.

“The Most Corrupt Health System Globally Is That in the US. Unfortunately It is Also the Most Influential Medical System”

Tuesday, July 21st, 2015

PillsIn response to this recent post, I received the following from an individual who prefers to be called “a fraud investigator from the United Kingdom.”

*****

I was interested to read your points and observations about health care and the foreign official issue. Notwithstanding whether or not employees and physicians connected to state owned or controlled hospitals etc are foreign officials, there is a very real concern, certainly in the UK, that financial interests undermine medical decision making. Indeed there are various studies which appear to prove the effect.

I know from experience there is a resultant detriment to state funds here, so in this context and in the absence of other meaningful regulation of health care corruption, the broad use of “foreign officials” is welcome.

Many people working in my industry recognise that health care presents unique issues with corruption. This may be explained by market forces. For example, if you ‘marketize’ an essential service where the purchasers are entirely reliant on people with financial interests (Physicians) to decide what is best for them, and at the same time patients cannot challenge those people without potentially jeopardizing their own care, it is arguable that such a market cannot ever function effectively, particularly when huge amounts of money are involved.

Health care is also unique in how and why it is utilized. You can walk away from your lawyer, accountant etc if you feel uncomfortable, but you can’t so easily walk away from a Physician who may hold the key to curing you. It follows that you are very unlikely to question or care about their financial interests, particularly when your insurer or the government is paying most of the costs.

Ultimately though, patients not only trust Physicians based on them being people of high public standing, but they also have to trust Physicians if they are to be confident of getting well. It is this inherent trust which is exploited and undermined by financial interests. I think everyone knows fundamentally how wrong it is for payments to be made to Physicians and other health care professionals, the question is how to stop the practices and to cure the underlying cultural cause.

Within the US health care sector there are agencies who use well intentioned laws to prosecute wrongdoing such as under Stark or the Federal Anti-Kickback statute; HHS-OIG and the FBI publicize high profile prosecutions very frequently. However, those efforts appear never ending – presumably because the profits are so great that for many people it is considered worth taking the risk. However, I also know in some parts of the US that businesses are unable to compete for patients on a legitimate basis because all other providers are paying kickbacks to secure business.

My interest and point in contacting you, is one of culture. Health care is an essential need for everyone and the corruption of those services affects all levels of society globally. Unfortunately, the US has suffered so much misconduct in medical practices that it has become almost the norm. For example, the very idea of so called “Patient Recruiters” goes against everything I understand to be reasonable yet they form part of the structure of health care provision in the US.

If you consider – Pharma payments, medical devices such as cardiac implants, CPD coding, patient recruiting, hospital kickbacks, pathology overuse, durable medical equipment and ambulatory care as headline issues (there are many others), you will find the US system is rife with problems. Although nowhere near to the same extent here in the UK, it is clear that in India, Serbia, Greece, China, Russia and many other countries there are massive issues with corruption in health care. However, my view and I suspect that of many others, is the most corrupt health system globally is that in the US, primarily due to conflicts of interest. Unfortunately it is also the most influential medical system.

The corruption is partly explained by the lack of transparency around pricing and proven clinical benefits. For example, I travelled to the US not so long ago and required a common over the counter remedy available in the UK for about 15 dollars. In the US, the same medicine is prescription only and costs $150 dollars plus $150 dollars to see a Physician for the prescription. Fortunately, a colleague had brought some with him as on his last trip he had ended up paying the $300 dollars.

Another example is just looking at all the people wearing physiotherapy aids. I couldn’t quite believe it when I was just walking around a US city, but came to understand that there is big money in prescribing pointless wrist, knee, elbow supports and the like. The reason for these two simple examples is to show that pricing in the US is out of control and that treatments of questionable clinical benefit are routinely offered and accepted.

What I wonder is:

  • How much global health care corruption can be accounted for by large corporates which are either directly based or primarily selling in the US (Pharma and device manufacturers in particular)?
  • Is the issue in fact that financial practices designed to influence Physicians’ independent decision making have become so commonplace in the US that they are replicated overseas as a matter of course? In other words if usual business practice in the US is on a corrupt basis, and indeed is necessary just to compete with rivals, then when those corporate move into overseas markets the natural tendency must be to use the same methods. This is certainly evident in FCPA cases in China. It would be easy to make a lot more discussion around what happens when US corporate practices are applied in countries with endemic corruption issues.
  • Would it be better to have an anti-corruption focus and international agreement specifically targeting designated sectors – health in this case but also perhaps mining, energy and other areas where problems are similar on a global level, are well known about and the market is one which all people are to an extent dependent on?

