For many years, the DOJ has advanced the policy position that DPAs and NPAs “have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.” (See here for the prior post). Specifically in the Foreign Corrupt Practices Act context, the DOJ has stated that “the companies against which DPAs and NPAs have been brought have often undergone dramatic changes.” (See here for the prior post).
As highlighted here, in March 2012 Biomet resolved an FCPA enforcement action involving alleged conduct in Brazil, Argentina, and China by agreeing to pay approximately $22.8 million ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint).
Since then, FCPA Professor has chronicled (here, here and here) how Biomet’s DPA was extended, how the DOJ ultimately came to conclude that Biomet had breached its DPA based on subsequent improper conduct, and how an additional FCPA enforcement was expected.
Last week, the DOJ and SEC announced (here and here) the additional FCPA enforcement action against Zimmer Biomet Holdings (in 2015 Zimmer Holdings acquired Biomet) and Biomet. As highlighted below, a portion of the improper conduct involved the same distributor in Brazil that gave rise to the 2012 FCPA enforcement action.
The enforcement action involved this superceding criminal information against Zimmer Biomet Holdings, this criminal information against JERDS Luxembourg Holding S.A.R.L, this deferred prosecution agreement against Zimmer Biomet Holdings, and this SEC administrative order against Biomet Inc.
The overall settlement amount was approximately $30.4 million ($17.4 million paid in connection with the DOJ enforcement action and approximately $13 million paid in connection with the related SEC enforcement action).
The remainder of this post goes in-depth into the enforcement action.
Zimmer Biomet Holdings Superceding Information
The superceding information against Zimmer Biomet Holdings concerns business conduct in Brazil and Mexico and states, under the heading “The Unlawful Schemes” as follows.
At all relevant times, Biomet exported products to, and sold those products in, countries with a high risk for corruption, including Mexico and Brazil. Despite being aware of red flags and prior corruption-related misconduct at Biomet’s subsidiaries in Mexico and Brazil, and despite entering into the 2012 DPA both in connection with corruption in Brazil and other countries relating to Biomet’s distributors, and as a consequence of its failure to implement internal accounting controls, Biomet knowingly failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent bribery by its agents and business partners. As a result, Biomet’s subsidiary in Mexico paid bribes to customs officials through an agent and its sub-agents. Biomet further did not conduct appropriate due diligence on proposed agents and business partners or require adequate controls for payments to third parties, which also resulted in bribes being paid in Mexico, as well as the use of a distributor in Brazil whom Biomet knew had previously paid bribes on its behalf.
Specifically, in connection with the 2012 DPA, Biomet knew that Brazilian Distributor [described as the principal owner of Brazilian Distributor Company A and at relevant times controlled Brazilian Distributor Company B] previously had paid bribes to win business for Biomet through Brazilian Distributor Company A, and as a result, Biomet had prohibited its employees from using all companies affiliated with Brazilian Distributor. Despite knowing this, Biomet, through its employees and agents, including Biomet Executive [described as an attorney at Biomet and Biomet International during the relevant period who became a high-level attorney during that period. Biomet Executive’s responsibilities included ensuring that Biomet had effective internal accounting controls, such as third-party due diligence, and implementing Biomet’s internal accounting controls. Biomet Executive was also responsible for addressing the requirements of Biomet’s FCPA monitor with respect to Biomet International], allowed Brazilian Distributor to sell, import, and market its products through Brazilian Distributor Company B and took steps to conceal Brazilian Distributor’s relationship with Brazilian Distributor Company B.
In Mexico, despite being aware of red flags and issues concerning due diligence, and its obligations under the 2012 DPA, Biomet’s employees failed to implement due diligence procedures or payment authorization controls to ensure that payments were made in accordance with Biomet’s policies. As a result, Biomet’s subsidiaries used a customs broker whose 5 subagents bribed Mexican customs officials to allow Biomet to export mislabeled products to Mexico. Between in or around 2010 and 2013, 3i Mexico paid approximately $980,774 to the customs broker’s subagents knowing that at least part of this amount would be passed on to customs officials, and falsified corporate records to disguise the bribe payments.”
