Top Menu

Friday Roundup

Roundup

Question to ponder, scrutiny alerts and updates, Caremark, and for the reading stack. It’s all here in the Friday roundup.

Question to Ponder

If publicly-traded companies can put law enforcement to its burden of proof in peer countries, why do publicly traded companies (nearly universally) roll over and play dead when the subject of U.S. law enforcement inquiries?

Continue Reading

The First FCPA Enforcement Action Against A Foreign Issuer, Plus An Interesting Issue

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

In 1996, the SEC brought this civil complaint against Montedison, an Italian corporation with headquarters in Milan that had interests in the agro-industry, chemical, energy and engineering sectors.  The enforcement action was principally a financial fraud case as the SEC alleged that the company committed “financial fraud by falsifying documents to inflate artificially the company’s financial statements.”  (See here for the SEC’s release).

However, the enforcement action also included allegations that Montedison violated the FCPA’s books and records and internal control provisions based on allegations that the company concealed “hundreds of million of dollars of payments that, among other things, were used to bribe politicians in Italy and other persons.”

As described in the SEC’s complaint, Montedison wanted to enter into a joint venture with an Italian state energy agency and “determined to secure political backing” to change the terms of the underlying joint venture agreement as well as overturn a judge’s decision that had the effect of making the proposed transaction more difficult.  According to the complaint, “Montedison determined that to achieve these ends, the company would need to pay extensive bribes.”

The complaint then states:

“In an attempt to do so, Montedison management entered into an arrangement with a Rome real estate developer (the “Developer”), who was developing real estate complexes in Rome for Montedison at that time.  Under their agreement, Montedison, directly or through companies it controlled, effected numerous real estate purchases and sales at artificially high prices.  The artificial prices had the effect of transferring hundreds of million of dollars to the Developer.  On information and belief, the Developer used this money to bribe politicians in Italy and other persons on Montedison’s behalf.”

For example, the complaint alleges that Montedison, through a wholly-owned subsidiary, overpaid the Developer approximately $95 million and agreed to pay an additional $123 million “for properties that were either owned by, or had connections to, various politicians.

As noted in the SEC’s complaint, “despite these efforts, Montedison’s management was ultimately unsuccessful” in its bribery scheme.

According to the complaint:

“The fraudulent conduct … continued undetected for several years because of a seriously deficient internal control environment at Montedison.  In fact, Montedison’s internal controls were so deficient that, according to Montedison, neither the company itself, nor its auditors, have been able to reconstruct previously what occurred and who was responsible.”

The Montedison enforcement action was the first SEC Foreign Corrupt Practices Act enforcement action against a foreign issuer and was based on the company having American Depository Receipts ADRs listed on the New York Stock Exchange.

Montedison did not immediately resolve the SEC’s complaint as is the norm today.  Rather, the 1996 complaint was resolved in 2001.   As noted in the SEC’s release Montedison was ordered to pay a civil penalty of $300,000 and resolved the enforcement action without admitting nor denying liability for the allegations in the complaint.  According to the release, “the fraudulent conduct was disclosed only after new management was appointed when Montedison disclosed it was unable to service its bank debt.  Virtually all of the former senior management at Montedison responsible for the fraud were convicted by Italian criminal authorities and were sued by the company.”

The release notes as follows.

“Montedison was acquired by Compart, S.p.A., in late 2000 and its ADRs were delisted. Compart then changed its name to Montedison. No securities of Compart are listed for sale by U.S. stock exchanges. Compart, which agreed to the settlement on behalf of the former Montedison, was not a defendant in the Commission’s complaint.”

In original source media reports, Paul Gerlach (SEC Associate Enforcement Director at the time) stated:

“The case’s message is if you are a foreign company wanting to trade stock here, you are going to have to adhere to the same reporting, accounting and internal control standards followed by U.S. companies.”