One final thought/question. Should the US be policing health care overseas under the guise of the “foreign official” enforcement theory or should the US be policing it by redefining how businesses operate in the US as a starting point and then applying those standards overseas?

I will certainly continue to watch developments on your website with interest and thank you for your excellent insights – do keep up the good work.

Next Up – Stryker

Friday, October 25th, 2013

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).  Then it was Eli Lilly (see here – $29 million in combined fines and penalties in December 2012).

Next up, in the recent sweep of pharmaceutical / healthcare and medical device companies is Stryker Corporation.

Yesterday, the SEC announced that Stryker agreed to pay $13.2 million to resolve an SEC Foreign Corrupt Practices Act enforcement action via an administrative cease and desist order in which the company neither admitted or denied the SEC’s allegations.

The conduct at issue focused on various Stryker subsidiaries.  There is no allegation in the SEC’s order concerning Stryker Corp. itself other than the following.

“The financial results of all of the Stryker subsidiaries discussed herein were consolidated into Stryker’s financial statements.  Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within a given country. During the relevant period, each of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anti-corruption, but these policies were inadequate and insufficiently implemented on the regional and country level. Accordingly, Stryker failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that the company maintained accountability for its assets and that transactions were executed in accordance with management’s authorization.”

In summary fashion, the SEC order states:

“From approximately August 2003 to February 2008 (the “relevant period”), Stryker made approximately $2.2 million in unlawful payments to various government employees including public health care professionals (collectively, the “foreign officials”) in Mexico, Poland, Romania, Argentina, and Greece. Stryker incorrectly described these expenses in the company’s books and records as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made by Stryker to obtain or retain business. Stryker earned approximately $7.5 million in illicit profits as a result of these payments.  During the relevant period, Stryker incorrectly described unlawful payments to foreign officials in its accounting books and records in violation of [the FCPA's books and records provisions] and failed to devise and maintain an adequate system of internal accounting controls in violation [of the FCPA's internal controls provisions.]“

Under the heading “Unlawful Payments In Mexico,” the order states:

Between March 2004 and January 2007, Stryker’s wholly-owned subsidiary in Mexico (“Stryker Mexico) made three payments totaling more than $76,000 to foreign officials employed by a Mexican governmental agency (the “Mexican Agency”) responsible for providing social security for government employees. Stryker made these payments to win bids to sell its medical products to certain public hospitals in Mexico. Stryker Mexico earned more than $2.1 million in profits as a result of these illicit payments.  These payments were made at the direction of Stryker Mexico employees, including country level management, and paid to the foreign officials through third party agents. For example, in January 2006, Stryker Mexico learned that the Mexican Agency was threatening to revoke a contract that Stryker Mexico had won to provide knee and hip products to certain public hospitals unless Stryker Mexico paid an employee of the Mexican Agency.  As a result of the demand by the employee of the Mexican Agency, Stryker Mexico directed its outside counsel in Mexico (the “Mexican Law Firm”) to make payment to the employee, on Stryker Mexico’s behalf, in order for Stryker to keep the winning bid.  At Stryker Mexico’s direction, the Mexican Law Firm paid the foreign official approximately $46,000 on behalf of Stryker Mexico and, as a result of this payment, the Mexican Agency did not revoke Stryker Mexico’s status as the winning bidder. The Mexican Law Firm then invoiced Stryker Mexico for $46,000 for purported legal services rendered, even though no such services were provided. Stryker Mexico recorded these improper payments as legitimate legal expenses in its books and records.  Stryker Mexico earned over $1.1 million in illicit profits on this contract alone. Stryker Mexico made two additional payments through intermediaries during the relevant period in much the same fashion, with the purpose of retaining or obtaining business from public hospitals. The additional payments were in excess of $34,000 and earned Stryker illicit profits of nearly $1 million.”