[3i Mexico is described as being owned by JERDS Luxembourg Holding S.ar.l. (“JERDS”), a wholly-owned subsidiary of IIH [Implant Innovations Holdings, LLC, a wholly-owned subsidiary of Biomet in Florida]. 3i Mexico marketed and sold Biomet 3i’s products in Mexico. 3i Mexico’s financial statements were consolidated into JERDS ‘s financial statements, which were eventually consolidated into Biomet’s financial statements.]
The information states:
“Between in or around 2009 and 2013, Biomet earned approximately $3,168,000 in profits from sales of its products in Brazil through Brazilian Distributor and Brazilian Distributor Company B, some of which Brazilian Distributor Company A had imported for Brazilian Distributor Company B.”
Between in or around 2010 and 2013, 3i Mexico paid approximately $980,774 to Mexico Customs Broker in connection with clearing Biomet 3i products.
Between in or around 2010 and 2013, 3i Mexico and Biomet’s Mexican subsidiary earned approximately $2,652,100 in profits from sales of products in Mexico that were shipped through Texas.”
Under the heading “Biomet’s Internal Accounting Controls,” the information states:
“During the relevant period, even though Biomet was aware of high corruption risks and having entered into the 2012 DPA based in part on corruption in Argentina and Brazil relating to its distributors and its failure to implement internal accounting controls, Biomet knowingly and willfully failed to devise and maintain an adequate system of internal accounting controls. In particular, and as relevant here, Biomet had inadequate internal accounting controls to, among other things: (a) ensure that the company would conduct adequate due diligence for the retention of third-party consultants and agents; (b) ensure that Biomet not continue to contract with or use directly or indirectly third-party consultants and agents who Biomet determined had engaged in corrupt practices and were prohibited from importing, storing, promoting, distributing, or marketing its products; (c) implement oversight of the payment process to ensure that payments were made pursuant to appropriate controls, including those that verified that payments were made only when invoices accurately described the goods or services rendered in exchange for the payment and the party rendering the goods or services; (d) ensure that standard contracts were used when retaining third parties who interacted with government officials; and (e) ensure that third parties did not retain subagents without Biomet’s approval, especially in high-risk areas where the third parties interacted with foreign government officials.
For example, in connection with the Brazil scheme, senior Biomet employees allowed Brazilian Distributor to purchase, import, and market Biomet’s products in Brazil even after Brazilian Distributor had admitted to bribing HCPs and after Biomet terminated its relationship with Brazilian Distributor and prohibited its employees from working with Brazilian Distributor.
Furthermore, Biomet’s inadequate due diligence on Brazilian Distributor Company B failed to identify that Brazilian Distributor used Brazilian Distributor Company B to hide Brazilian Distributor’s continued marketing of Biomet’s products.
In addition, when Biomet’s internal audit team learned that Brazilian Distributor controlled Brazilian Distributor Company B, Biomet did not terminate its relationship with Brazilian Distributor Company B until several years later and failed to implement controls to ensure that Brazilian Distributor was not paying bribes on behalf of Biomet.
Further, in connection with the Mexico scheme, Biomet did not require 3i Mexico to conduct adequate due diligence on third parties, especially those that worked in high-risk areas, such as third parties that interacted with customs officials in Mexico.
Biomet also did not prohibit third parties, including its customs brokers in Mexico, who interacted with Mexican government officials from hiring subagents to perform work for Biomet without Biomet’s approval or without Biomet’s ability to conduct due diligence.
Moreover, Biomet did not implement controls to ensure that 3i Mexico made payments only when invoices accurately described the goods or services rendered in exchange for the payment and the entity that performed the service.”
Based on the above, the information charges Zimmer Biomet Holdings with one count of knowingly and willfully failing to implement a system of internal accounting controls sufficient to satisfy the FCPA’s requirements.
JERDS Luxembourg Holding S.A.R.L Criminal Information
JERDS is described as follows.
“JERDS was a wholly-owned subsidiary of IIH, which in turn was a subsidiary of Biomet. JERDS had its headquarters in Luxembourg, and owned several subsidiaries, including Biomet 3i Mexico S.A. de C.V. (“3i Mexico”), that marketed and sold Biomet 3i’s products overseas. 3i Mexico, which was incorporated in Mexico, was owned by JERDS. 3i Mexico marketed and sold Biomet 3i’s products in Mexico. 3i Mexico’s financial statements were consolidated into JERDS’s financial statements, which were eventually consolidated into Biomet’s financial statements.”
