Top Menu

Danish Subsidiary Exposes Analogic To $14.9 Million Enforcement Action

analogic

Yesterday the DOJ and SEC announced (see here and here) a parallel Foreign Corrupt Practices Act enforcement action against medical device manufacturer Analogic Corp. and BK Medical ApS (Analogic’s Danish subsidiary) in which the entities agreed to pay approximately $14.9 million.

The conduct at issue involved alleged improper payments by BK Medical, primarily in Russia through distributors, and the government alleged that BK Medical took various steps to conceal its conduct from Analogic.

The enforcement action involved a DOJ non-prosecution agreement with BK Medical in which the company agreed to pay a $3.4 million criminal penalty and an SEC administrative order against Analogic in which the company agreed to pay approximately $11.5 million in disgorgement and prejudgment interest. In connection with the same administrative order, the SEC also announced that “Lars Frost, BK Medical’s former Chief Financial Officer, agreed to pay a $20,000 civil penalty to settle charges that he knowingly circumvented the internal controls in place at BK Medical and falsified its books and records.

Continue Reading

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

Chevron and others get the front-page treatment, the Aguilar prosecution is officially over as well, some additional FCPA compliance survey data, Wal-Mart civil suits continue to pile up, and Chinese state-owned enterprises continue their global M&A push, it’s all here in the Friday roundup.

Kazakhstan Customs Inquiry

In yesterday’s Wall Street Journal, Christopher Matthews and Joe Palazzolo broke a story (“Oil Giants Launch Bribe Probes”) about an apparent investigation regarding Kazakh customs issues involving members of Karachaganka Petroleum Operating BV (“KPO”) including Chevron Corp. and Eni SpA, as well as a logistics arm of Deutsche Post AG, DHL, which handles freight shipments for the group.  (For more on KPO see here).  According to tips discussed in the WSJ article, the “KPO joint venture authorized DHL to bribe Kazakh customs officials to ignore paperwork irregularities that could have delayed shipments.”  The WSJ article discusses “the difficult choices companies face operating in developing countries” and notes that, according to a knowledgeable source, when KPO logistics officials ordered DHL representatives to “stop payments to customs officials” in March 2011 the “customs inspectors found problems with virtually very KPO shipment” and “nothing was cleared to pass” until DHL resumed the payments.

Payments in connection with foreign customs, licenses, permits and the like have been fertile ground for FCPA enforcement activity, although as noted in this recent post in connection with Wal-Mart’s potential FCPA exposure, it is an open question in many cases whether the conduct at issue is the type of conduct Congress sought to capture in passing the FCPA.

In 2007, Chevron resolved an enforcement action (here) involving Iraqi Oil for Food conduct and in 2010 Eni (and related entities) resolved an enforcement action (see here for the prior post) involving Bonny Island, Nigeria conduct.  In addition, as highlighted in this recent post, Eni is also reportedly under investigation concerning its conduct in Libya.

Aguilar Conviction Vacated

This recent post highlighted the official end to the Lindsey Manufacturing prosecution.  The prosecution of Angela Maria Gomez Aguilar, who was tried along with the Lindsey defendants, is officially over as well.  As noted in this previous post, Aguilar (a purported agent of Lindsey Manufacturing) was granted a judgment of acquittal after the DOJ’s case as to one substantive count of money laundering, but the jury convicted her of one count of money laundering conspiracy.  After the conviction, Aguilar negotiated an agreement with the DOJ for a time-served sentence and immediate release from custody.  Following Judge Matz’s dismissal of the indictment last December based on numerous instances of prosecutorial misconduct (see here for the prior post), Aguilar obtained an agreement from the DOJ to stipulate to a motion vacating the one count of conviction, an agreement which took effect upon the DOJ’s recent decision not to further pursue its appeal.