Of interest, a 1996 Washington Post article about the enforcement action noted:

“The commission has been locked in debate with the NYSE for years over whether foreign companies that raise money from U.S. investors should be held to the same reporting standards as U.S. companies. SEC officials have argued that loosening the standards would hurt U.S. investors. The exchange has responded that overly stringent rules will discourage foreign companies from raising capital in the United States and erode the preeminent position of U.S. securities markets.”

Why, despite the SEC’s allegations, was Montedison not charged with FCPA anti-bribery violations?  Jurisdictional issues aside, according to a knowledgeable source at the SEC at the time, there was a belief that there were no “foreign” officials involved because Montedison, an Italian company, allegedly bribed Italian officials.

It’s an interesting question.

Does the “foreign” in official mean as it relates to the specific company at issue or as to the U.S.?

I believe that the legislative history supports the later, but will also add that Congress likely never understood that it was legislating as to foreign issuers when the FCPA was passed in 1977 because there were few foreign issuers.  Today, there are approximately 1,000 foreign issuers.  (See here and here).

In most FCPA enforcement actions against foreign issuers (Siemens, Daimler, Total, Technip, Alcatel-Lucent, etc.) the question is not relevant as, for example, German or French officials were not among the officials allegedly bribed.

Next Up – Pfizer

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).  The latest Foreign Corrupt Practices Act enforcement based on the enforcement theory that various foreign health care providers are “foreign officials”  is Pfizer / Wyeth (an entity acquired by Pfizer in 2009).

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

DOJ

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

Criminal Information

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

The information alleges, in summary fashion, as follows.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DPA

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

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

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

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

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

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

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

SEC

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

Pfizer Complaint

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

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

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

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

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

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

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

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

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

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

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

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

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

Wyeth Complaint

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

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

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

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

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

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

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

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

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

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

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

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

See here for Pfizer’s press release.

The Compliance Defense Around The World

As highlighted in this prior post, numerous FCPA reform bills in the 1980’s included a specific defense which stated a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. An FCPA reform bill containing such a provision did pass the U.S. House, but was not enacted into law.

Amending the FCPA to include a compliance defense is one of the U.S. Chamber’s FCPA reform proposals (see here). In November 2010, Andrew Weissman, on behalf of the Chamber, testified in favor of a compliance defense (and other reform proposals) during the Senate’s FCPA hearing (see here for the prior post) and during the House hearing earlier this month (see here for the prior post), former Attorney General Michael Mukasey, on behalf of the Chamber, also testified in favor of a compliance defense (and other reform proposals).

During the House hearing, there appeared to be bi-partisan support for consideration of an FCPA compliance defense.

Even so, Greg Andres, testifying on behalf of the DOJ, stated that a potential FCPA compliance defense was “novel and risky” and that the “time is not right to consider it.”

Public debate on a potential compliance defense has thus far focused, from a comparative standpoint, on the United Kingdom and Italy.

The purpose of this post is to further inform the public debate on a potential compliance defense by highlighting various compliance-like defenses around the world in other countries that are signatories (like the U.S.) to the OECD Anti-Bribery Convention.

This post is further to my work in progress – Revisiting an FCPA Compliance Defense – and represents hours of research analyzing 38 OECD Country Reports.

The post provides an overview of compliance-like defenses in the following OECD Convention signatory countries: Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, and Switzerland. [The U.K. Bribery Act, set to go live on July 1st, also contains a compliance-like defense in Section 7].

A first reaction might be – only 12 of the 38 OECD member countries have a compliance-like defense.

However, this number must be viewed against the backdrop of the following dynamics: (i) in many OECD Convention signatory countries, the concept of legal person criminal liability (as opposed to natural person criminal liability) is non-existent; and (ii) in many OECD Convention signatory countries that do have legal person criminal liability, such legal person liability can only result from the actions of high-level executive personnel or other so-called “controlling minds” of the legal person.

Obviously if a foreign country does not provide for legal person liability, there is no need for a compliance defense, and the rationale for a compliance defense is less compelling if legal exposure can result only from the conduct of high-level executive personnel or other “controlling minds.”

