Appearances Matter – President Obama Hobnobs With Siemens Executives Who Provide Him Something of Value
Granted, it happened in late 2008.
The “it” is the Siemens Foreign Corrupt Practices Act enforcement action in which the U.S. government stated, among other things, that “for much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens” and that the “pattern of bribery by Siemens was unprecedented in scale and geographic reach.”
According to the U.S. government, Siemens’ conduct was “egregious,” “staggering,” “brazen,” and “systematic;” and that there existed a “corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”
In 2008, Siemens resolved parallel DOJ/SEC FCPA enforcement actions by agreeing to pay $800 million (still the largest FCPA settlement amount of all-time – see here for the current top ten list).
Although approximately 7.5 years have passed since 2008, the Siemens FCPA enforcement action remains an active issue for the U.S. government. Indeed, as highlighted in this recent post, the DOJ is seeking to block release of the Siemens’ Monitor Reports.
Friday Roundup
Harder pleads guilty, scrutiny alerts and updates, when the dust settles, visual proof, and golf. It’s all here in the Friday roundup.
Harder Pleads Guilty
As highlighted in this post, in January 2015 the DOJ announced a Foreign Corrupt Practices Act enforcement action against Dmitrij Harder for allegedly bribing an official with the European Bank for Reconstruction and Development. Harder is a Russian national, naturalized German citizen and permanent resident of the U.S. and the former owner and President of Chestnut Consulting Group Inc. and Chestnut Consulting Group Co. both based in Pennsylvania.
The enforcement action was notable in that it invoked the rarely used “public international organization” prong of the FCPA’s “foreign official” definition.
Issues To Consider From The SciClone Enforcement Action
This recent post highlighted the SEC’s $12.8 million Foreign Corrupt Practices Act enforcement action against SciClone Pharmaceuticals.
The action was based on the marketing and promotional activities of a subsidiary that provided various things of value to healthcare professionals employed by state-owned hospitals in China including weekend trips, foreign language classes, “golf in the morning and beer drinking in the evening,” and travel to the Grand Canyon and Disneyland.
This post continues the analysis of the enforcement action by highlighting various issues to consider.
Time Line
In August 2010, SciClone disclosed that the SEC had issued the company a subpoena inquiring about its business practices in China.
If the SEC wants the public to have confidence in its SEC enforcement program, it must resolve instances of FCPA scrutiny much quicker. 5.5 years is simply inexcusable.
For instance, SciClone previously disclosed that in “July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement” and its disclosure specified the exact amount in last week’s settlement.
Should it really take 7 months to finalize an agreement in principle to settle?
Nearing 20
According to my figures, SciClone is the 18th corporate FCPA enforcement action based on the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA.
This enforcement theory has never been subjected to any meaningful judicial scrutiny and, perhaps most telling as to its validity and legitimacy, is that none of the corporate enforcement actions based on this theory have resulted in related charges against an individual.
Initial Disclosure of Settlement Amount
In March 2014, SciClone disclosed, in connection with its FCPA scrutiny, “that a payment of $2.0 million to the government in penalties, fines and/or other remedies is probable.”
As highlighted above, the final settlement was $12.8 million.
Anything of Value
The enforcement action contains the following list of things of value.
- “weekend trips, vacations, gifts, expensive meals, foreign language classes, and entertainment”
- attendance at “the annual Qingdao Beer Festival consisting of golf in the morning and beer-drinking in the evening”
- “vacations to Anji, China”
- “paying for family vacations and regular family dinners”
- “$8,600 in lavish gifts”
- non-business “travel to Las Vegas and Los Angeles with tours of the Grand Canyon or Disneyland.”
- “sightseeing and [travel to] tourist locations such as Mt. Fuji.”
- “a weekend stay on the island of Hainan, a resort destination”
Chinese Travel Companies
Purported travel companies, as well as the fapiao’, are well-known compliance risks in China. On these issues, the SEC’s order states:
“Local Chinese travel companies were routinely hired to provide services (such as arranging transportation, accommodations, and meals for HCPs) in connection with what were ostensibly legitimate conferences, seminars, and other events. In addition to a lack of due diligence for these third party vendors … there was a lack of controls over the events to ensure they had an appropriate business purpose and that the events actually occurred. Many events did not include a legitimate educational purpose or the educational activities were minimal in comparison to the sightseeing or recreational activities.”
