Archive for the ‘Non-Prosecution Agreement’ Category

DOJ Prosecution of Individuals – Then vs. Now

Thursday, January 22nd, 2015

Thenvs.Yesterday’s post highlighted the following statistics concerning Foreign Corrupt Practices Act individual criminal prosecutions by the DOJ.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA criminal enforcement actions. 53 of these corporate enforcement actions were resolved solely with an NPA or DPA. In only 5 of these actions – 9% – was there related criminal charges of company employees.

More broadly, other statistics recently published on this site highlighted how in this new era of FCPA enforcement approximately 75% of corporate DOJ FCPA enforcement actions have not (at least yet) resulted in any DOJ charges against company employees.

Prior posts proposed, based on these statistics, that instead of asking the “but why was nobody charged” question in connection with most corporate DOJ FCPA criminal enforcement actions, the more appropriate question is asking whether NPAs and DPAs necessarily represent provable FCPA violations.

To best highlight how NPAs and DPAs have transformed the nature and quality of FCPA enforcement, it is useful to analyze FCPA enforcement statistics prior to the introduction of NPAs and DPAs to the FCPA context in 2004.

For starters, it must be recognized that few meaningful conclusions can be drawn when comparing early FCPA enforcement (lets say 1977 – 2004) to FCPA enforcement 2005 to the present.

Growing pains associated with a new law, and a pioneering one at that, were understandable as both business organizations and enforcement agencies alike were absorbing the law and its new expectations and challenges.  More substantively, for much of the FCPA’s history there were material differences in the law, enforcement agency policies, and the global business environment that all impacted early FCPA enforcement.  

Nor can any meaningful conclusions be drawn from comparing fine and penalty amounts in early FCPA enforcement actions to fine and penalty amounts in this new era.  For starters, the FCPA’s statutory fine and penalty amounts have changed over time.  Perhaps more significantly, criminal fine amounts in FCPA enforcement actions are rarely based on the statutory amounts, but rather based on the Alternative Fines Act, a statute passed in 2006, which can result in a fine amount up to twice the benefit the payer sought to obtain through the improper payment. Moreover, for much of the FCPA’s history, the SEC did not have authority to assess civil monetary penalties in a wide variety of securities law enforcement actions including FCPA enforcement actions, and disgorgement, a central feature of most SEC FCPA enforcement actions in this new era, was not used for most of the FCPA’s history.

Although certain historical comparisons of FCPA enforcement lack meaningful value, other comparisons are noteworthy.

For instances, while one can question how the DOJ held individuals accountable (i.e whether the criminal fines and sentences were too lenient) for most of the FCPA’s history, the DOJ did frequently hold individuals accountable when a company resolved an FCPA enforcement action.

Indeed, from 1977 to 2004, approximately 90% of DOJ criminal corporate FCPA enforcement actions RESULTED in related charges against company employees.

Compare that to FCPA enforcement in this new era when approximately 75% of DOJ criminal corporate FCPA enforcement actions HAVE NOT RESULTED (at least yet) in related charges against company employees. 

Consider also that when a DOJ criminal corporate FCPA enforcement action is resolved solely with an NPA or DPA, approximatley 90% of such actions HAVE NOT RESULTED (at least yet) in related charges against company employees.

In other words, NPAs and DPAs have significantly distorted the nature and quality of FCPA enforcement and if the statistics recently published on this site do not convince you of this, no statistics ever will.

DOJ Prosecution Of Individuals – Are Other Factors At Play?

Wednesday, January 21st, 2015

What woudl you doYesterday’s post (here) focused on DOJ FCPA individual prosecutions and highlighted the following facts and figures.

  • Since 2008, the DOJ has charged 99 individuals with FCPA criminal offenses.
  • 58% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just five cases and 78% of the individuals charged by the DOJ since 2008 have been in just eleven cases.
  • There have been 67 corporate DOJ FCPA enforcement actions since 2008 and of these actions, 50 (or 75%) have not (at least yet) resulted in any DOJ charges against company employees.

These statistics should cause alarm, including at the DOJ as it has long recognized that a corporate-fine only enforcement program is not effective and does not adequately deter future FCPA violations.   For instance, in 1986 John Keeney (Deputy Assistant Attorney General, Criminal Division, DOJ) submitted written responses in the context of Senate hearings concerning a bill to amend the FCPA. He stated as follows:

“If the risk of conduct in violation of the statute becomes merely monetary, the fine will simply become a cost of doing business, payable only upon being caught and in many instances, it will be only a fraction of the profit acquired from the corrupt activity. Absent the threat of incarceration, there may no longer be any compelling need to resist the urge to acquire business in any way possible.”