When properly viewed against these dynamics, a compliance-like defense (whether specifically part of a foreign country’s “FCPA-like” law or otherwise generally part of a foreign country’s legal principles) is far from a “novel” idea, but rather common among OECD Anti-Bribery Convention signatory countries that – like the U.S. – have legal person criminal liability that can attach based on the conduct of non-executive officers or other “controlling minds.”

[The below information is based strictly on OECD country reports and is subject to the qualification that in many instances the most recent information concerning a particular country may be several years old. If anyone has more recent information concerning any particular country, how the compliance defense in a particular country has worked in practice, or any other relevant information, please leave a comment on this site or contact me at mjkoehle@butler.edu]

*****

Australia

Australian law implementing the OECD Convention entered into force on December 18, 1999.

Thereafter, a section of the Criminal Code on corporate criminal liability came into full force establishing an organizational model for the liability of legal persons. “Bodies corporate” are liable for offences committed by “an employee, agent or officer of a body corporate acting within the actual or apparent scope of his or her employment, or within his or her actual or apparent authority” where the body corporate “expressly, tacitly, or impliedly authorised or permitted the commission of the offence”.

Pursuant to the Criminal Code, authorisation or permission by the body corporate may be established in the following ways: (1) the board of directors intentionally, knowingly or recklessly carried out the conduct, or expressly, tacitly or impliedly authorised or permitted it to occur; (2) a high managerial agent intentionally, knowingly or recklessly carried out the conduct, or expressly, tacitly or impliedly authorised or permitted it to occur; (3) a corporate culture existed that directed, encouraged, tolerated or led to the offence; or (4) the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

However, under the Criminal Code, “if a high managerial agent is directly or indirectly involved in the conduct, no offence is committed where the body corporate proves that it “exercised due diligence to prevent the conduct, or the authorisation or permission.”

Chile

Chilean law implementing the OECD Convention entered into force on October 8, 2002.

In December 2009, a separate Chilean law entered into force establishing criminal responsibility of legal persons for a limited list of offences including bribery of foreign public officials.

In order for a legal person to be held responsible for a foreign bribery offence, the following “three cumulative requirements” must be satisfied: (1) the offence must be committed by a person acting as a representative, director or manager, a person exercising powers of administration or supervision, or a person under the “direction or supervision” of one of the aforementioned persons; (2) the offence must be committed for the direct and immediate benefit or interest of the legal entity. No offence is committed where the natural person commits the offence exclusively in his/her own interest or in the interest of a third party; and (3) the offence must have been made possible as a consequence of a failure of the legal entity to comply with its duties of management and supervision. An entity will have failed to comply with its duties if it violates the obligation to implement a model for the prevention of offences, or when having implemented the model, it was insufficient.”

As to the final element, the OECD report states as follows. “The final cumulative requirement for responsibility stresses that the offence must have been made possible as a consequence of the failure of the legal person to comply with its duties of administration and supervision. The entity will have failed to comply with its duties if it violated the obligation to implement a model for the prevention of offences, or when having implemented the model, the latter was insufficient. It shall be considered that the functions of direction and supervision have been met if, before the commission of the offense, the legal person had adopted and implemented organization, administration and supervision models, pursuant to the following article, to prevent such offenses as the one committed.”

The minimum features of a prevention system under the law are as follows: identify the different activities or processes of the entity, whether habitual or sporadic, in whose context the risk of commission of the offences emerges or increases; establish protocols, rules and procedures that permit persons involved in above-mentioned activities or processes to program and implement their tasks or functions in a manner that prevents the commission of the indicated offences; identify procedures for the administration and auditing that allow the entity to impede their use in the listed offences; establish internal administrative sanctions, as well as procedures for reporting or pursuing pecuniary responsibility against persons who violate the prevention system; introduce the above-mentioned duties, prohibitions and sanctions into the internal regulations of the legal person, and ensure that they are known by all persons bound to apply it (workers, employees, and service providers).