[…]
As part of its remedial efforts, SciClone conducted a detailed, comprehensive internal review of promotion expenses of employees … This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings.”
Professional Fees and Expenses
Even though SciClone, in its March 2015 annual report, disclosed for the FY ended December 31, 2013 “$5.3 million related to legal matters associated with the ongoing government investigation and our ongoing improvements to our FCPA compliance efforts,” the company’s other disclosures over its long period of FCPA scrutiny lack specifics regarding pre-enforcement action professional fees and expenses.
Nevertheless, it is a safe assumption that the aggregate of such fees and expenses exceeded the $12.8 million settlement amount. Add to this SciClone’s post-enforcement action reporting obligations and the biggest “winner” of SciClone’s FCPA journey would appear to be the law firm representing SciClone.
Other Ripples
FCPA Professor has followed SciClone’s FCPA scrutiny since day one in August 2010 (see here).
As chronicled on FCPA Professor, the biggest storyline was how SciClone’s disclosure of the SEC subpoena triggered a nearly 40% drop in the company stock price, resulting in an absolute feeding frenzy of plaintiff lawyers filing FCPA-related civil claims. (See here and here).
Indeed, SciClone’s FCPA scrutiny is prominently featured in the article “Foreign Corrupt Practices Act Ripples“ which highlights how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.
Nevertheless, savvy investors know that FCPA-induced dips often present buying opportunities and SciClone’s stock closed last Friday (the first day of trading after announcement of the FCPA enforcement action) up 8% and substantially higher compared to its August 2010 close (recognizing of course that a number of factors can influence a company’s stock price over the course of nearly 6 years).
For Your Viewing Pleasure
In this 2014 video, SciClone’s CEO talks about the company’s FCPA scrutiny and, more generally, compliance.
“Golf In The Morning And Beer-Drinking In the Evening” – SciClone Pharmaceuticals Resolves $12.8 Million FCPA Enforcement Action For Subsidiary’s Marketing And Promotional Activities
Yesterday, the SEC released this administrative action finding that SciClone Pharmaceuticals (a California pharmaceutical company with a China-focused business) violated the FCPA’s anti-bribery, books and records and internal controls provisions.
The conduct at issue related to the marketing and promotional activities of SciClone Pharmaceuticals International Ltd., a wholly-owned subsidiary of SciClone incorporated in the Cayman Islands with an affiliate in Hong Kong.
Among other things of value provided to healthcare professionals employed by state-owned hospitals in China were weekend trips, foreign language classes, “golf in the morning and beer drinking in the evening,” and travel to the Grand Canyon and Disneyland.
In summary fashion, the SEC’s order states:
“From at least 2007 to 2012, employees of SciClone subsidiaries, who acted as agents of SciClone in conducting business in China, gave money, gifts and other things of value to foreign officials, including healthcare professionals (“HCPs”) who were employed by state-owned hospitals in China, in order to obtain sales of SciClone pharmaceutical products. Various means were employed, and these schemes were known to and condoned by various managers within SciClone’s China-based corporate structure. The related transactions were falsely recorded in SciClone’s books and records as legitimate business expenses, such as sponsorships, travel and entertainment, conferences, honoraria, and promotion expenses. During this period, SciClone also failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program.”
The conduct at issue largely focused on SciClone Pharmaceuticals International Ltd. (“SPIL”) which is described as a wholly-owned subsidiary of SciClone that is incorporated in the Cayman Islands with an affiliate in Hong Kong. According to the order:
“SciClone operates internationally primarily through subsidiaries, including SPIL and SPIL’s wholly-owned subsidiaries that sell and promote SciClone’s products in China. SciClone directs the relevant operations of SPIL and its subsidiaries and oversees SPIL’s operations through various means including through the appointment of directors and officers of SPIL, review and approval of its annual budget, business and financial goals, and oversight of its legal, audit, and compliance functions. SciClone also reviews and approves annual marketing and promotion budgets of SPIL and its subsidiaries. During relevant periods, some SciClone officers also served as officers and/or directors of SPIL, traveled frequently to China to participate in the management of SPIL, and were responsible for negotiating its contracts with its Chinese distributors. SPIL’s books and records are consolidated by SciClone and reported in its financial statements.”