In 2010 Hank Walther (Deputy Chief Fraud Section) stated that a corporate fine-only FCPA enforcement program allows companies to calculate FCPA settlements as the cost of doing business.

In 2013 Daniel Suleiman (DOJ Deputy Chief of Staff, Criminal division) stated that “there is no greater deterrent to corporate crime that the prospect of prison time … if people don’t go to prison, then enforcement can come to be seen as merely the cost of doing business.”

More recently, Patrick Stokes (DOJ FCPA Unit Chief) stated that DOJ is “very focused” on prosecuting individuals as well as companies and that “going after one or the other is not sufficient for deterrence purposes.”

Earlier this week, Deputy Assistant Attorney General Sung-Hee Suh rightly acknowledged that “corporations do not act criminally, but for the actions of individuals.”

In my 2010 Senate FCPA testimony (here), I noted that the absence of individual FCPA charges in most corporate FCPA enforcement actions causes one to legitimately wonder whether the conduct giving rise to the corporate enforcement action was engaged in by ghosts.

Others have rightly asked the “but nobody was charged” question, including James Stewart in a New York Times column highlighted in this previous post.

However, as I stated in my Senate testimony, there is an equally plausible reason why no individuals have been charged in connection with many corporate FCPA enforcement actions.  The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.

Readers know well of the prevalence of non-prosecution and deferred prosecution agreements (NPAs / DPAs)  in the FCPA context. As highlighted in this recent post, since 2010, 86% of corporate DOJ enforcement actions have involved either an NPA or DPA.

Informed observers also understand how NPAs and DPAs, not subject to any meaningful judicial scrutiny, are often agreed to by companies for reasons of ease and efficiency, and not necessarily because the conduct at issue violates the FCPA.

Indeed, prior to becoming SEC Chair, Mary Jo White stated a “fear [that] the deferred prosecution [agreement] is becoming a vehicle to show results” (here) and former Attorney General Alberto Gonzales has stated as follows.

“It is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs; such resolution vehicles have “less of a toll” on the DOJ’s budget and such agreements “provide revenue” to the DOJ.  It is all “unfortunate”

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

Moreover, Mark Mendelsohn (former chief of the DOJ’s FCPA Unit), has talked about the “danger” of NPAs and DPAs and how “it is tempting for the [Justice Department] or the SEC…to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.” (See “Mark Mendelsohn on the Rise of FCPA Enforcement,” 24 Corporate Crime Reporter 35, September 10, 2010).

For more on the above dynamics, see my article “The Facade of FCPA Enforcement.”

Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.

In other words, perhaps the more appropriate question is not “but nobody was charged,” but rather do corporate NPAs and DPAs always represent provable FCPA violations?  For a recent excellent article asking the same general question, see here.

I set out to test this with the following working hypothesis.

  • Instances in which the DOJ brings actual criminal charges against a company or otherwise insists in the resolution that the corporate entity pleads guilty to FCPA violations, represent a higher quality FCPA enforcement action (in the eyes of the DOJ) and is thus more likely to result in related FCPA criminal charges against company employees.
  • Instances in which the DOJ resolves an FCPA enforcement action solely with an NPA or DPA, represent a lower quality FCPA enforcement action and is thus less likely to result in related FCPA criminal charges against company employees given that an individual is more likely to put the DOJ to its high burden of proof.

The below statistics provide a compelling datapoint concerning the quality and legitimacy of many corporate DOJ FCPA enforcement actions.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA enforcement actions.

  • 14 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  10 of these corporate enforcement actions – 71% – resulted in related criminal charges of company employees.
  • 53 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 9% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since the introduction of NPAs and DPAs in the FCPA context, there have been 16 such corporate enforcement actions.  In 5 of these actions – 31% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above, although it is interesting to note the following regarding 3 of these 5 instances.  The DOJ ended up dismissing the charges against Si Chan Wooh (Schnitzer Steel), John O’Shea (ABB) was not found not guilty, and Bobby Elkin (Alliance One) received a probation sentence after the sentencing judge questioned many aspects of the enforcement action (see here for the prior post).

Although NPAs and DPAs were first introduced to the FCPA context in 2004, their use by the DOJ was sporadic at first and such alternative resolution vehicles did not become a fixture of FCPA enforcement until approximately 2007.

Thus, in testing the above hypothesis, 2007 is perhaps the best starting point.  Since 2007, there have been 77 corporate DOJ FCPA enforcement actions.