As noted in this recent release, Judge Matz this week signed an order vacating Aguilar’s conviction.  In the release, Aguilar’s counsel, Stephen Larson (Arent Fox – here) stated as follows.  “The government overreached in its efforts to press this case.  It is bittersweet whenever a prosecution is terminated for misconduct.  Although Ms. Aguilar is greatly relieved by Judge Matz’s decision to end this ordeal, it is tragic that it was permitted to go this far.  I am pleased that the Department of Justice has recognized as much by opting not to pursue its appeal in this case.”

Kroll’s 2012 FCPA Benchmarking Report

This post discussed recent FCPA survey data.  Add Kroll’s recent FCPA Benchmarking Report (here) to the list.

As noted in the Report, the study was “designed to take the pulse of corporate compliance officers at U.S. based multinationals and to provide benchmarks for the current state of anti-bribery preparedness.”

Survey results that caught my eye include the following.

“Sixty-nine percent of all respondents said their companies were either moderately or highly exposed to bribery risk; this number jumps to 100 percent in the pharmaceutical industry and drops to 46 percent in the financial services industry.  […] 85 percent believe [such risk] will increase or stay the same in the future.”

“Fifty-three percent of respondents said their compliance departments have increased their budgets in the last year; 49 percent said they have increased hiring; and 22 percent said they have experienced a centralization of compliance decision-making.”

“The most frequently cited challenges to anti-bribery compliance include the inability to anticipate regulators’ next moves (21 percent) and ensuring that employee training is taken seriously and is used when a risky situation presents itself (20 percent).”

“Seventy-nine percent of respondents characterized their compliance efforts as a strategic advantage in addition to being a strong defensive tactic.”

“[T]he weakest link among survey respondents was how they handled third party relationships.  While 99 percent of respondents said they had anti-bribery provisions for employees in their companies’ codes of conduct, that number fell to 73 percent when compliance officers were asked about anti-bribery provisions for third parties.  […] The scope of [FCPA risk by using third parties] is exacerbated by the fact that approximately three in four U.S. companies (77 percent) report that they partner with foreign companies to do business abroad.  Thirty-seven percent of respondents said they do business with between 100 and 1,000 third parties; 27 percent said they work with between 1,000 and 10,000 third parties; and 17 percent said they work with between 10,000 and 100,000 different third parties.  A small number said they worked with more than 100,000 different third parties.”

It’s a third-party world.

The Report was based on responses from “139 senior corporate compliance executives from companies ranging in size from $100 million to over $10 billion in revenues per year” who were interviewed by phone from July 2011 to February 2012.  Survey respondents were drawn mainly from four industries:  financial services, IT/telecommunications, energy, and pharmaceuticals.

The report was published by Kroll Advisory Solutions (here), a company that assists clients mitigate and respond to risks, including FCPA issues.

Wal-Mart Civil Suits

One of my earliest Wal-Mart posts (here) noted that not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico.

Sure enough.

Wal-Mart’s recent quarterly SEC filing stated as follows.

“The Company is a defendant in several recently-filed lawsuits in which the complaints closely track the allegations set forth in a news story that appeared in the New York Times on April 21, 2012.  One of these is a securities lawsuit that was filed on May 7, 2012 in the United States District Court for the Middle District of Tennessee, in which the plaintiff alleges various violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) beginning in 2005, and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, relating to certain prior disclosures of the Company. The plaintiff seeks to represent a class of shareholders who purchased or acquired stock of the Company between December 8, 2011, and April 20, 2012, and seeks damages and other relief based on allegations that the defendants’ conduct affected the value of such stock. In addition, eleven derivative complaints were filed in April and May 2012, in Delaware and Arkansas, also tracking the allegations of the Times story, and naming various current and former officers and directors as additional defendants. The plaintiffs in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants who are or were directors or officers of the Company breached their fiduciary duties in connection with oversight of FCPA compliance. While management cannot predict the outcome of these matters, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.”

