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Stung By The Sting – Smith & Wesson Resolves FCPA Scrutiny That Originated With The Africa Sting

In January 2010 when highlighting the manufactured Africa Sting enforcement action, I predicted that the public company employing one of the defendants was likely going to be the subject of Foreign Corrupt Practices Act scrutiny not only based on the alleged conduct in the Africa Sting case, but also other conduct as well because the indicted individual was the “Vice President−Sales, International & U.S. Law Enforcement” for the company.  That company, it soon was learned, was Smith & Wesson and indeed in July 2010 Smith & Wesson disclosed its FCPA scrutiny (see here).

In an instructive example of a dynamic I highlight in my recent article “Foreign Corrupt Practices Act Ripples” (that is every instance of FCPA scrutiny has a point of entry – in other words, a set of facts that give rise to the scrutiny in the first place – and this point of entry is often the beginning of a long and expensive journey for the company under scrutiny as the company – to answer the frequently asked “where else” question and to demonstrate its cooperation – will conduct a world-wide review of its operations), yesterday the SEC announced this administrative FCPA enforcement action against Smith & Wesson.

The conduct has nothing to do with the manufactured (and failed) Africa Sting case, but does involve Smith & Wesson’s former Vice President of International Sales and another individual referred to as the Regional Director of International Sales.  The SEC states in summary fashion as follows.

“This matter concerns violations of the anti-bribery,books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Smith & Wesson. The violations took place from 2007 through early 2010, when a senior employee and other employees and representatives of Smith & Wesson made, authorized, and offered to make improper payments  and/or to provide gifts to foreign officials in an attempt to win contracts to sell firearm products to foreign military and law enforcement departments. During this period, Smith & Wesson’s international business was in its developing stages and accounted for approximately 10% of the company’s revenues. Smith & Wesson’s employees and representatives engaged in a systemic pattern of making, authorizing and offering bribes while seeking to expand the company’s overseas business.

The bribe payments were inaccurately recorded in Smith & Wesson’s books and records as legitimate sales commissions or other business expenses. Despite its push to make sales in new and high risk markets overseas, Smith & Wesson failed to establish an appropriate compliance program or devise and maintain an adequate system of internal accounting controls, which allowed the repeated improper offers and payments to continue undetected for years.”

According to the SEC:

“Smith & Wesson does not have any international subsidiaries and conducts its international business directly and through brokering agents. Much of Smith & Wesson’s international business involves the sale of firearms to foreign law enforcement and  military departments.  […] From 2007 through early 2010, as Smith & Wesson sought to break into international markets and increase sales, certain of the company’s employees and representatives engaged in a pervasive practice of making, authorizing and offering improper payments to foreign government officials as a means of obtaining or retaining international business. Although only one of the contracts was fulfilled before the unlawful activity was identified, company employees made or authorized the making of improper payments in connection with multiple ongoing or contemplated international sales.”

The SEC’s order contains factual allegations regarding the following countries: Pakistan, Indonesia, Turkey, Nepal and Bangladesh.

As to Pakistan, the SEC order states:

“In 2008, for example, Smith & Wesson retained a third-party agent in Pakistan to assist the company in obtaining a deal to sell firearms to a Pakistani police department. Even after the agent notified the company that he would be providing guns valued in excess of $11,000 to Pakistani police officials in order to obtain the deal, and that he would be making additional cash payments to the officials, the company authorized the agent to proceed with the deal. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized the sale of the guns to the agent to be used as improper gifts and authorized payment of the commissions to the agent, while knowing or consciously disregarding the fact that the agent would be providing the guns and part of his commissions to Pakistani officials as an inducement for them to award the tender to the company. Smith & Wesson ultimately sold 548 pistols to the Pakistani police for $210,980 and profited from the corrupt deal in the amount of $107,852.”

As to Indonesia, the SEC order states:

“In 2009, Smith & Wesson attempted to win a contract to sell firearms to a Indonesian police department by making improper payments to its third party agent in Indonesia, who indicated that part of the payment would be provided to the Indonesian police officials under the guise of legitimate firearm lab testing costs. On several occasions, Smith & Wesson’s third-party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional amounts above the actual cost of testing the guns as an inducement to enter the contract. The agent later notified Smith & Wesson’s Regional Director of International Sales that the price of “testing” the guns had risen further. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized and made the inflated payment, but a deal was never consummated.”