  • 12 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  9 of these corporate enforcement actions – 75% – resulted in related criminal charges of company employees.
  • 50 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 10% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since 2007, there have been 15 such corporate enforcement actions.  In 4 of these actions – 26% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above.

If the above statistics do not cause one to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will.  For those who believe NPAs and DPAs always represent provable FCPA violations, the ball is now in your court to offer credible explanations for following datapoints.

Since NPAs and DPAs were introduced to the FCPA context in 2004, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 71% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 9% chance that criminal charges will be brought against a company employee.

Since 2007, when NPAs and DPAs become a fixture of DOJ FCPA enforcement, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 75% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 10% chance that criminal charges will be brought against a company employee.

[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]

Assistant Attorney General Caldwell’s Unconvincing Defense Of DPAs / NPAs

Monday, December 8th, 2014

As noted in this Global Investigations Review article, at a recent event in Paris in connection with the release of the OECD’s Foreign Bribery Report, Assistant Attorney General Lisa Caldwell defended the DOJ’s frequent use of DPAs and NPAs to resolve Foreign Corrupt Practices Act enforcement actions.  As stated in the article:

“Caldwell defended the Department of Justice’s (DoJ) reliance on settlements in FCPA cases. “In the United States we are often able to achieve much more through a settlement – a negotiated settlement – than we could achieve following conviction at trial,” she said. “We are able to impose reforms, impose compliance controls, and impose all sorts of behavioural change that a court would never be able to impose following even a conviction at trial.” Since 2009 over 50 companies have settled with the DoJ for alleged FCPA violations. Caldwell told the audience in Paris: “Companies cannot be sent to jail, so all a court can do is say you will pay ‘x’. We can say: ‘you will also have a monitor and will do all sorts of other things for the next five years, and if you don’t do them for the next five years then you can still be prosecuted’.” “In the United States system at least it is a more powerful tool than actually going to trial,” she said.

Post-enforcement action compliance obligations typically last 2-3 years, not 5 as Caldwell suggested.  Regardless, Caldwell’s defense of DPAs and NPAs is just as unconvincing as former Assistant Attorney General Lanny Breuer’s defense of DPAs and DPAs in September 2012 (see here for the prior post).

For starters, the function of the DOJ’s criminal division, as stated on its website, is to “serve the public interest through the enforcement of criminal statutes.”  Whether the function of the DOJ is, in addition, to “impose reform, impose compliance controls, and all impose all sorts of behavioral changes” on a business organization is a point of much disagreement. (See, e.g., “Prosecutors in the Boardroom“).

Regardless of one’s thoughts on whether the DOJ’s criminal division ought to play the role of a quasi-regulator, the notion that the DOJ is powerless to effect corporate change through old-fashion law enforcement (that is enforcing the FCPA without use of NPAs and DPAs) is plainly false.

For instance, the Siemens enforcement action did not involve the use of an NPA or DPA.  Yet, it is clear from the plea agreement, sentencing memorandum, and judgment that the DOJ was able to obtain the reforms, compliance controls and behavioral changes it wanted.  More recently in 2014, the Alcoa enforcement action was resolved without an NPA or DPA.  The plea agreement and judgment in the case (see here and here) again demonstrate that the DOJ was again able to obtain the reform, compliance controls and behavioral changes it wanted.

To return to Caldwell’s words, perhaps NPAs and DPAs are indeed a more powerful tool in FCPA enforcement actions than actually going to trial, but then again the DOJ is 0-2 in FCPA history when put to its ultimate burden of proof by a business organization in an FCPA enforcement action.

Just because the DOJ may have difficulty proving FCPA violations against business organizations and just because the DOJ is troubled – with good reason – by traditional notions of corporate criminal liability, does not mean the DOJ needs to continue to champion the alternate universe of NPAs and DPAs it has created.

*****

To read a different perspective on Caldwell’s recent remarks, see here from Tom Fox at the FCPA Compliance and Ethics Blog.

Friday Leftovers

Friday, November 28th, 2014

Roundup2Scrutiny update, a double standard, ripples, that’s interesting, and for the reading stack.  It’s all here in a leftovers edition of the Friday roundup.

Scrutiny Update

One of the longest-lasting instances of FCPA scrutiny concerns PBSJ Corporation (a global engineering and architectural firm) that first disclosed FCPA scrutiny in December 2009.  PBSJ was subsequently acquired by WS Atkins (a U.K. company) and WS Atkins disclosed in a recently regulatory filing as follows.