Chinese SOEs

This recent post focused on China SOEs and provided links to data and analysis concerning the ever increasing global push of Chinese SOEs.  Yesterday, the Wall Street Journal ran an article titled “China Buys Overseas Assets” that discusses a recent report from A Capital, a private equity firm based in China and Paris (see here for A Capital’s report).  As indicated in the article, “China’s overseas investment surged in the first quarter [of 2012] to $21.4 billion as state-owned companies snapped up resource-related assets around the globe.”  According to the report, state-owned companies accounted for 98% of all deal value in the first quarter, a new high.

*****

A good weekend to all.

Friday Roundup

Coming attractions, monitor talk, LatinNode related individual sentences, just who are those “gestores,” scholarship of note, and Supreme Court quotables.  It’s all here in the Friday roundup.

Coming Attractions

This prior post contained FCPA practitioner Homer Moyer’s discussion of industry sweeps.  Industries that have been subjected to industry sweeps or are reportedly in the middle of industry sweeps include:  oil and gas, pharmaceutical / medical devices, and financial services.

Add Hollywood film studies to the list.

Reuters reports (here) that the SEC “has sent letters of inquiry to at least five movie studios in the past two months, including News Corp’s 20th Century Fox, Disney, and DreamWorks Animation” that “ask for information about potential inappropriate payments and how the companies dealt with certain government officials in China.”

The New York Times (here) also reported on the letters of inquiry and stated that the SEC “has begun an investigation into whether some of Hollywood’s biggest movie studios have made illegal payments to officials in China to gain the right to film and show movies there.”

In other disclosure news, Turkcell Iletisim Hizmetleri A.S. (Turkcell), Turkey’s only New York Stock Exchange listed company, recently disclosed in an SEC filing (here) as follows.  “Some of [the countries the company operates in] also suffer from relatively high rates of fraud and corruption. For example, allegations have been made regarding improper payments relating to the operations of KCell, a mobile operator in Kazakhstan and 51% subsidiary of Fintur Holdings B.V., in which we hold a 41.45% stake, while TeliaSonera holds the remainder. The allegations were discussed by Turkcell’s Board of Directors, which requested an independent investigation of the allegations made. TeliaSonera initiated an independent investigation as agreed by the Fintur Board. The Turkcell Board has been informed that to date there has not been substantiated any such allegations and the Fintur Board informs us that it has completed its own investigation. Since no assurance can be given that there will not be further requests for investigation, we remain vigilant on this matter.”

In other disclosure news, in October 2006, the SEC informed the Bristol Myers Squibb Company that it had begun a formal inquiry into the activities of certain of the company’s German pharmaceutical subsidiaries and its employees and/or agents.  The company previously disclosed that “the SEC’s inquiry encompasses matters formerly under investigation by the German prosecutor in Munich, Germany, which have since been resolved,” that the inquiry concerns potential violations of the FCPA and that “the company is cooperating with the SEC.”  Yesterday, in a 10-Q filing, the company stated as follows.  “In March, 2012, the Company received a subpoena from the SEC. The subpoena, issued in connection with an investigation under the FCPA, primarily relates to sales and marketing practices in various countries. The Company is cooperating with the government in its investigation of these matters.”

According to my tally, over the past two months, approximately 15 companies have newly disclosed, or been linked to, FCPA scrutiny.  See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.”  (And no, Wal-Mart is not included in this list, the company disclosed its FCPA scrutiny in December 2011).

Hercules Offshore disclosed better news in its 10-Q filing yesterday.  The company stated as follows.  “On April 4, 2011, the Company received a subpoena issued by the Securities and Exchange Commission (“SEC”) requesting the delivery of certain documents to the SEC in connection with its investigation into possible violations of the securities laws, including possible violations of the Foreign Corrupt Practices Act (“FCPA”) in certain international jurisdictions where the Company conducts operations. The Company was also notified by the Department of Justice (“DOJ”) on April 5, 2011, that certain of the Company’s activities were under review by the DOJ. On April 24, 2012, the Company received a letter from the DOJ notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ indicated that its decision to close the matter was based on, among other factors, the thorough investigation conducted by the Company’s special counsel and the Company’s compliance program. The Company, through the Audit Committee of the Board of Directors, intends to continue to cooperate with the SEC in its investigation. At this time, it is not possible to predict the outcome of the SEC’s investigation, the expenses the Company will incur associated with this matter, or the impact on the price of the Company’s common stock or other securities as a result of this investigation.”