As to Turkey, Nepal and Bangladesh, the SEC order states:

Similarly, Smith &Wesson made improper payments in 2009 to its third party agent in Turkey, who indicated that part of the payments would be provided to Turkish officials in an attempt to secure two deals in Turkey for sale of handcuffs to Turkish police and firearms to the Turkish military. Neither of these interactions resulted in the shipment of products, as Smith & Wesson was unsuccessful bidding for the first deal, while the latter deal was ultimately canceled. Similarly, Smith & Wesson authorized improper payments to third party agents who indicated that parts of these payments would be provided to foreign officials in Nepal and Bangladesh in unsuccessful attempts to secure sales contracts in those countries. Although these contemplated deals in Nepal and Bangladesh were never consummated in each case, the company had obtained or attempted to obtain the contract by using third party agents as a conduit for improper payments to government officials.”

The SEC’s order then states:

“Despite making it a high priority to grow sales in new and high risk markets overseas, the company failed to design and implement a system of internal controls or an appropriate FCPA compliance program reasonably designed to address the increased risks of its new business model. The company did not perform any anti-corruption risk assessment and conducted virtually no due diligence of its third-party agents regardless of the perceived level of corruption in the country in which Smith & Wesson was seeking to do business. Smith & Wesson  failed to devise adequate policies and procedures for commission payments, the use of samples for test and evaluation, gifts, and commission advances. The Vice President of International Sales had almost complete authority to conduct the company’s international business, including the sole ability to approve most commissions. Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision also were inadequate. As a result of these compliance and internal controls failures, Smith & Wesson’s Vice President of International Sales and the Regional Director of International Sales were able to cause the company to pay and/or authorize improper payments in numerous countries around the globe for a period of several years.”

Under the headline “Remedial Measures,” the SEC order states:

“Smith & Wesson took prompt action to remediate its immediate FCPA issues, including: conducting an internal investigation, terminating its entire international sales staff; terminating pending international sales transactions; and re-evaluating the markets in which it sought international sales. In addition, Smith & Wesson implemented a series of significant measures to improve its internal controls and compliance processes, including: implementing new internal audit procedures to identify FCPA issues; creating more robust controls on payments, gifts, and other transactions in connection with international business activity; enhancing its FCPA compliance policies and procedures; and creating a Business Ethics and Compliance Committee.”

Based on the above findings, the SEC found that Smith & Wesson violated the FCPA’s anti-bribery provisions, books and records provisions and internal controls provisions.  As to the later, the SEC order states:

“Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy. For example, Smith & Wesson failed to devise adequate policies and procedures with regard to commission payments, the use of samples for test and evaluation, gifts, and commission advances. Further, Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision were inadequate.”

As highlighted in the SEC’s order, Smith & Wesson agreed to “report to the Commission staff on the status of [its] remediation and implementation of compliance measures at six-month to twelve-month intervals during a two-year term.” In addition, Smith & Wesson agreed to conduct an initial review – and two follow-up reviews – “setting forth a complete description of its remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Respondent for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews.”

In the SEC order, Smith & Wesson was ordered to cease and desist from future FCPA violations and agreed to pay $2,034,892 …  including $107,852 in disgorgement, $21,040 in prejudgment interest, and a civil monetary penalty of $1,906,000.”  In resolving its FCPA scrutiny, Smith & Wesson did not admit nor deny the SEC’s findings.

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

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In this release, Smith & Wesson President and CEO James Debney stated:

“We are pleased to have concluded this matter with the SECand believe that the settlement we have agreed upon is in the best interests of Smith & Wesson and its shareholders.  Today’s announcement brings to conclusion a legacy issue for our company that commenced more than four years ago, and we are pleased to now finally put this matter behind us.”

John Pappalardo (Greenberg Traurig) represented Smith & Wesson.

Smith & Wesson’s stock price was down approximately .7% on the day of the SEC’s announcement of the enforcement action.

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.