Under the heading “Improper Payments in Poland,” the order states:

“Between August 2003 and November 2006, Stryker’s wholly-owned subsidiary in Poland (“Stryker Poland”) made 32 improper payments to foreign officials in Poland for the purpose of obtaining or retaining business at public hospitals. In total, Stryker Poland made approximately $460,000 in unlawful payments resulting in more than $2.4 million of illicit profits. These improper payments were recorded in Stryker’s books and records as legitimate expenses, including reimbursement for business travel, consulting and service contract payments, and charitable donations.  For example, in May 2004, Stryker Poland paid for a foreign official then employed as the director of a public hospital in Poland, and her husband, to travel to New York City and Aruba. Although the official purpose of the trip was for the foreign official to attend a single-day tour of Stryker’s manufacturing and research facility in Mahwah, New Jersey, Stryker paid for the couple’s six-night stay at a hotel in New York City, attendance at two Broadway shows, and a five-day trip to Aruba before their return flight to Poland.  According to Stryker Poland’s records, expenses for the trip, including airfare, accommodations, and entertainment, totaled approximately $7,000, all of which Stryker Poland recorded as legitimate travel expenses.  Stryker Poland’s internal documents confirm a quid pro quo arrangement between Stryker Poland and the foreign official. For example, the form containing the schedule for the foreign official’s facility tour states that the purpose of the visit was to “strengthen [the public doctor’s] conviction that Stryker products are the best solution for her hospital,” and notes that “we won a big tender for [one product] (about $350,000) and in this year they are going to buy our products for $500,000.”  Stryker Poland also made additional improper travel payments, payments under purported consulting agreements totaling approximately $47,000, and gifts and donations of nearly $400,000, each of which was made to a state-employed healthcare professional for the purpose of Stryker Poland’s obtaining or retaining the business of public hospitals.”

Under the heading “Improper Payments in Romania,” the order states:

“From at least 2003 through July 2007, Stryker’s wholly-owned subsidiary in Romania (“Stryker Romania”) made 192 improper payments to foreign officials totaling approximately $500,000 in order to obtain or retain business with affiliated public hospitals.  Stryker Romania recorded these payments as legitimate sponsorships of foreign officials’ attendance, travel and lodging at conferences, and medical events, when in reality they were illicit payments made to obtain or retain business.  As a result of these payments, Stryker Romania earned more than $1.7 million in illicit profits.  For example, in April 2004, a Stryker Romania salesperson submitted a form to sponsor a foreign official’s lodging abroad to attend a conference. The form stated that a “business benefit[]” from the sponsorship was that, in return, Stryker Romania would receive a contract for the sale of a particular medical device. In addition, Stryker Romania internally discussed that the foreign official in question was “waiting to be confirmed as chief physician” at a public hospital, “thus becoming important” for an upcoming bid for a contract. Stryker Romania recorded the payment as a legitimate business travel expense even though its own internal documents demonstrated that the payment was made with the purpose of obtaining future business.”

Under the heading “Unlawful Payments in Argentina,” the order states:

“Between 2005 and 2008, Stryker’s wholly-owned subsidiary in Argentina (“Stryker Argentina”) made 392 commission payments, or “honoraria,” to physicians employed in the public healthcare system in order to obtain or retain business with affiliated public hospitals. Unlike traditional honorarium payments that are made in exchange for the provision of a service (such as making a speech), these honoraria were commissions that were calculated as a percentage of a total sale to a particular hospital and then paid to the public doctor associated with the sale. Stryker Argentina routinely made these payments by check to doctors at rates between 20% and 25% of the related sale. In total, Stryker Argentina made more than $966,500 in improper honoraria payments during the relevant period, causing Stryker Argentina to earn more than $1.04 million in profits from the public hospitals with which the doctors were associated. Stryker Argentina booked these payments as commission expenses in an account entitled “Honorarios Medicos,” when in fact they were unlawful payments made to compensate doctors for purchasing Stryker products.”