“There are ongoing discussions regarding the longstanding and previously reported Department of Justice and Securities and Exchange Commission enquiries relating to potential Foreign Corrupt Practices Act violations by the PBSJ Corporation prior to its acquisition by the Group. We anticipate resolution of this matter before the end of the current financial year.”

Double Standard?

Several FCPA enforcement actions or instances of FCPA scrutiny have been based on providing things of value such as meals, entertainment and consulting fees to foreign physicians.

Against this backdrop, the Wall Street Journal reports:

“As it fights to buy Botox maker Allergan Inc.,  Valeant Pharmaceuticals International Inc. is investing cash and time wooing the doctors it would need on its side after a takeover. A centerpiece of the effort: Valeant said it met with a total of 45 influential cosmetic surgeons and dermatologists in September at events in Aspen, Colo., and Palm Beach, Fla. Valeant paid for the physicians’ airfares, two-night stays at luxury hotels and meals. The company also agreed to provide consulting fees that could amount to as much as $30,000, according to doctors who attended the meetings. Valeant, a smaller player than Allergan in cosmetic medicine, must win over doctors if it wrests control of the Botox maker, since it will rely on the physicians for business. Valeant said the pursuit seems to be paying off. Several doctors who attended the sessions, of what Valeant called its special advisory committee, said they were won over by the company’s plans for Allergan—including attracting patients to physicians’ offices and introducing new products.”

Ripples

My recent article “Foreign Corrupt Practices Act Ripples“ highlights that settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.

One such ripple is offensive use of the FCPA to further advance a litigating position and that is just what Instituto Mexicano Del Seguro Social (“IMSS”) has done in this recent civil complaint against Orthofix International.

You may recall that in July 2012 Orthofix resolved a $7.4 million FCPA enforcement action based on allegations that its Mexican subsidiary paid bribes totaling approximately $317,000 to Mexican officials in order to obtain and retain sales contracts from IMSS. (See here for the prior post).

In the recent civil complaint, IMSS uses the core conduct at issue in the FCPA enforcement action and alleges various RICO claims, fraud claims, and other claims under Mexican law.

That’s Interesting

As has been widely reported (see here for instance), “President Obama called on the Federal Communications Commission … to declare broadband Internet service a public utility, saying that it was essential to the economy …”.

That’s interesting because – as informed readers know – in the 11th Circuit’s “foreign official” decision the court concluded that an otherwise commercial enterprise can be a “instrumentality” of a government if the “entity controlled by the government … performs a function the controlling government treats as its own.”  Among the factors the court articulated for whether an entity performs a “function the controlling government treats as its own” was “whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

Reading Stack

Several law firm client alerts regarding the DOJ’s recent FCPA Opinion Procedure release concerning successor liability (see herehere, here).  In this alert, former DOJ FCPA Unit Chief Charles Duross leads with the headline “Is DOJ Evolving Away from the Halliburton Opinion Standard?” (a reference to this 2008 Opinion Procedure release).

From Foley & Larder and MZM Legal (India) – “Anti-Bribery and Foreign Corrupt Practices Act Compliance Guide for U.S. Companies Doing Business in India.”

Recent interviews (here and here) with Richard Bistrong, a real-world FCPA violator and undercover cooperator.  See here for my previous Q&A with Bistrong.  As noted here, Bistrong recently spoke to my FCPA class at Southern Illinois University School of Law. Having the ability to hear from an individual who violated the law my students were studying, and being able to hear first-hand of real-world business conditions, was of tremendous value to the students and added an important dimension to the class.

Should the government reconsider its use of deferred prosecution agreements?  That is the question posed in this New York Times roundtable (in the context of recent bank prosecutions).

Finally for your viewing pleasure, an FCPA-related interview here of SciClone’s CEO (a company that has been under FCPA scrutiny since approximately August, 2010).

*****

A good weekend to all.

Bio-Rad Laboratories Agrees To Pay $55 Million To Resolve FCPA Enforcement Action

Tuesday, November 4th, 2014

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against Bio-Rad Laboratories Inc. based on alleged conduct in Russia, Thailand and Vietnam.

The enforcement action involved a DOJ non-prosecution agreement and an SEC administrative order.  Bio-Rad agreed to pay approximately $55 million to resolve the alleged FCPA scrutiny ($14.35 million in the DOJ action; and $40.7 million in the SEC action).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents.

DOJ Enforcement Action

The enforcement action focused on the conduct of Bio-Rad Laboratorii OOO (“Bio-Rad Russia”) and Bio-Rad SNC as well as the alleged knowledge of certain Bio-Rad managers concerning various Russian business practices.