The conduct alleged in the information is the same Mexico conduct alleged by the DOJ in the above-described Zimmer Biomet Holdings Superceding Information. JERDS was charged with one count of violating the FCPA’s books and records provisions.
Zimmer Biomet Holdings DPA
The criminal charge against Zimmer Biomet Holdings was resolved via a DPA based on the following facts and circumstances.
a. In June 2015, Zimmer Holdings, Inc. acquired Biomet, Inc. (“Biomet”), the company that entered into the 2012 DPA, and changed its name to Zimmer Biomet. Zimmer Biomet thus knowingly assumed the rights and the obligations of Biomet under the 2012 DPA, including the 2012 DPA’s requirement of an outside compliance monitor to reduce the possibility of recidivism of its FCPA violations, and became Biomet’s successor-in-interest for purposes of the 2012 DPA and the conduct in the Statement of Facts attached to this Agreement;
b. Biomet failed to meet the compliance obligations of the 2012 DPA, as follows:
- Biomet had agreed to the compliance monitorship for an initial term of 18 months, which was later extended under the DPA to a three-year term;
- At the end of the term, the independent compliance monitor found that based on Biomet’s conduct it could not certify that Biomet’s compliance program met the standards set forth in the 2012 DPA, and the Fraud Section agreed with that assessment and extended the monitorship and 2012 DPA for an additional year to give Biomet another opportunity to be able to build the required compliance program;
- At the end of the additional year, the independent compliance monitor again could not certify that Biomet’s compliance program met the standards set forth in the 2012 DPA, and the Fraud Section concurred in that assessment;
c. During the DPA, Biomet continued to engage in criminal conduct, specifically Biomet informed the Fraud Section of: (1) internal controls failures related to Mexico between 2010 and 2013, which resulted in Biomet’s earning approximately $2,652,100 in profits; and (2) the continued use, between 2009 and 2013, by Biomet of a Brazilian distributor who had been engaged in the underlying criminal conduct that led to the 2012 DPA, which resulted in Biomet’s earning approximately $3,168,000 in profits; Biomet executives were aware of the continued use of the prohibited distributor and red flags related to corruption in Mexico that Biomet did not address; Biomet executives ignored recommendations by Biomet’s internal auditors and a company-wide requirement to cease all business with the Brazilian distributor;
d. as a result of [the] above, on or about April 15, 2016, the Fraud Section notified the Company that it had breached its obligations under the 2012 DPA;
e. although Biomet disclosed the conduct described in the Statement of Facts to the Fraud Section during the term of the 2012 DPA, Zimmer Biomet did not receive voluntary disclosure credit because the 2012 DPA obligated Biomet to disclose the conduct described in the Statement of Facts, and some of the conduct described in the Statement of Facts predated the 2012 DPA;
f. the Company received full credit for its cooperation with the Fraud Section’s investigation, including conducting a thorough internal investigation, making regular factual presentations to the Fraud Section, voluntarily making employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Fraud Section;
g. by the conclusion of the investigation, the Company had provided to the Fraud Section all relevant facts known to it, including information about individuals involved in the misconduct;
h. the Company has been designing and is implementing an effective compliance program and system of internal accounting controls, has committed to ensuring that these will be implemented in a manner that satisfies the elements set forth in Attachment C to this Agreement (Corporate Compliance Program), and has agreed to engage the Monitor pursuant to the terms described herein;
i. the Company has engaged in remedial measures, including: (1) terminating or causing the resignation of five employees who participated in the misconduct described in the Statement of Facts; (2) terminating one employee who failed to identify issues with the use of a prohibited distributor in Brazil and failed to take appropriate steps to mitigate risks; (3) disciplining two employees who failed to detect the misconduct, failed to supervise effectively those who were engaged in the misconduct, and failed to take appropriate steps to mitigate corruption and compliance risks, including by placing an official letter of reprimand in their employment files, reducing their bonuses, and requiring them to take additional anticorruption training; (4) conducting individualized training for certain remaining employees; (5) adopting heightened controls related to their third-party intermediary policies; (6) increasing their resources devoted to compliance, particularly in Latin America; and (7) requiring improved FCPA training;
j. the nature and seriousness of the offense, including the involvement of a high-level executive in the criminal conduct recounted in the Statement of Facts during an ongoing deferred prosecution agreement with the Fraud Section;
k. the Company has agreed to continue to cooperate with the Section as set forth in this Agreement in any investigation of the Company and its officers, directors, employees, agents, business partners, and consultants relating to violations of the FCPA;
l. the Company has agreed to disgorge the profits from the misconduct described in the Statement of Facts, in the amount of $5,820,100, to the U.S. Securities and Exchange Commission; and accordingly, after considering (a) through (l) above, the Company will enter into the Agreement, pay a criminal penalty at the middle of the United States Sentencing Guidelines fine range, and agree to the imposition of an independent compliance monitor, and JERDS Luxembourg Holding S.ar.l. will plead guilty pursuant to the plea agreement related to this matter.”