Friday Roundup

A costly monitor, Daimler’s DPA debacle, meeting releases, and another addition to the list (in an unusual way), it’s all here in the Friday roundup.

Willbros Monitor Costs

Earlier this week, Willbros Group announced (here) “that in connection with the Company’s completion of the requirements of the DPA and expiration of the term of the monitorship, on March 30, 2012, the DOJ filed a motion to dismiss the criminal charges filed previously against the Company stemming from legacy issues in Nigeria and South America in 2005 and prior years, which led to the DPA.”  In May 2008, Willbros resolved parallel DOJ (here) and SEC (here) FCPA enforcement actions and agreed to pay approximately $32 million in combined fines and penalties.

Pursuant to the May 2008 DOJ DPA, the monitor was supposed to be engaged by Willbros within 60 days.  However the company disclosed that its monitor was not engaged until September 25, 2009 – an astounding year plus delay in engaging the monitor.  Furthermore, although the monitor was supposed to serve a three year term per the DPA, the early termination provisions of the DPA apparently were triggered.  Even though the monitor got a late start and its three year term was trimmed, the Willbros monitor had a nice assignment.  Doing the math from figures disclosed in various SEC filings, the Willbros monitor cost has been approximately $10.2 million subject to increase for 1st quarter 2012 expenses ($3.6 million for the year ended Dec. 31, 2011; $4 million for the year ended Dec. 31, 2010; and $2.6 million for the year ended Dec. 31, 2009).

During a recent earnings conference call, Randy Harl (President and CEO of Willbros) stated as follows.  “The DOJ monitorship brought great positive change to Willbros in the form of a stronger compliance culture. The cost of the monitor and the major spending to establish the required controls and processes are behind us. However, we will continue to invest in a compliance culture.”

Daimler DPA Debacle

While Willbros’s DPA expired, Daimler’s DPA was extended.  As noted by Christopher Matthews in this Wall Street Journal Corruption Currents report, the two year DPA was set to expire, but was extended until December 31st.  As noted in this prior post, in April 2010, Daimler agreed to pay approximately $185 million to resolve parallel DOJ and SEC FCPA enforcement actions.  The prior post, along with this post, noted that the prosecution was a joke from the start, among other things, U.S. District Court Judge Richard Leon approved settlement on April Fool’s Day.  The DOJ’s release noted that Daimler (and three of its subsidiaries) “brazenly offered bribes in exchange for business around the world” and that Daimler “saw foreign bribery as a way of doing business.”  The DOJ alleged improper conduct all the way up to senior levels of the company, yet Daimler was not required to plead guilty to anything.

Instead Daimler was offered a two-year DPA. The term of the DPA could be extended if Daimler “knowingly violated any provision of the Agreement.”  This recently filed amendment to the DPA is silent as to the reason for the extension.

I intended, but forgot, to include the above Daimler development in yesterday’s post (here) regarding NPAs and DPAs.  Needless to say, the Daimler DPA debacle furthers the rationale for abolishing such resolution vehicles.

Chamber Sponsored FCPA Roundtable

Earlier this week, the U.S. Chamber of Commerce Institute for Legal Reform hosted a roundtable discussion regarding the FCPA and upcoming FCPA guidance with Assistant Attorney General Lanny Breuer, SEC Enforcement Division chief Robert Kuzami and Commerce Department General Counsel Kameron Kerry.

In this release, Lisa Rickard (President of the U.S. Chamber Institute for Legal Reform) stated as follows.  “The business community is pleased with today’s frank and productive discussion on the significant uncertainty that many U.S. businesses face when attempting to comply in good faith with the FCPA.  We are encouraged by the thoughtful dialogue that helped us reach a mutual understanding on many of these important issues.  We look forward to working with the administration as it prepares the forthcoming guidance.”  As noted in the release, the roundtable was attended by the following business groups or trade associations:   the Advanced Medical Technology Association, the American Insurance Association, the International Association of Drilling Contractors, the International Stability Operations Association, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the National Foreign Trade Council, PhRMA, the Professional Services Council, the Retail Industry Leaders Association, and The Financial Services Roundtable.