According to the NPA, Bio-Rad Russia is:

“[A] wholly owned subsidiary of BIO-RAD located in Moscow, Russia. Bio-Rad Russia primarily sold BIO-RAD clinical diagnostic products, such as HIV testing kits. Approximately 90% of its clientele were government customers, most notably the Russian Ministry of Health. In order to obtain certain Russian government contracts, Bio-Rad Russia was required to participate in public tender processes.”

According to the NPA, Bio-Rad SNC is:

“[A]n indirectly wholly-owned subsidiary of Bio-Rad headquartered in Marnes-la-Coquette, France.  Bio-Rad SNC manufactured, sold, and distributed Bio-Rad products worldwide.”

According to the NPA, Agent 1 (described as an agent retained by Bio-Rad SNC with respect to sales in Russia) assisted Bio-Rad Russia in connection with certain governmental sales in Russia and established Intermediary Companies (described as Agent 1 affiliated companies in Panama, the United Kingdom, and Belize) which Bio-Rad SNC retained “purportedly to perform extensive services on its behalf in Russia.”  However, according to the NPA, Intermediary Companies “were located offshore and had no employees aside from Agent 1.”  Moreover, according to the NPA, “Intermediary Companies used a phony address on its invoices that belonged to a Russian government agency.”

According to the NPA, Manager 1 (described as a high-level manager of Bio-Rad’s Emerging Markets sales region, which included Rusia, from 2004 to 2010 and based in Bio-Rad’s corporate offices in California) “authorized Bio-Rad SNC’ agreements with the Intermediary Companies without conducting any due diligence on the Intermediary Companies.”

According to the NPA,

“Bio-Rad SNC paid the Intermediary Companies a commission of 15-30% purportedly in exchange for various services outlined in the agency contracts, including acquiring new business by creating and disseminating promotional materials to prospective  customers, installing Bio-Rad products and related equipment, training customers on the installation and use of Bio-Rad products, and delivering Bio-Rad products.

The Intermediary Companies, however, lacked the capabilities to perform these contractually defined services. In some instances, the Intermediary Companies submitted invoices suggesting that they performed distribution services in connection with certain contracts. The Intermediary Companies did not perform these services, and would have been significantly overpaid even had they performed such services.”

According to the NPA:

“Manager 1, Manager 2 [described as a high-level accounting manager of Bio-Rad's Emerging Markets sales region, which included Russia, from around 2004 to 2010 and based in Bio-Rad's corporate offices in California] and Manager 3 [described as a high-level manager of Bio-Rad Russia from 2007 to 2011 and based in Moscow] reviewed and approved commission payments to Intermediary Companies, despite knowing that Intermediary Companies and Agent 1 were not performing the services from which they were being paid.”

The NPA further states that Manager 1, Manager 2, and Manager 3 used the code word “bad debt” when communicating with each other to refer to the Intermediary Companies’ commission payments.  According to the NPA, Manager 2 “instructed lower-level Bio-Rad SNC finance employees to ‘talk with codes’ when communicating about the Intermediary Companies’ invoices and that Manager 3 requested that Intermediary Company invoices be paid in installments of less than $200,000 each so as to avoid additional approvals required by Bio-Rad policy for payment over $200,000.

According to the NPA,

“The payments to the Intermediary Companies were made by Bio-Rad SNC and falsely recorded as “commission payments” in its books. Moreover, Manager 1 and Manager 2, who falsely described the commission payments as “bad debt” in e-mails, knew that Bio-Rad SNC maintained the bogus contracts with the Intermediary Companies, as well as the numerous associated false invoices Bio-Rad SNC had paid, as part of its books and records. Bio-Rad SNC’s books, records, and financial accounts were consolidated into Bio-Rad’s books and records and reported by Bio-Rad in its financial statements. Thus, Manager 1 and Manager 2 knowingly caused BIO-RAD to falsify its books and records.”

The NPA further states:

“Bio-Rad maintained a set of corporate policies, but Bio-Rad’s international offices were given autonomy by the company to implement and maintain adequate controls. However, Manager 1 and Manager 2 failed to implement adequate controls for Bio-Rad’s Emerging Markets sales region, including controls related to its operations in Russia where those managers knew that the failure to implement these controls allowed Agent 1 and the Intermediary Companies to be paid significantly above-market commissions for little or no services that were supported by false contracts and invoices. For example, Manager 1 and Manager 2 did not put in place a system of controls to conduct due diligence on third party agents, such as the Intermediary Companies, to ensure documentation supporting payments to third parties, or to monitor such payments. Nor did the company implement adequate testing of the controls that should have been in place.