The OECD report states – as to the minimum requirements as follows. “It also aims to introduce a system of self-regulation by companies. Having a code of conduct on paper will not be sufficient to avoid responsibility. If prosecutors can prove that the code does not meet the minimum requirements of or that it is not implemented, the company can be responsible for the offence.”

Under Chilean law, “the failure to comply with duties of management and supervision is an element of the offence rather than a defence. Therefore the burden of proof lies on prosecutors, i.e. it will be up to prosecutors to prove that the entity failed to comply with its duties of management and supervision.”

The OECD report notes as follows. “This will require prosecutors to prove that the company failed in the design and/or implementation of the offense prevention model including why, in the circumstances, the prevention model was insufficient. This would appear to also require the prosecutor to establish that this failure made perpetration of the offence possible.”

As noted in the OECD report, the Chilean “standard of liability is inspired from the Italian system of liability of legal persons” (discussed below).

Germany

German law implementing the OECD Convention entered into force on February 15, 1999.

German law establishes the liability of legal persons, including liability for the foreign bribery offence, under an administrative (i.e. non-criminal form) act.

Pursuant to the administrative act, “the liability of legal persons is triggered where any “responsible person” (which includes a broad range of senior managerial stakeholders and not only an authorised representative or manager), acting for the management of the entity commits i) a criminal offence including bribery; or ii) an administrative offence including a violation of supervisory duties which either violates duties of the legal entity, or by which the legal entity gained or was supposed to gain a “profit”.”

As noted in the OECD report, “in other words, Germany enables corporations to be imputed with offences i) by senior managers, and, somewhat indirectly, ii) with offences by lower level personnel which result from a failure by a senior corporate figure to faithfully discharge his/her duties of supervision.”

The OECD report states that the “standards for a violation of supervisory duties include consideration of factors such as whether the company has in place a monitoring system or in-house regulations for employees.”

Hungary

Hungarian law implementing the OECD Convention entered into force on March 1, 1999.

In 2004, a separate law was enacted specifying the individuals whose actions can trigger the liability of the legal person.

The OECD report states as follows. “The specific persons and additional conditions for liability are defined as follows: (i) the bribery is committed by one of the members or officers [of the legal entity] entitled to manage or represent it, or a supervisory board member and/or their representatives acting within the legal scope of activity of the legal person ; (ii) the bribery is committed by one of the members of the legal entity or an employee acting within the legal scope of activity of the legal person provided the bribery could have been prevented by the chief executive fulfilling his supervisory or control obligations; and (iii) the bribery is committed by a third party individual, provided that the legal entity’s member or officer entitled to manage or represent the it had knowledge of the facts.”

According to the OECD report, the relevant law does not provide any guidance as to the necessary degree of supervision to avoid liability for bribery.

Italy

Italian law implementing the OECD Convention entered into force on October 26, 2000.

Under Italian law, “criminal liability cannot be attributed to legal persons” however, “administrative liability may be attributed to legal persons for certain criminal offences (including foreign bribery) committed by a natural person.

The relevant administrative decree provides a “defence of organisational models” to a body which makes reasonable efforts to prevent the commission of an offence.

The OECD report states as follows. “… [A] body is not liable for offences committed by persons in senior positions if it proves the following. First, before the offence was committed, the body’s management had adopted and effectively implemented an appropriate organisational and management model to prevent offences of the kind that has occurred. Second, the body had set up an autonomous organ to supervise, enforce and update the model. Third, this autonomous organ had sufficiently supervised the operation of the model. Fourth, the perpetrator committed the offence by fraudulently evading the operation of the model.” The defence of organisation models operates as a full defence which completely exculpates a legal person.

The relevant administrative decree stipulates the essential elements of an acceptable organisational model described in the OECD report as follows. “First, the model must identify activities which may give rise to offences. Second, the model must define procedures through which the body makes and implements decisions relating to the offences to be prevented. It must also prescribe procedures for managing financial resources to prevent offences from being committed. Third, the model must oblige the internal organ responsible for supervision and enforcement to provide information to the body. Finally, the model must include a disciplinary system for non-compliance.”