For the second straight day, I say kudos to the DOJ.  Yet, I also ask on consecutive days – would anything really change with an FCPA compliance defense?  As I note in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) the DOJ already recognizes a de facto FCPA compliance defense albeit in opaque, inconsistent and unpredictable ways. Thus, an FCPA compliance defense accomplishes, among other things, the policy goal of removing factors relevant to corporate criminal liability from the opaque, inconsistent, and unpredictable world of DOJ decision making towards a more transparent, consistent, and predictable model best accomplished through a compliance defense amendment to the FCPA.

Monitor Talk

As discussed in this prior post, in March Biomet resolved an FCPA enforcement action involving $22.8 million in combined fines and penalties ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint).  Pursuant to the DPA, Biomet agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures as described in an attachment to the DPA.

As evidence that investor concern regarding FCPA issues does not end on enforcement action day, during a recent earnings conference call, an analyst asked Biomet CEO Jeff Binder the following question.

“I guess just with regard to the DOJ settlement that was announced for the FCPA potential violations, I’m just wondering — I guess you’re going to have an 18-month monitoring period. So I assume that would only apply to your international business? And then maybe even within the international business, would that only apply to certain regions where there have been problems found? And then what sort of a pricing — sorry, not pricing, but cost impact do you expect from that monitoring? Is it something material or not?”

Binder responded as follows.  “Yes. You’re correct that the monitorship will apply to our businesses outside the United States, but the monitors purview is broad outside the United States. The monitor has the ability to take a look at our businesses across the world. The monitor will do a risk assessment upfront. They’ll understand where our issues have been and they’ll take a look at our processes. They’ll develop that risk assessment. They’ll come up with a work plan that’s based on that risk assessment. And we’ll take it from there. We don’t expect that additional expenses for the monitor will be material to the business. DOJ and SEC require the candidates for the monitorship to submit budgets of the projected services for their work. And I’d just say that the amounts that were set forth in those budgets are not material, and we don’t anticipate significant internal expenses associated with the monitorship.”

LatiNode Individual Sentences

As noted in this DOJ release, in April 2009 LatiNode, a privately held Florida corporation, pleaded guilty to violating the Foreign Corrupt Practices Act in connection with improper payments in Honduras and Yemen and agreed to pay a $2 million criminal penalty.  Thereafter, several of its former executives – Jorge Granados, Manuel Caceres, Manuel Salvoch, and Juan Vasquez were criminally charged and pleaded guility.

Earlier this week Caceres (former vice president of business development at LatiNode) and Vasquez (a former senior commercial executive at LatiNode) were sentenced.  U.S. District Court Judge Joan Lenard (S.D. of Fl.) sentenced Caceres to 23 months followed by 1 year supervised release – the DOJ sought a 36 month sentence.  U.S. District Court Judge Patrricia Seitz (S.D. of Fl.) sentenced Vasquez to 3 years probation, community service, home detention and monitoring and ordered him to pay a $7,500 criminal fine – the DOJ originally sought a 36 month sentence and recently stated that it “would not oppose a sentence for Vasquez that was less than the sentence for Caceres and Salvoch [who is yet to be sentenced].”

As noted in this prior post, in September 2011, Granados was sentenced to 46 months in prison.