Under the heading “Facts,” the order states:
“Although SciClone has local distributor relationships in China, its sales and marketing activities there are conducted through SPIL. Sales representatives in China regularly reported to senior management of SPIL on their efforts to increase sales. In these reports, sales representatives openly referred to instances in which they provided weekend trips, vacations, gifts, expensive meals, foreign language classes, and entertainment to HCPs in order to obtain an increase in prescriptions from those HCPs. As described by one sales manager, this was “luring them with the promise of profit.”
Some sales representatives referred to those HCPs with the greatest impact on their sales volume as VIP clients, and provided details on their volume of prescriptions when reporting to SPIL. This practice was known and encouraged by certain former SPIL managers at the time SPIL and SciClone had overlapping officers and/or directors. These reports included such things as:
- In August 2005, numerous surgical VIP clients including several hospital presidents attended the annual Qingdao Beer Festival consisting of golf in the morning and beer-drinking in the evening. In later years, SPIL continued to sponsor VIPs to the annual festival.
- In February 2007, VIP clients were provided with vacations to Anji, China.
- In November 2007, a sales representative recounted the experience of recruiting a VIP client by paying for family vacations and regular family dinners through an employee expense account. The sales representative attributed a nearly four-fold sales increase to that VIP as a result.
In 2007, SciClone submitted a license application to the State Food and Drug Administration for a new medical device product and had a renewal pending for its largest product. SciClone hired a well-connected regulatory affairs specialist (“Specialist”) to facilitate that licensing.
The Specialist arranged trips for two foreign officials to attend an academic conference in Greece at SciClone’s expense. The conference was solely related to the new medical device. One of the foreign officials had oversight over new product approvals, and the other foreign official had oversight over renewals for existing licensed products. At the time the trip was arranged, both SciClone’s renewal application and its application for a new license were pending.
As the foreign officials were unable to obtain travel visas in time to attend the conference in Greece, the Specialist instead provided them at least $8,600 in lavish gifts. The Specialist submitted two expense reimbursements for the gifts, the first of which was approved by the senior vice president of SPIL.
After learning of the gifts, SciClone terminated the Specialist and conducted an internal investigation related to the Specialist’s conduct and practices in China. The review did not look more broadly at sales and marketing practices in China. No further action or remedial measures were taken by SciClone or SPIL after the conclusion of the internal investigation in 2008.
Local Chinese travel companies were routinely hired to provide services (such as arranging transportation, accommodations, and meals for HCPs) in connection with what were ostensibly legitimate conferences, seminars, and other events. In addition to a lack of due diligence for these third party vendors, prior to 2012, there was a lack of controls over the events to ensure they had an appropriate business purpose and that the events actually occurred. Many events did not include a legitimate educational purpose or the educational activities were minimal in comparison to the sightseeing or recreational activities. For example:
- Between at least 2008 and 2010, SciClone sponsored dozens of Chinese HCPs to attend liver and oncology conferences in the United States. While a portion of the travel was devoted to educational purposes, it also consisted of significant sightseeing that involved, for example, travel to Las Vegas and Los Angeles with tours of the Grand Canyon or Disneyland.
- In April 2010, SPIL sponsored Chinese HCPs to attend a seminar in Japan regarding Zadaxin, its principle product. While a portion of the meeting appeared to involve half a day of educational activities, the remaining six days involved sightseeing and tourist locations such as Mt. Fuji.
- In March 2010, SPIL held its annual sales meeting in China on the island of Hainan, a resort destination. The sales meeting was attended by the sales representatives and senior management from SPIL. The weekend before the sales meeting, SPIL hosted VIP clients to a weekend stay on Hainan. There was no educational component to the VIP clients’ stay.