Japan

Japanese law implementing the OECD Convention entered into force on February 15, 1999 .

“Under Japanese law, criminal responsibility of a legal person is based on the principle that the company did not exercise due care in the supervision, selection, etc. of an officer or employee to prevent the culpable act.

The burden rests on the legal person to prove that due care was exercised. Where a legal person raises the defence, a person must be identified as having exercised due care, etc., and the court must determine whether it was exercised properly having regard to the nature of the legal person and the circumstances of the case.”

Korea

Korean law implementing the OECD Convention entered into force on February 15, 1999.

Korean law establishes the criminal responsibility of legal persons for the bribery of a foreign public official, however, a legal person is exempt from liability where it has paid “due attention” or exercised “proper supervision” to prevent the offence.

The statute itself does not provide information about what constitutes “due attention” or “proper supervision.” A representative of the Supreme Public Prosecutor’s Office informed the OECD that “the exemption is triggered when a director or ‘superior person’ exercises due attention.” The Explanatory Manual published by the Ministry of Justice states that “it is difficult to standardize the extent of attention or supervision in deciding whether a legal person can be exempted from criminal punishment.” The Explanatory Manual further states that whether the exemption applies depends upon “general circumstances such as the motive and background that led to the bribery, intervention of exclusive members of the legal person, whether it was informed earlier, and how much effort was usually made by the corporation to prevent bribery, etc.” and that companies involved in international business must prevent violations of the law by all employees and executives of the company “through sufficient necessary management”.

Poland

Polish law implementing the OECD Convention entered into force on February 4, 2001.

Polish law provides “a noncriminal form of responsibility for collective entities.” Among the requirements for liability is the offence was committed “in the effect of at least absence of due diligence in electing the natural person [committing the act] or of at least the absence of due supervision over this person by an authority or a representative of the collective entity.”

According to the relevant Polish legislative history, “the perpetration of a prohibited act by a natural person will trigger liability of the
collective entity where the act occurred as a result of negligence on the part of the authority or representative of the collective entity.”

Portugal

Portuguese law implementing the OECD Convention entered into force on June 9, 2001.

Under Portuguese law relevant to corruption in international business transactions, legal persons can be liable for conduct committed “on their behalf and in the collective interest by natural persons occupying a leadership position within the legal person structure” or by “whoever acts under the authority” of such natural persons.

However, “[t]he liability of legal persons and equivalent entities is excluded when the actor has acted against the orders or express instructions of the person responsible.”

Sweden

Swedish law implementing the OECD Convention entered into force on July 1, 1999.

Under Swedish Law, only natural persons can commit crimes. However, pursuant to the Swedish Penal Code, a “kind of quasi-criminal liability is applied to an ‘entrepreneur’ (a general term meaning “any natural or legal person that professionally runs a business of an economic nature) for a ‘crime committed in the exercise of business activities.’”

However, one requirement under the Penal Code is that “the entrepreneur has not done what could reasonable be required of him for prevention of the crime.”

Switzerland

Swiss law implementing the OECD Convention entered into force on May 1, 2000.

Article 100quater of the Swiss Criminal Code requires “defective organisation as a condition for corporate criminal liability.”

In order to incur criminal liability, “the enterprise must not have taken all reasonable and necessary organisational measures to prevent the individual from committing the offence.”

Under Swiss law, the burden is on the prosecutor to furnish proof of defective organization and according to Swiss authorities contacted by the OECD “steps should be taken to assess whether employees have been sufficiently informed, supervised and controlled” and “the fact that an enterprise is organised in compliance with international management standards will not be sufficient to rule out all liability on its part; it will be one element to take into consideration among others …”. In the view of Swiss authorities, “ shifting the burden of proof in criminal cases would contravene Article 6 of the European Convention on Human Rights.”

Powered by WordPress. Designed by WooThemes