“Gestores”

The New York Times article suggested that many of the Wal-Mart Mexican payments at issue were routed through Mexican gestores.   Just who are those “gestores.”?  I found this article from CBS of interest.  The article states as follows.   “A visit to any government office is likely to bring the sighting of a well-dressed man carrying reams of documents who will glide past the long lines, shake hands with the official behind the counter and get ushered into a backroom, where his affairs presumably get a fast-track service. The suspicion is these go-betweens funnel a portion of the fees they charge clients to corrupt officials to smooth the issuance of permits, approvals and other government stamps.  In a country where laws on zoning rules, construction codes and building permits are vague or laxly enforced, the difference between opening a store quickly and having it held up for months may depend on using a gestor.”

Scholarship of Note

Pre-Wal-Mart, the FCPA conversation of the spring focused on charitable contributions in the context of the Wynn-Okada dispute.  See here, here and here for the prior posts.  Other posts have noted (see here) that, strange as it may sound, the FCPA’s anti-bribery provisions are only implicated when something of value is provided, directly or indirectly, to a foreign official to influence the official in obtaining or retaining business.  The FCPA’s anti-bribery provisions are not implicated when the thing of value is provided to a foreign government itself.  Other prior posts (here and here) have discussed Dodd-Frank Act Section 1504’s Resource Extraction Disclosure Provisions.

Given my prior writings on these issues, I was pleased when Emory University School of Law student Francesca Pisano sent me the student comment “Anti-Corruption Law & Corporate Philanthropy: Rethinking the Regulations” (here) selected for publication in a forthcoming issue of the Emory Law Journal.

The abstract states as follows.

“When the 2010 earthquake hit Port-au-Prince, Haiti, U.S. companies donated over $146.8 million to the relief effort. Despite this impressive display of global engagement, commentators suggested that the US anti-corruption laws had discouraged corporations from greater involvement. Even with the laws in force, however, reports of corruption in the relief effort soon surfaced, derailing Haiti’s recovery. Foreign aid that feeds corruption will never achieve sustainable growth, but development efforts will similarly fail if U.S. anti-corruption laws discourage corporate philanthropy.  This comment analyzes the application of two U.S. anti-corruption laws, the Foreign Corrupt Practices Act (“FCPA”) and the Dodd-Frank Section 1504, to international corporate charity. It shows how the FCPA’s ambiguous nature has the unfortunate effect of being both over- and under-inclusive, discouraging bona fide charity while at the same time failing to capture corrupt donations. The recently-enacted Dodd-Frank Section 1504 has great potential, but the SEC’s proposed rules have created a loophole to allow corruption to continue if hidden in corporate charity.  This comment proposes a modification to FCPA enforcement: creating a Safe Harbor Option. This will offer businesses the opportunity to “buy” a rebuttable presumption of legitimacy for their charitable donations by publically disclosing the payments, projects, and recipients of their philanthropy. Granting a presumption of legitimacy to disclosed donations will ameliorate many of the over-inclusive aspects of the FCPA. The increased disclosure will allow the public to monitor corporate charity and question suspicious gifts, ameliorating the under-inclusive aspects of FCPA enforcement. This comment also argues that Section 1504 should be defined expansively to prevent charity from being used to circumvent the congressional goals of increasing transparency and combating corruption. If properly defined, Section 1504 is an excellent example of regulation through disclosure and transparency, rather than prohibitions.”

Supreme Court Quotable

This recent post discussed non-FCPA caselaw that touched upon issues relevant to the recent “foreign official” challenges.  Last week, the Supreme Court issued its opinion (here) in Mohamad v. Palestinian Authority concerning the scope of the Torture Victim Protection Act.  The Court, in an opinion authored by Justice Sotomayor held that the term “individual” in the TVPA encompasses only natural persons, and thus the law does not impose liability against corporatons.  In her opinion, Justice Sotomayor’s stated, among other things, as follows.

“Congress remains free, as always, to give the word [individual] a broader or different meaning. But before we will assume it has done so, there must be some indication Congress intended such a result.”

“We add only that Congress appeared well aware of the limited nature of the cause of action it estab­lished in the Act.”