Manager 1 and Manager 2′s knowing failure to implement adequate internal accounting controls with respect to Russia was due, at least in part, to their desire to continue to obtain and retain contracts with the Russian government. Bio-Rad Russia won 100% of its government contracts when Agent 1 was involved and lost its first major Russian government  contract after terminating Agent 1 in or around 2010.”

According to the NPA:

“In addition to the knowing failure to implement an adequate system of internal accounting controls, prior to the discovery of the misconduct in Bio-Rad did not maintain an adequate compliance program. The company did not provide any FCPA training to its employees and, although Bio-Rad had a business ethics policy and code of conduct that prohibited bribery and was posted on the company’s intranet site, many employees of Bio-Rad and its subsidiaries were unaware of its existence. Moreover, the code was only available in English despite the fact that a significant number of employees working for Bio-Rad’ss overseas subsidiaries did not speak or understand English well enough to understand the code.”

“Bio-Rad also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct. However, Manager 1 and Manager 2 did not take steps to ensure such compliance in Emerging Markets, and Bio-Rad did not take sufficient steps to monitor its international offices. As a result, Bio-Rad’s international offices did not undertake appropriate risk-based due diligence in connection with the retention of agents and business partners and, further, did not have distribution and agency agreements with appropriate anti-corruption terms. Bio-Rad also did not undertake periodic risk assessments of its compliance program. Bio-Rad’s failure to maintain an adequate compliance program significantly contributed to the company’s inability to prevent the misconduct in Russia, as well as improper payments to government officials in Vietnam and Thailand.”

The NPA states as follows.

“The [DOJ] enters into this Non-Prosecution Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) following discovery of potential FCPA violations during the course of an internal audit, the Company’s audit committee retained independent counsel to conduct an internal investigation and voluntarily disclosed to the [DOJ] the misconduct described in the Statement of Facts; (b) the Company has fully cooperated with the [DOJ's] investigation, including conducting an extensive internal investigation in several countries, voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, summarizing its findings, translating numerous documents, and providing timely reports on witness interviews for the [DOJ]; (c) the Company has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional FCPA compliance procedures, including due diligence and contracting procedures for intermediaries, instituting heightened review of proposals and other transactional documents for all Company contracts, closing its Vietnam office after learning of improper payments by its Vietnam subsidiary, and conducting extensive anti-corruption training throughout the global organization; (d) the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment B to this Agreement; and (e) the Company has agreed to continue to cooperate with the [DOJ] in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to possible violations of the FCPA …”.

Pursuant to the NPA, which has a term of two years, Bio-Rad admitted, accepted and acknowledged that it was responsible for the acts of its employees and agents as set forth in the Statement of Facts.  The NPA also contains a “muzzle clause” in which Bio-Rad expressly agree[d] that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for the Company make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company …”.

In the NPA, Bio-Rad also agreed to undertake a host of compliance enhancements and report to the DOJ during the two-year term of the NPA “regarding mediation and implementation of the compliance program and internal controls, policies and procedures” described in the NPA.

In the DOJ release, Assistant Attorney General Leslie Caldwell stated:

“Public companies that cook their books and hide improper payments foster corruption.  The department pursues corruption from all angles, including the falsification of records and failure to implement adequate internal controls.   The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”

Special Agent in Charge David Johnson of the FBI’s San Francisco Field Office stated:

“The FBI remains committed to identifying and investigating violations of the Foreign Corrupt Practices Act. This action demonstrates the benefits of self-disclosure, cooperation, and subsequent remediation by companies.”

The release further states:

“The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation.  That cooperation included voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, and summarizing the findings of its internal investigation.  In addition, Bio-Rad has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional due diligence and contracting procedures for intermediaries, and conducting extensive anti-corruption training throughout the organization.”

SEC Enforcement Action

The SEC’s order is based on the same core conduct alleged in the DOJ action as relevant to Russia business and also contains allegations concerning conduct in Vietnam and Thailand.