The DPA contains an advisory Sentencing Guidelines fine range of approximately $11.6 to $23.3 million and states:
“The Company and the Fraud Section further agree that the appropriate resolution in this case is a criminal penalty of $17,460,300, and disgorgement of the Company’s profits in the amount of $5,820,100, plus prejudgment interest on the disgorgement of $702,705. The Company agrees to pay a monetary penalty in the amount of $17,460,300 to the United States Treasury no later than ten business days after the Agreement is fully executed. The Fraud Section agrees to credit the $5,820,100 disgorgement and $702,705 prejudgment interest paid by the Company in connection with its settlement of this matter with the U.S. Securities and Exchange Commission. The Fraud Section also agrees that any fine imposed on JERDS Luxembourg Holding in connection with the Plea Agreement related to this matter shall be credited against the $17,460,300 penalty to be paid by Zimmer Biomet.”
Pursuant to the three-year DPA, Zimmer Biomet agreed to a variety of compliance undertakings and to imposition of a corporate monitor.
In the DOJ release Assistant Attorney General Leslie Caldwell states:
“Zimmer Biomet had the opportunity to avoid criminal charges but its misconduct allowed the bribes to continue. Zimmer Biomet is now paying the price for disregarding its obligations under the earlier deferred prosecution agreement. In appropriate circumstances the department will resolve serious criminal conduct through alternative means, but there will be consequences for those companies that refuse to take these agreements seriously.”
Stephen Richardson (Assistant Director of the FBI’s Criminal Investigative Division) states:
“Zimmer Biomet failed to rectify their misconduct and get back on track in compliance with the law, and now they are facing the consequences of their corrupt actions. The FBI will not stand idly by when companies operate outside the law and attempt to play by different rules in the marketplace. We remain vigilant and committed to holding those accountable who disregard the rule of law in the United States.”
The SEC’s administrative action was based on the same core conduct alleged in the DOJ action. In summary fashion, the administrative order states:
“These proceedings arise from violations of the FCPA by Biomet, Inc., a global medical device company with operations around the world. From approximately 2008 through 2013, Biomet, through its subsidiary and third party customs brokers, made unlawful payments to Mexican customs officials to facilitate the importation of Biomet’s unregistered and mislabeled dental products into Mexico. In addition, from 2009 to 2013, Biomet improperly recorded transactions with a known prohibited distributor in Brazil as transactions with another distributor. Biomet had prohibited the use of the distributor after determining the distributor made improper payments to public doctors in Brazil from 2000 to August 2008 to obtain sales of Biomet products, which was the subject of Biomet’s 2012 settlement with the Commission and criminal authorities for FCPA violations. Biomet could not account for the prohibited distributor’s use of certain funds nor determine if the prohibited distributor had continued the same improper conduct. Biomet failed to appropriately record the transactions in Mexico and Brazil in its books and records. Biomet also failed to devise and maintain a sufficient system of internal accounting controls.”