In this release, Rosario Palmieri (Vice President for Infrastructure, Legal and Regulatory Policy of the National Association of Manufacturers) stated as follows.  “Manufacturers are facing a great deal of uncertainty when it comes to complying with the Foreign Corrupt Practices Act.  Today we had a very productive discussion and were able to share manufacturers’ concerns. We are hopeful that a continuing dialogue with the Administration will help us meet our mutual goals of increasing exports, stamping out corruption and providing clear rules of the road for international business.”

Another Addition to the List

In this recent release, Transparency International urges the DOJ to investigate the conduct of Walters Power International  (an Oklahoma based company that supplies, develops, services and manages electrical generation power plants around the world see here) in connection with power plant projects in Pakistan.  It is certainly not the traditional way in which companies become the subject of FCPA scrutiny, but even so it makes the list, and according to my tally, in the last seven weeks, eight companies have newly become the focus of FCPA scrutiny.

Also, last week’s post (here) discussed recent Libya related disclosures by Total S.A. and Eni S.p.A.  It turns out that Marathon Oil Corp. can be added to that list.  In its recent annual report, the company stated as follows.  “On May 25, 2011, we received a subpoena issued by the SEC requiring production of documents related to payments made to the government of Libya, or to officials and persons affiliated with officials of the government of Libya. We have been and intend to continue cooperating with the SEC in its investigation.”

*****

A good weekend to all.

The FCPA And South Asia

[If FCPA Professor is a valuable part of your day, please consider taking a moment to register your support in the LexisNexis Top 25 Business Law Blog contest.  The link to submit comments is here and the comment period ends on October 25th]

Yesterday, I had the pleasure to participate in the South Asia Legal Studies conference at the University of Wisconsin Law School.  I participated in a panel moderated by Andy Spalding (here – Visiting Assistant Professor at Chicago-Kent College of Law) titled “Corruption in South Asia:  The Role of Law and Legal Institutions.”

The focus of my remarks addressed the following question:  are U.S. companies (or other multinational companies subject to the FCPA) doing business in South Asia intent on engaging in bribery or are such companies doing business in South Asia confronted by conditions not of their own making (the later comment inspired by Joseph Covington’s recent observation regarding a potential FCPA compliance defense – see here).

I noted, as evidenced by recent FCPA enforcement activity in India, Bangladesh, and Pakistan, that the latter seems to be true.  South Asia is plagued by harassment bribes.  For instance, according to the 2010 Transparency International Global Corruption Barometer –  here – 54% of Indian households paid a bribe in a 12 month period to receive basic services.  As noted in this previous post, Kaushik Basu (India’s Chief Economic Advisor) recently stated that “harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society.”  This 2010 National Public Radio piece noted that “getting things done without hassles [in India] requires a bribe.”  The piece observed as follows.  India is “famous for paperwork, tangled bureaucracy and the courts are slow.  So, often it just makes economic sense to shrug and pay the money.  Because when you bribe someone, they can become like your own personal Ganesh, the god who is the remover of obstacles.”

FCPA enforcement in South Asia has almost exclusively focused on harassment bribes, payments made by companies, nearly always with the assistance of local agents, consultants, and brokers, simply to get things done and remove obstacles.  For instance, the Diageo enforcement action concerned, in part, payments in India in connection with product label registration and securing favorable product placement and promotion.  The Wabtec enforcement action concerned payments in India in connection with the scheduling of pre-shipping product inspections, issuance of product delivery certificates and tax audits.  The Dow enforcement action concerned payments in India in connection with registering products.  The Avery Dennison enforcement action concerned, in part, payments in Pakistan in connection with obtaining bonded zone licenses and to overlook bonded zone regulatory violations.  The Baker Hughes enforcement action concerned, in part, payments in India in connection with shipping permits.

Are the above FCPA enforcement actions the best way to address harassment bribes in South Asia and other parts of the world?

Avery Dennison Settles FCPA Matter – Is There a Strict Liability Standard for FCPA Books and Records and Internal Controls Violations?

The FCPA’s books and records and internal control provisions, as written, generally state where an issuer “holds 50 per[cent] or less of the voting power with respect to a domestic or foreign firm” the books and records and internal control provisions “require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls…” See 15 USC 78m(b)(6). The section further notes that “[s]uch circumstances include the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of [the books and records and internal control provisions].” Id.