Under the heading “Unlawful Payments in Greece,” the order states:

“In 2007, Stryker’s wholly-owned subsidiary in Greece (“Stryker Greece”) made a sizeable and atypical donation of $197,055 to a public university (the “Greek University”) to fund a laboratory that was then being established by a foreign official who served as a prominent professor at the Greek University, and was the director of medical clinics at two public hospitals affiliated with the Greek University.  As a result of this donation, Stryker Greece earned a total of $183,000 in illicit profits.  The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business from the public hospitals with which the foreign official was affiliated, in exchange for making the donation to the foreign official’s pet project. In an email from the country manager of Stryker Greece to the regional manager, the country manager emphasized that she believed the donation to the Greek University was necessary to secure future sales for Stryker Greece. The country manager wrote: “I think that anything below 30K will leave [the foreign official] disappointed. He did promise that he would direct his young assistants into using our trauma and sports medicine products. [The foreign official] is . . . difficult to get as a ‘friend’ and really tough to have as a disappointed customer.”  The regional manager asked,  “What do we get for the sponsorship – or is it just a gift?” The country manager confirmed the quid pro quo, stating, “For the sponsorship we get the Spine business and a promise for more products in his Department. . .”  At a later date, another country manager stated, “I am willing to support what [the foreign official] is asking for in order to secure the sales he is bringing in.” The regional manager then approved the request. Soon thereafter, the country manager said of his meeting with the foreign official: “Things went well (how couldn’t they—I offered him the amount he is asking for . . .). . . . My impression is that we will sta rt business again.”  Stryker Greece made the donation to the Greek University in three installments, each of which was improperly booked as a legitimate marketing expense in an account entitled “Donations and Grants.”

Based on the above allegations, the SEC found that Stryker violated the FCPA’s books and records and internal controls provisions.

In the SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated:

“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed.  Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”

As noted in the SEC’s release, the administrative order “requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million.  Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of the FCPA’s books and records and internal controls provisions.

The Stryker action is yet another example of the SEC obtaining a disgorgement remedy without finding or charging violations of the FCPA’s anti-bribery provisions.  (See here for a prior post on no-charged bribery disgorgement).

The SEC order also contains a separate section titled “Stryker’s Remedial Efforts” and states:

“In response to the Commission’s investigation, Stryker retained outside counsel to assist Stryker in conducting an internal investigation into Stryker’s compliance with the FCPA in the jurisdictions that were the subject of the staff’s inquiry, as well as in jurisdictions where issues arose through Stryker’s audit and hotline processes. Stryker voluntarily produced reports and other materials to the Commission staff summarizing the findings of its internal investigation. In total, Stryker produced over 800,000 pages of documents at Stryker’s expense, including courtesy translations of numerous key documents.  Since the time of the conduct detailed above, Stryker implemented a company wide anti-corruption compliance program, which includes: (a) enhanced corporate policies and standard operating procedures setting forth specific due diligence and documentation requirements for relationships with foreign officials, health care professionals, consultants, and distributors; (b) compliance monitoring and corporate auditing specifically tailored to anticorruption, including the hiring of a chief compliance officer and a sizeable full-time dedicated staff in both its internal audit and compliance functions to ensure FCPA compliance and the implementation of periodic self-assessments; (c) enhanced financial controls and governance; (d) expanded anti-corruption training to all Stryker employees; and (e) the maintenance of an Ethics Hotline which serves as a mechanism for employees to report any actual or suspected illegal or unethical behavior.  In addition to its internal anti-corruption enhancements, from 2007 through the present, Stryker engaged a third-party consultant to perform FCPA compliance assessments and compile written reports for Stryker’s operations in dozens of foreign jurisdictions across the world at least annually. Stryker voluntarily produced documents that permitted the Commission staff to assess how Stryker’s internal audit and compliance functions used the results of each of the assessments to implement additional enhancements to its infrastructure, to target jurisdictions for future assessments, and to create management action plans in collaboration with local management.  Based on the improvements described above, Stryker has demonstrated a commitment to designing and funding a meaningful compliance program in order to prevent and detect violations of the FCPA and other applicable anti-bribery laws.”

In this Wall Street Journal Risk and Compliance post, a Stryker spokesperson stated that the company “was advised that the Justice Department closed its investigation.”

Matthew Kipp (Skadden) represented Stryker.

Stryker’s November 2007 quarterly filing stated:

“In October 2007, the Company disclosed that the United States Securities and Exchange Commission has made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries.”