As part of its remedial efforts, SciClone conducted a detailed, comprehensive internal review of promotion expenses of employees from 2011 to early 2013. This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings. A portion of the funds generated through the reimbursements were used as part of the sales practices described above that continued through at least 2012.”
Based on the above, the SEC found as follows:
“SciClone through SPIL violated [the anti-bribery provisions] by providing things of value to foreign officials, including healthcare professionals (“HCPs”) who were employed by state-owned hospitals in China, in order to obtain sales of SciClone pharmaceutical products. SciClone violated [the books and records provisions] by improperly recording the payments to health care providers as sales, marketing, and promotion expenses. The false entries were initially recorded by SPIL which were then consolidated and reported by SciClone in its consolidated financial statements. SciClone violated [the internal controls provisions] by failing to devise and maintain a sufficient system of internal accounting controls to detect and prevent the making of improper payments to foreign officials.”
Without admitting or denying the SEC’s findings, SciClone is required to cease and desist from committing future FCPA violations and agreed to pay approximately $12.8 million ($9,426,000 in disgorgement and prejudgment interest of $900,000 as well as a $2.5 million civil penalty).
In resolving the action, SciClone agreed to “report to the Commission staff periodically, at no less than nine-month intervals during a three-year term, the status of its remediation and implementation of compliance measures.” Specifically, SciClone is required to “submit to the Commission staff a written report within 180 calendar days of the entry of this Order setting forth a complete description of its Foreign Corrupt Practices Act (“FCPA”) and anti-corruption related 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 addition, SciClone is required to “undertake at least three follow-up reviews, incorporating any comments provided by the Commission staff on the previous report, to further monitor and assess whether the policies and procedures of Respondent are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws.”
Under the heading “Remedial Efforts,” the order states:
“SciClone has taken steps to improve its internal accounting controls and to create a dedicated compliance function. These include the following: (1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anticorruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone’s policies; and (8) creating an internal audit department and compliance department.”
In this release, SciClone’s Chief Executive Officer (Friedhelm Blobel) commented: “We are very pleased to have reached a final settlement with the SEC and DOJ that is in line with our previous expectations and brings this matter to conclusion. We believe that we have established an industry-leading compliance program, including a commitment to constant improvement, which is a key business asset. We look forward to continuing to focus on providing high quality medicines to patients, growing our business and creating value for our shareholders.”
John Dwyer and Jessica Valenzuela Santamaria (Cooley) represented SciClone.
Further Details Regarding The DOJ’s Recent Individual FCPA Enforcement Action In Connection With PDVSA Procurement
This previous post briefly mentioned the DOJ’s recent Foreign Corrupt Practices Act enforcement action against Roberto Rincon and Abraham Shiera for alleged improper business practices with officials at Petroleos de Venezuela S.A. (PDVSA), Venezuela’s alleged state-owned and state-controlled oil company.
This post goes in-depth regarding this recently unsealed criminal indictment.
In the indictment, Rincon is described as a U.S. lawful permanent resident and a resident of Texas who controlled, together with others, a number of closely held companies, including several U.S. companies, that he used to secure contracts with PDVSA.
Shiera is described as a Venezuelan national who resided in Florida who controlled, together with others, a number of closely held companies, including several U.S. companies, that he used to secure contracts with PDVSA.
Both Rincon and Shiera, along with their respective unnamed Texas or Florida-based companies, are alleged to be “domestic concerns.”
The “foreign officials” are described as follows.
Official A – employed by PDVSA, including as a buyer at PDVSA and a supervisor of other PDVSA buyers. Official A’s job responsibilities including assigning bidding panels to PDVSA buyers, including Official C and Official D, who would then be responsible for selecting companies for the bidding panels, which allowed those companies to submit bids on individual PDVSA projects.
Officials B – employed by PDVSA, including as a purchase analyst for PDVSA. Official B’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects.