In summary fashion, the SEC’s order states:

“From approximately 2005 to 2010, subsidiaries of Bio-Rad made unlawful payments in Vietnam and Thailand to obtain or retain business. During the same period, Bio-Rad’s subsidiary paid certain Russian third parties, disregarding the high probability that at least some of the money would be used to make unlawful payments to government officials in Russia. With respect to Russia, one of Bio-Rad’s foreign subsidiaries paid three off-shore agents (the“Russian Agents”) for alleged services in connection with sales of its medical diagnostic and life science equipment to government agencies. These agents were not legitimate businesses, and despite receiving large commissions, they did not provide the contracted-for services. In paying these agents, Bio-Rad’s foreign subsidiary demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of the commissions to pay foreign officials to obtain profitable government contracts. The General Manager (“GM”) of Bio-Rad’s Emerging Markets sub-division and the Emerging Markets Controller, both employees of the parent company (collectively, “the Emerging Markets managers”) ignored red flags, which permitted the scheme to continue for years. In Vietnam and Thailand, Bio-Rad’s foreign subsidiaries used agents and distributors to funnel money to government officials. In total, Bio-Rad made $35.1 million in illicit profits from these improper payments.

In violation of Bio-Rad’s policies, Bio-Rad’s foreign subsidiaries did not record the payments in their own books in a manner that would accurately or fairly reflect the transactions. Instead they booked them as commissions, advertising, and training fees. These subsidiaries’ books were consolidated into the parent company’s books and records. During the relevant period, Bio-Rad also failed to devise and maintain adequate internal accounting controls.”

As to the Vietnam and Thailand conduct, the SEC’s order focuses on Bio-Rad Laboratories (Singapore) Pte. Limited (“Bio-Rad Singapore”) described as a wholly-owned subsidiary located in Singapore and Diamed South East Asia Ltd. (“Diamed Thailand”) described as  a 49%-owned subsidiary of Diamed AG (Switzerland) that was acquired by Bio-Rad in October 2007.  According to the order, local majority owners ran Diamed Thailand’s operations until 2011, when Bio-Rad bought out their interest in the company.

Under the heading “Facts in Vietnam,” the order states:

“From at least 2005 to the end of 2009, Bio-Rad maintained a sales representative office in Vietnam. A country manager supervised the Vietnam Office’s sales activities, and was authorized to approve contracts up to $100,000 and sales commissions up to $20,000. Vietnam’s country manager reported to Bio-Rad Singapore’s Southeast Asia regional sales manager (“RSM”), who in turn reported to the Asia Pacific GM.

From 2005 through 2009, the country manager of the Vietnam office authorized the payment of bribes to government officials to obtain their business. At the direction of the country manager, the sales representatives made cash payments to officials at government-owned hospitals and laboratories in exchange for their agreement to buy Bio-Rad’s products.

In 2006, the RSM first learned of this practice from a finance employee. She raised concerns about it to the Vietnam Office’s country manager, who informed her that paying bribes was a customary practice in Vietnam. On or about May 18, 2006, the Vietnamese country manager wrote in an email to the RSM and the Bio-Rad Singapore finance employee that paying third party fees “[wa]s outlawed in the Bio-Rad Business Ethics Policy,” but that Bio-Rad would lose 80% of its Vietnam sales without continuing the practice. In that same email, the country manager proposed a solution that entailed employing a middleman to pay the bribes to Vietnamese government officials as a means of insulating Bio-Rad from liability. Under the proposed scheme, Bio-Rad Singapore would sell Bio-Rad products to a Vietnamese distributor at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes.

The RSM and the Asia Pacific GM were aware of and allowed the payments to continue. Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

Under the heading “Facts in Thailand,” the order states:

“Bio-Rad acquired a 49% interest in Diamed Thailand as part of its acquisition of Diamed AG (Switzerland) in October 2007. Bio-Rad performed very little due diligence on Diamed Thailand prior to the acquisition.

Diamed Thailand’s local majority owners managed the subsidiary. Bio-Rad’s Asia Pacific GM was responsible for working and communicating with Diamed Thailand’s majority owners and distributors.

Prior to the October 2007 acquisition, Diamed Thailand had an established bribery scheme, whereby Diamed Thailand used a Thai agent to sell diagnostic products to government customers. The agent received an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.

The scheme continued even after Bio-Rad acquired Diamed Thailand. Diamed Thailand renewed the contract with the distributor in June 2008, but unbeknownst to Bio-Rad, the distributor was partially owned by one of Diamed Thailand’s local Thai owners.

Bio-Rad’s Asia Pacific GM learned of Diamed Thailand’s bribery scheme while attending a distributor’s conference in Bangkok in March 2008. At the conference, Diamed Thailand’s local manager informed him that some of Diamed Thailand’s customers received payments, which the Asia Pacific GM understood to mean kickbacks. The Asia Pacific GM instructed Bio-Rad Singapore’s controller to investigate the matter. The controller confirmed to the Asia Pacific GM that Diamed Thailand was bribing government officials through the distributor. Despite these findings, the Asia Pacific GM did not instruct Diamed Thailand to stop making the improper payments to the distributor.