Thus, the time period from first instance of public disclosure of FCPA scrutiny to actual settlement was 6 years.

Yesterday Stryker’s stock was up approximately .07%.

*****

A few upcoming events that may be of interest to East Coast readers.

On Wednesday, October 30th, Brooklyn Law School will host a panel discussion of practitioners, in-house counsel, and professors titled “New Developments in FCPA Enforcement” (see here for more information).

On Saturday, Nov. 10th, I will be participating in a panel titled “Anti-Corruption Initiatives in the Arab World” as part of Harvard’s Arab Weekend.  (To learn more about the event and the other panelists, see here).

Philips Resolves First Corporate FCPA Enforcement Action Of The Year

Wednesday, April 10th, 2013

A Netherlands-based company with shares listed on the New York Stock Exchange is the parent of a group of companies including a Polish subsidiary that sells medical equipment to Polish healthcare facilities.  Between six and fourteen years ago “in at least 30 transactions” employees of the Polish subsidiary, without any mention of parent company knowledge or approval, ”made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded” to the subsidiary.

The end result?

Why of course $4,515,178 to the U.S. treasury.

Recently the SEC issued (here) an administrative cease and desist order against Koninklijke Philips Electronics N.V. (“Philips”).  The action is the first corporate FCPA enforcement action of 2013.

The SEC Order states, in pertinent part, as follows.

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Philips. The violations took place through Philips’s operations in Poland from at least 1999 through 2007. The violations relate to improper payments made by employees of Philips’s Polish subsidiary, Philips Polska sp. z o.o. (“Philips Poland”) to healthcare officials in Poland regarding public tenders proffered by Polish healthcare facilities to purchase medical equipment.”

[...]

“Since at least 1999, Philips has participated in public tenders to sell medical equipment to Polish healthcare facilities. From 1999 through 2007, in at least 30 transactions, employees of Philips Poland made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded to Philips.”

“Representatives of Philips Poland entered into arrangements with officials of various Polish healthcare facilities whereby Philips submitted the technical specifications of its medical equipment to officials drafting the tenders who incorporated the specifications of Philips’ equipment into the contracts. Incorporating the specifications of Philips’ equipment in the tenders’ requirements greatly increased the likelihood that Philips would be awarded the bids.”

“Certain of the healthcare officials involved in the arrangements with Philips also decided whom to award the tenders, and when Philips was awarded the contracts, the officials were paid the improper payments by employees of Philips Poland.”

“The improper payments made by employees of Philips Poland to the Polish healthcare officials usually amounted to 3% to 8% of the contracts’ net value.”

“At times, Philips Poland employees also kept a portion of the improper payments as a “commission.” The Philips Poland employees involved in the improper payments often utilized a third party agent to assist with the improper arrangements and payments to Polish healthcare officials.”

“The improper payments made by employees of Philips Poland to Polish healthcare officials were falsely characterized and accounted for in Philips’s books and records as legitimate expenses. At times those expenses were supported by false documentation created by Philips Poland employees and/or third parties. Philips Poland’s financial statements are consolidated into Philips’ books and records.”

Under the heading “Discovery, Internal Investigation and Self Report,” the Order states as follows.

“Philips became aware of misconduct by Philips Poland employees in August 2007, when Polish officials conducted searches of three of Philips’ offices in Poland and arrested two Philips Poland employees.”

“In response to the search of Philips’ offices and arrests of its employees, Philips conducted an internal audit in 2007. Philips failed to discover the improper payments to Polish healthcare officials in its internal audit, but terminated and disciplined several Philips Poland employees and made substantial changes to Philips Poland’s management and significant revisions to the company’s internal controls.”

“In December 2009, the Prosecutor’s Office in Poznan, Poland, indicted 23 individuals, including three former Philips Poland employees and 16 healthcare officials, for violating laws related to public tenders for the purchase of medical equipment. That indictment described the improper payments discussed in this Order.”

“In response to the Polish authorities’ indictment, Philips conducted an internal investigation. The findings of the investigation supported the allegations of the 2009 indictment and revealed that Philips Poland employees had made unlawful payments to Polish healthcare officials, that its books, records and accounts failed to accurately account for the improper payments and that its internal controls failed to ensure that transactions were properly recorded by Philips in its books and records.”