Under the heading “Anti-Bribery Violations,” the order states:
“Biomet subsidiary 3i Mexico engaged Mexican Customs Broker and certain subagents to pay bribes to Mexican customs officials for the purpose of circumventing Mexican customs laws regarding importing unregistered and improperly labeled products into Mexico. Biomet the parent saw numerous red flags indicating that the Mexican subsidiary’s customs agents were using bribes to resolve the known Mexican customs issues. Biomet had already instructed Biomet Mexico and 3i Mexico to terminate a relationship with Texas Customs Broker after numerous red flags were identified indicating Texas Customs Broker was likely smuggling unregistered products over the border. 3i Mexico subsequently failed to conduct adequate due diligence in the hiring of Mexican Customs Broker and its sub-agents as a replacement, or to require a written contract or fee schedule. Further, Biomet employees across multiple levels and departments were aware of importation issues arising in Mexico and failed to question how Mexican Customs Broker was managing to overcome such issues while other Biomet employees based in Mexico knew that bribes were being paid at the border. Biomet was on notice of substantial compliance risks based in part on the outside auditor report since as early as 2008, and failed to take steps to detect and prevent the ongoing bribery. As a result of the bribery of Mexican customs officials, Biomet violated [the FCPA’s anti-bribery provisions].”
Under the heading “Failure to Maintain Accurate Books and Records,” the order states:
“In Brazil, over the period July 2009 to September 2013, Biomet improperly recorded in its books and records payments to Prohibited Brazilian Distributor as payments to another authorized distributor. In Mexico, a Biomet subsidiary engaged two agents, one who was unlicensed, to smuggle goods across the border. One of the agents paid bribes to Mexican customs officials. Biomet improperly recorded payments to both agents between 2010 and 2013 in excess of $1.5 million, including $981,000 in payments to sub-agents that was actively concealed in Biomet’s books and records. The payments were recorded as freight cost and as other legitimate costs, which did not reflect the true nature of those payments. Biomet violated [the books and records provisions] by improperly recording the transactions and payments in Brazil and Mexico in its accounting books and records.”
Under the heading “Failure to Maintain Sufficient Internal Accounting Controls,” the order states:
“Biomet failed to implement internal accounting controls sufficient to detect or prevent bribery and to ensure the accuracy of its books and records. Biomet’s ongoing business ties to Prohibited Brazilian Distributor were known to Biomet employees as early as December 2009 and Biomet failed to take appropriate steps to stop the continued prohibited relationship. Biomet improperly recorded its business transactions with Prohibited Brazilian Distributor as transactions with its authorized distributor. Biomet violated [the internal controls provisions] by failing to have internal controls in place to detect and prevent Biomet’s improper recording of transactions with the Prohibited Brazilian Distributor.
Biomet further failed to devise and maintain internal accounting controls to prevent and detect 3i Mexico’s payments to Texas Customs Broker and Mexican Customs Broker to get product without valid registrations or proper labeling into Mexico, including improper payments to Mexican customs officials made by Mexican Customs Broker. Biomet directed 3i Mexico to terminate its arrangement with Texas Customs Broker and to hire a new broker. However, 3i Mexico failed to conduct due diligence on Mexican Customs Broker and failed to get a written contract or fee schedule. Biomet failed to address the numerous red flags that bribery was occurring to import its goods into Mexico. Biomet’s internal accounting controls did not prevent and detect the improper payments totaling approximately $981,000 between 2010 and 2013.”
As noted in the SEC’s release Biomet agreed to pay more than $5.82 million in disgorgement plus $702,705 in interest and a $6.5 million penalty for a total of more than $13 million.
In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“Biomet didn’t entirely learn its lesson the first time around as it continued to use a prohibited agent in Brazil and engaged in a new bribery scheme in Mexico.”
This Zimmer Biomet release states that “all of the Biomet conduct underlying today’s settlement announcement has been reported in the past and occurred years prior to Zimmer Holdings, Inc.’s acquisition of Biomet in June 2015.” In this release, Chad Phipps (Senior VP, General Counsel and Secretary of Zimmer Biomet Holdings) stated:
“We are pleased to have reached this resolution involving legacy Biomet FCPA compliance matters. Zimmer Biomet is committed to upholding the highest ethical and legal standards in our business practices across the globe, and we look forward to continuing to integrate the legacy Biomet business operations into our robust corporate compliance program.”
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