From 2007 to early 2010, Diamed Thailand improperly paid a total of $708,608 to the distributor, generating gross sales revenues of $5.5 million to Diamed Thailand. These  payments were recorded as sales commissions. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

The SEC’s order found that:

“Bio-Rad violated [the FCPA's anti-bribery provisions] because Bio-Rad’s Emerging Markets managers demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of Bio-Rad Russia’s sales commission payments to bribe Russian government officials in exchange for awarding the company profitable government contracts. These managers knew the Russian Agents operated as mere shell entities. They also knew that, among other things, the commissions were large, and that the Russian Agents did not have the resources to perform any of the contracted-for services set forth in their agreements. Nevertheless, the managers approved all of their agreements, and authorized $4.6 million in payments to the Russian Agents’ off-shore accounts even though many of the payment requests and invoices raised substantial questions as to their legitimacy. Finally, the same Emerging Markets managers communicated about the Russian Agents under cover of secrecy, which further calls in question their legitimacy. These red flags surfaced repeatedly over a five year period.”

The SEC’s order also found violations of the books and records and internal controls provisions based on the Russia, Vietnam, and Thailand conduct.  As to internal controls, the order states:

“[A]lthough [Bio-Rad] had an ethics policy prohibiting the payment of bribes and various policies and procedures requiring accurate books and records, its systems of internal controls proved insufficient to provide reasonable assurances that such payments would be detected and prevented.”

Under the heading, “Self-Disclosure, Cooperation and Remedial Efforts,” the order states:

“Bio-Rad made an initial voluntary self-disclosure of potential FCPA violations to the Commission staff and the Department of Justice in May 2010, and immediately thereafter Bio-Rad’s audit committee retained independent counsel to conduct an investigation of the alleged violations. The audit committee conducted a thorough internal investigation, and subsequently expanded it voluntarily to cover a large number of additional potentially high-risk countries. The investigation included over 100 in-person interviews, the collection of millions of documents, the production of tens of thousands of documents, and forensic auditing. Bio-Rad’s cooperation was extensive, including voluntarily producing documents from overseas, summarizing its findings, translating numerous key documents, producing witnesses from foreign jurisdictions, providing timely reports on witness interviews, and making employees available to the Commission staff to interview.

Bio-Rad also undertook significant and extensive remedial actions including: terminating problematic practices; terminating Bio-Rad employees who were involved in the misconduct; comprehensively re-evaluating and supplementing its anticorruption policies and procedures on a world-wide basis, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing FCPA compliance procedures, including the further development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries and policies concerning hospitality, entertainment, travel, and other business courtesies; and conducting extensive anticorruption training throughout the organization world-wide.”

As noted in the SEC’s release:

“[Bio-Rad] agreed to pay $40.7 million in disgorgement and prejudgment interest to the SEC … The company also must report its FCPA compliance efforts to the SEC for a period of two years.”

In the SEC release, Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated:

“Bio-Rad Laboratories failed to detect a bribery scheme and did not properly address red flags that such a scheme was underway. “This enforcement action, which reflects credit for Bio-Rad’s cooperation in our investigation, reiterates the importance of all companies ensuring they have the proper internal controls to prevent FCPA violations.”

Bio-Rad was represented by Douglas Greenburg (Latham & Watkins).

In this release, Norman Schwartz (Bio-Rad President and Chief Executive Officer) stated:

“The actions that we discovered were completely contrary to Bio-Rad’s culture and values and ethical standards for conducting business. We took strong, decisive action to end the problematic practices and prevent anything like this from happening in the future, including terminating involved employees and committing substantial resources to strengthening our compliance functions and financial controls. Bio-Rad prides itself on operating with the highest levels of integrity, and I am pleased that this settlement fully resolves the government’s FCPA investigation and puts this matter behind us.”

The release further states:

“Bio-Rad discovered the potential FCPA violations and self-reported them to the DOJ and SEC in May 2010. The Company subsequently conducted a thorough global investigation with the assistance of independent legal and forensic specialists, terminated involved employees and third party agents, and significantly enhanced its internal controls, procedures, training and compliance functions designed to prevent future violations. The settlement fully resolves all outstanding issues related to these investigations.”

On the day the FCPA enforcement action was announced Bio-Rad’s stock closed up .5%.