“In early 2010, Philips self-reported its internal investigation to the staff of the Commission and to the Department of Justice. As the internal investigation progressed, Philips shared the results of the investigation with the staff and undertook significant remedial measures.”

Under the heading “Remedial Measures,” the Order states as follows.

“In response to its internal audit and investigation, Philips terminated and disciplined several Philips Poland employees and installed new management at Philips Poland, as stated above. Philips also retained three law firms and two auditing firms to conduct the investigation and design remedial measures to address weaknesses in its internal controls. Included in changes to internal controls, Philips established strict due diligence procedures related to the retention of third parties, formalized and centralized its contract administration system and enhanced its contract review process, and established a broad-based verification process related to contract payments. In addition, Philips has made significant revisions to its Global Business Principles policies and continually revises the policies to keep them current and relevant. Philips also established and enhanced an anti-corruption training program that includes a certification process and a variety of training applications to ensure broad-based reach and effectiveness.”

Based on the above conduct, the SEC found that Philips violated the FCPA’s books and records and internal control provisions.  The Order states as follows.

“Employees of Philips Poland made improper payments to healthcare officials in Poland to increase the likelihood that Philips would be awarded public tenders to sell medical equipment to Polish healthcare facilities. The payments were improperly recorded in Philip’s books and records as legitimate expenses. Philips Poland employees also utilized falsified records to support the false accounting entries. Accordingly, as a result of its misconduct, Philips failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected its transactions and the disposition of its assets …”

“Philips Poland’s improper payments to healthcare officials in Poland related to at least 30 public tenders over a period of eight years. Philips’s internal controls failed to detect or prevent the improper payments and false recordings of those transactions during that time. As a result, Philips failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded by Philips in its books and records. Philips also failed to implement an FCPA compliance and training program commensurate with the extent of its international operations. Accordingly, Philips violated [the internal control provisions].”

Without admitting or denying the SEC’s findings, Philips consented to entry of the Order prohibiting future FCPA violations and agreed to pay disgorgement of $3,120,597 and prejudgment interest of $1,394,581.  The Order further states that Philips “acknowledges that the Commission is not imposing a civil penalty based upon its cooperation in a Commission investigation and related enforcement action.”

A few random comments regarding the Philips FCPA enforcement action.

As noted in the SEC Order, Philips retained “three law firms and two auditing firms to conduct the investigation and design remedial measures.”  Wow.  There is a reason I call it FCPA Inc. and the business of bribery.

Just what does the SEC mean when it says that Philips failed to implement an FCPA compliance and training program “commensurate with the extent of its international operations.”  As noted in this prior post discussing how the November 2012 FCPA Guidance can be used as a useful measuring stick for future enforcement activity, I highlighted the following statements from the Guidance.

“The ‘in reasonable detail’ qualification [of the FCPA’s books and records provisions] was adopted by Congress ‘in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.’ [...] The term ‘reasonable detail’ is defined in the statute as the level of detail that would ‘satisfy prudent officials in the conduct of their own affairs.’ Thus, as Congress noted when it adopted this definition, ‘[t]he concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.’” (Pg. 39)

“Like the ‘reasonable detail’ requirement in the books and records provision, the [FCPA’s internal control provisions] defines ‘reasonable assurances’ as ‘such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.’ The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provisions gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.” (Pg. 40)

The Philips enforcement action involved Polish healthcare officials.  As noted in this prior post, in 2012, 50% of corporate FCPA enforcement actions involved, in whole or in part, foreign health care providers.

The Philips enforcement action is similar to prior SEC administrative actions against foreign issuers Allianz and Diageo (see here and here for prior posts).  As noted in the previous posts, 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 in the Philips action does not contain any findings concerning any U.S. nexus in regards to the payments at issue.

Despite the absence of FCPA anti-bribery charges or findings, the SEC still sought a disgorgement remedy.  The Philips enforcement action is thus another example of “no-charged bribery disgorgement.”  See here for criticism of such actions 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.”