Official C – employed by PDVSA, including as a purchasing manager and superintendent of purchasing at PDVSA. Official C’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects, and selecting which companies would win the economic portion of the bid process.
Official D – employed by PDVSA, including as a buyer for PDVSA. Official D’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects.
Official E – employed by PDVSA, including as a purchasing manager. Official E’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects.
The indictment refers to various PDVSA entities collectively as PDVSA including PDVSA Services Inc. (a U.S. based affiliate of PDVSA located in Houston, Texas that was, at various times, responsible for international purchasing on behalf of PDVSA) and Bariven S.A. (a PDVSA procurement subsidiary responsible for equipment purchases).
The indictment alleges that Rincon and Shiera “referred to the PDVSA officials who were assisting them in obtaining and retaining contracts with PDVSA in exchange for the bribes as ‘aliados,’ which translates into English as ‘allies’ or “allieds.”
The indictment alleges a conspiracy between 2009 and 2014 in which Rincon, Shiera and others enriched themselves “by obtaining and retaining lucrative energy contacts with PDVSA through corrupt and fraudulent means, including by paying bribes to PDVSA officials.” The alleged bribes to PDVSA officials were to “influence acts and decisions of the PDVSA officials in their official capacities and to induce the PDVSA officials to do and omit to do certain acts, including, but not limited to:
- assisting Rincon’s and Shiera’s companies in winning PDVSA contracts;
- providing Rincon and Shiera with inside information concerning the PDVSA bidding process;
- placing one or more of Rincon’s and Shiera’s companies on certain bidding panels for PDVSA projects;
- helping to conceal the fact that Rincon and Shiera controlled more than one of the companies on certain bidding panels for PDVSA projects;
- supporting Rincon’s and Shiera’s companies before an internal PDVSA purchasing committee;
- preventing interference with the selection of Rincon’s and Shiera’s companies for PDVSA contracts;
- updating and modifying contract documents, including change orders to PDVSA contracts awarded to Rincon’s and Shiera’s companies;
- assisting Rincon’s and Shiera’s companies in receiving payment for previously awarded PDVSA contracts, including by requesting payment priority for projects involving Rincon’s and Shiera’s companies.
The indictment alleges that “in addition to monetary bribes, Rincon and Shiera, together with others, bribed PDVSA officials by providing things of value, including recreational travel (including stays at the Fontaineblue Hotel in Miami Beach), meals (including whiskey), and entertainment, in order to obtain and retain business on behalf of Rincon’s and Shiera’s companies.”
The indictment also alleges that money was transferred from a bank account in the name of one of Rincon’s companies “to pay off the balance of a mortgage loan in Official E’s name for a residence in the Southern District of Texas, in exchange for Official E’s assistance in connection with PDVSA contracts” as well as money to “a close personal associate of Official E, but over which Official E held power of attorney.”
According to the indictment, Rincon and Shiera “provided to certain PDVSA officials who were receiving bribes proposed bidding panel lists that would include more than one company controlled by Rincon or Shiera to create the false appearance that the bidding process was competitive.” The indictment also alleges that Rincon and Shiera “attempted to conceal the bribes to certain PDVSA officials, which they referred to as ‘commissions,’ by creating false justifications for the bribes, including requesting or receiving invoices for equipment that was not provided and services that were never rendered in order to disguise the bribe payments to PDVSA officials.”
In addition to the conspiracy charge, the indictment also charges: (i) Rincon with four substantive violations of the FCPA’s anti-bribery provisions; (ii) Shiera with five substantive violations of the anti-bribery provisions; and (iii) Rincon and Shiera with money laundering conspiracy as well as seven substantive money laundering offenses.
An Order of Detention Pending Trial against Rincon states that the DOJ’s investigation “covered 730 bank accounts; of those 108 were related to Rincon, his family and his companies.” According to the filing, “the indictment seeks forfeiture of three Swiss bank accounts” that the Government has “traced $100 million from the scheme.” The filing further states that “from 2009 to 2014, over one billion dollars was traced to this conspiracy.”
In response to the U.S. allegations, PDVSA released the below statement.