As readers of this blog are perhaps keenly aware – the FCPA, as written, and the FCPA, as enforced, are sometimes two different things.

Such is the case with the SEC’s apparent position that issuers are liable (in a way that closely resembles strict liability) for any record keeping or internal control deficiency of any entity (no matter how remotely related to the issuer) in its corporate hierarchy. Although it is sometimes difficult to draw conclusions from negotiated settlement documents, the recent FCPA enforcement action against Avery Dennison Corporation would seem on-point. (See here for the SEC Cease- and-Desist Order, here for the SEC Litigation Release).

“Big picture,” and as noted in the Litigation Release, the SEC filed a settled civil complaint against Avery Dennison (a California-based manufacturer of self-adhesive materials, offices products, labels, and graphics imaging media) (“Avery”), charging Avery with violations of the FCPA’s books and records and internal control provisions. The SEC also issued an administrative cease-and-desist order (“Order”) finding that Avery violated these same provisions.

The alleged violations principally involve Avery (China) Co. Ltd. (“Avery China”), an “indirect subsidiary” of Avery. I wish I knew how to post a flow-chart in this forum, because to connect Avery to Avery China, a flow-chart would indeed be useful. In any event, here is the narrative version as found in para 6 of the Order:

“Avery China is a wholly-owned subsidiary of Avery headquartered in Shanghai, China. It is incorporated under the laws of China and wholly-owned by Avery Dennison Hong Kong BV, which is in turn wholly owned by Avery Dennison Group Danmark ApS, which is in turn wholly owned by Avery Dennison Corporation. The Reflective Division is part of Avery China and is currently part of Avery’s Graphics Division. Avery China is overseen by Avery’s Asia Pacific Group, an unincorporated group based in Hong Kong within the Avery Dennison Hong Kong BV entity.”

As set forth in the Order, the SEC found that: “Avery China’s Reflective Division paid or authorized the payments of several kickbacks, sightseeing trips, and gifts to Chinese government officials” with “the purpose and effect of improperly influencing decisions by foreign officials to assist Avery China to obtain or retain business.” (See para. 2).

The SEC also found that “after Avery acquired a company in June 2007, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries.” (See para. 3). These findings, which relate to payments to customs officials in Indonesia and Pakistan, and China, are interesting as well from the standpoint that the Order, at various times, refers to these payments as “certain potential [FCPA] violations” (para. 1), “illegal” (para. 3, 16 and 17), “possible improper payments” (para. 15), and “illicit” (para. 17).

The Order is silent as to Avery’s participation in, or knowledge of, any of this conduct.

Yet the SEC found that “Avery failed to accurately record these payments and gifts in the company’s books and records, and failed to implement or maintain a system of internal accounting controls sufficient to detect and prevent such illegal payments or promises of illegal payments.” (See para. 4).

More specifically, the SEC found that:

“Avery’s books, records, and accounts did not properly reflect the illicit payments, sightseeing trips and gifts that Avery China made or provided to government officials, and the illicit payments to customs officials in several countries by employees of the acquired subsidiaries. As a result, Avery violated the [the books and records provisions]” (para. 19).

“Avery also failed to devise or maintain sufficient internal controls to provide reasonable assurance that Avery China and the acquired subsidiaries complied with the FCPA and that payments, gifts or sightseeing expenses they provided to foreign officials were accurately reflected on its books and records. As a result Avery violated [the internal control provisions]” (para 20).

Avery agreed to settle the matter by paying approximately $520,000 (disgorgement, prejudgment interest, and a civil penalty) and agreeing to cease and desist from future violations of the FCPA’s books and records and internal control provisions.

Notwithstanding 15 USC 78m(b)(6), this sure seems like a strict liability standard for multinational issuers. So long as this is the SEC’s position, the FCPA compliance message is clear – multinational issuers will be held responsible for the conduct of all entities within its corporate hierarchy (no matter how remote or indirect) which could potentially implicate the FCPA. For this reason, corporate leaders are wise to fully implement FCPA compliance policies and procedures and audit protocols throughout the entire corporate hierarchy.

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