Because the conduct at issue in the Philips enforcement action occurred between six to fourteen years ago, you may be wondering about statute of limitations issues given the Supreme Court’s recent Gabelli decision.  As noted in this prior post, from the perspective of SEC FCPA enforcement against corporations, the Gabelli case is, unfortunately, unlikely to have much impact.  Cooperation will continue to be the name of the game and corporations facing FCPA scrutiny will likely continue to waive statute of limitations arguments or otherwise toll statute of limitations as evidence of their cooperation.

From SOE Employees To Health Care Providers – The “Foreign Officials” Of 2012

Thursday, January 10th, 2013

A “foreign official.”

Without one, there can be no FCPA anti-bribery violation (civil or criminal).  Who were the “foreign officials” of 2012 (at least from an enforcement perspective – recognizing of course that the meaning of this key FCPA element is the subject of much on-going dispute including a historic appellate court challenge – see here for links to the briefing).

This post, describes the “foreign officials” from 2012 corporate DOJ and SEC FCPA enforcement actions.

There were 12 core corporate enforcement actions in 2012.  Of the 12 enforcement actions, 5 (42%) involved, in whole or in part, employees of alleged state-owned or state-controlled entities (“SOEs”).  These entities ranged from oil and gas companies, nuclear power plants, and airlines.  In 2011, 81% of corporate enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 29-41).  In 2010, 60% of corporate FCPA enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 108-119).  In 2009, 66% of corporate FCPA enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 410-44).  As to whether Congress intended employees of SOEs to be “foreign officials” under the FCPA, see here for my “foreign official” declaration.

Even though 42% of 2012 corporate enforcement actions involved, in whole or in part, employees of alleged SOEs, the bigger “foreign official” story from 2012 was the number of enforcement actions based, in whole or in part, on the enforcement theory that various foreign health care providers (such as physicians, nurses, mid-wives, lab personnel, etc.) are “foreign officials” under the FCPA.  Of the 12 corporate enforcement actions in 2012, 6 (50%) involved, in whole or in part, foreign health care providers.  See here for a prior post on the origins and prominence of this enforcement theory.

Combining enforcement actions that involved, in whole or in part, SOE employees with enforcement actions that involved, in whole or in part, foreign health care providers, the result is 10 of 12 enforcement actions (83%).  The two exceptions are BizJet/Lufthansa and perhaps Oracle (although the SEC’s allegations as to “foreign officials” are general and vague).

The remainder of this post describes (as per DOJ/SEC allegations) the “foreign officials” of 2012.  As is apparent from the specific descriptions below, in certain instances the enforcement agencies describe the “foreign official” with reasonable specificity; in other instances with virtually no specificity.

[Note:  certain of the enforcement actions below technically only involved FCPA books and records and internal control charges.  As most readers know, actual charges in most FCPA enforcement actions hinge on voluntary disclosure, cooperation, collateral consequences, and other non-legal issues.  Thus, even if an FCPA enforcement action is resolved without FCPA anti-bribery charges, the actions remain very much about the "foreign officials" involved.  As I've said before, if an employee of a U.S. company consistently entertains his brother-in-law in the corporate suite and seeks reimbursement for "client entertainment" you will not be reading about this FCPA books and records and internal controls enforcement action]

Marubeni

DOJ

As in prior Bonny Island bribery enforcement actions, the “foreign officials”  were Nigeria LNG Limited (“NLNG”) officers and employees,  NLNG is majority owned by multinational oil companies and Nigerian National Petroleum Corporation (“NNPC”) owns 49% of NLNG and “through the NLNG board members appointed by NNPC, among other means, the Nigerian government exercised control over NLNG, including but not limited to the ability to block the award of EPC contracts.”  In addition, the Marubeni enforcement action (like the prior enforcement actions) generically refer to the other Nigerian government officials.

Smith & Nephew

DOJ

“Greece has a national healthcare system wherein most Greek hospitals are publicly owned and operated.  Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their officials capacities.  Therefore, such HCPs in Greece are “foreign officials” as that term in defined in the FCPA …”.

SEC

“Greece has a national health care system wherein most Greek hospitals are publicly-owned and operated.  Healthcare providers, including doctors, who work at publicly-owned hospitals are government employees, providing healthcare services in their official capacities. The public doctors in Greece are “foreign officials” as that term is defined in the FCPA”

BizJet / Lufthansa

DOJ

Foreign government customers, including the Mexican Federal Police, the Mexican President’s Fleet [the air fleet for the President of Mexico], Sinaola [the air fleet for the Governor of the Mexican State of Sinaloa], the Panama Aviation Authority, and other customers

The foreign officials are identified as follows:  Official 1 – “a Captain in the Mexican Federal Police,”  Official 2 – “a Colonel in the Mexican President’s Fleet,” Official 3 – “a Captain in the Mexican President’s Fleet,” Official 4 – “employed by the Mexican President’s Fleet,” Official 5 – “a Director of Air Services at Sinaloa,” and Official 6 – “a chief mechanic at the Panama Aviation Authority.”

Biomet

DOJ

“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.”

SEC

“public doctors employed by public hospitals and agencies in Argentina, Brazil, and China”

Data Systems and Solutions

DOJ

Ignalina Nuclear Power Plant (“INPP”) is described as a “state-owned nuclear power plant in Lithuania and an ‘agency’ and ‘instrumentality’ of a foreign government

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).

Orthofix

DOJ

“Instituto Mexicano del Seguro Social (“IMSS”) was a social-service agency of the Mexican government that provided public services to Mexican workers and their families. IMSS was created in 1943 by order of the Mexican president, who continued to select IMSS’s head, and subsequent changes to IMSS programs were made by acts of Mexico’s legislature. IMSS provided health care services to tens of millions of people, including workers, their families, and pensioners, at hospitals that IMSS owned and operated throughout Mexico. Mexico’s government funded IMSS through taxation and compulsory contributions.”

“Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)”

“Mexican Official 2 – the purchasing director of Magdelena de las Salinas”

“Mexican Official 3  – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)”

“Mexican Official 4 – a sub-director of IMSS”

SEC

“IMSS hospital employees”  [IMSS, the Mexican government-0wned medical care and social services provider], “certain IMSS officials”

NORDAM Group

DOJ

NPA refers to “customers in China including state-owned and -controlled entities, including airlines created, controlled, and exclusively owned by the People’s Republic of China.”

Pfizer

DOJ

“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.”

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 “foreign officials,” the information refers to “numerous [other] 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.”

SEC

“foreign officials, including doctors and other healthcare professionals employed by foreign governments” in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia.

 “foreign officials, including doctors and other healthcare professionals employed by foreign governments” in Indonesia, Pakistan, China, and Saudi Arabia.

Tyco

DOJ

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.

“employees of end-customers in Saudi Arabia, the U.A.E., and Iran, including to employees at Aramco, ENOC, Vopak, and NIGC”

General references to payments customers, including government customers, in 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.

“designers at design institutes owned or controlled by the Chinese government”

“publicly-employed healthcare professionals” in China

“a former employee of Banjarmasin provincial level public water company (PDAM) [Indonesia] and two payments to the project manager for PDAM Banjarmasin in connection with the Banjarmasin Project”, employees of PLN [a state-owned electricity company in Indonesia],

“employees of a public utility owned by the Government of Vietnam”

“a security officer employed by a government-owned mining company in Mauritania”

publicly employed health care providers in Saudi Arabia

SEC

Similar to the DOJ’s allegations above.  In addition, the SEC complaint alleges the following additional “foreign officials”

an employee of an instrumentality of the Turkish government

an employee of a government-controlled entity in Malaysia

representatives of a company majority-owned by the Egyptian government

public health care providers in Poland

Oracle

SEC

General reference in the complaint to “Indian government end-users,” Indian “government customers” and a contract with India’s Ministry of Information Technology and Communication

Allianz

SEC

“employees of state-owned entities in Indonesia”

Eli Lilly

SEC

Chinese  ”government-employed physicians”

“government health officials in a Brazilian state”

payments to “a small charitable foundation that was founded and administered by the head of one of the regional [Poland] government health authorities”

Russia “government officials or others with influence in the government,”  ”the Cypriot entities were owned by an individual associated with the distributor controlled by the member of the upper house of Russia Parliament,” “the beneficial owner of [the relevant] entity was the General Director of the government-owned distributor.”