“The text of the TVPA convinces us that Congress did not extend liability to organizations, sovereign or not. There are no doubt valid arguments for such an extension. But Congress has seen fit to proceed in more modest steps in the Act, and it is not the province of this Branch to do otherwise.”

*****

I went to Walmart last night.  After completing my purchase and before exiting the store, I stopped, looked around, and thought, wow, what a week!

A good weekend to all.

All About Panalpina

Last but certainly not least in the analysis of CustomsGate enforcement actions is Panalpina.

See here for the prior post on the Pride International enforcement action, here for the prior post on the Shell enforcement action, here for the prior post on the Transocean enforcement action, here for the prior post on the Tidewater enforcement action here for the prior post on the Noble enforcement action and here for the prior post on the GlobalSantaFe enforcement action.

The Panalpina enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $81.9 million ($70.6 million criminal fine via a DOJ plea agreement and deferred prosecution agreement; $11.3 million in disgorgement via a SEC settled complaint).

This is a long post, but the enforcement action takes up 230 pages.

What you will find in these pages is that Panalpina paid millions of dollars of alleged bribes on behalf of certain of its customers (and in some instances for its own benefit as well), that a majority of the improper payments relate to Nigeria, and that a majority of Nigerian payments relate to temporary importation permits in connection with importing rigs and other vessels into Nigerian waters.

As to a U.S. nexus of these payments (a nexus necessary to find Panalpina, a foreign based non-issuer company, liable under the FCPA) you will find that the information alleges one e-mail and one conference call in which a certain Nigerian payment was discussed.

You will find that Panalpina also engaged in alleged improper conduct in numerous other countries besides Nigeria, but because of how the deferred prosecution agreement is structured, Panalpina ended up paying $0 for this non-Nigeria improper conduct.

You will find how Panalpina, despite an alleged corporate culture of bribery, including at the most senior levels of the company, was offered a deferred prosecution agreement even though it did not disclose the conduct at issue, even though it did not cooperate at all times in the DOJ’s investigation, and even though certain improper payments continued while the company was engaged in discussions with the DOJ.

You will also find how the SEC asserted a rather unique jurisdictional basis against Panalpina. That is Panalpina acted as an agent for certain of its issuer-customers and violated the FCPA by masking the true nature of bribe payments in invoices submitted to its issuer customers that allowed the customers to then violate the FCPA.

DOJ

The DOJ enforcement action involved a criminal information against Panalpina World Transport (Holdings) Ltd. (“PWT”) resolved through a deferred prosecution agreement and a criminal information against Panalpina Inc. resolved through a plea agreement.

PWT Criminal Information

Basel, Switzerland based PWT (here) “is one of the world’s leading suppliers of forwarding and logistics services, specializing in global supply chain management solutions and intercontinental air freight and ocean freight shipments and associated supply chain management solutions.” It operates “a close-knit network with some 500 branches in over 80 countries,” does business in a further 80 countries with partner companies, and employs approximately 15,000 individuals.

The criminal information (here) focuses on a “network of local subsidiaries … each of which was responsible for providing the freight forwarding and logistics services to customers and for coordinating with other Panalpina-affiliated companies with respect to the transportation and shipment of cargo from abroad.” In addition, PWT and its subsidiaries “provided customers with importation, customs clearance and ground shipment services once the shipped goods reached their destination jurisdiction.”

The subsidiaries are:

Panalpina Inc. (“Panalpina U.S”), a wholly-owned subsidiary and agent of PWT located in New Jersey with 38 branches in the U.S. ,including Houston – the office that had the “primary relationship for [Panalpina’s] oil and gas industry customers”;

Panalpina World Transports (Nigeria) Limited (“Panalpina Nigeria), a majority-owned subsidiary and agent of PWT until 2008 located in Lagos, Nigeria that was an “affiliate of Panalpina U.S. and provided a wide variety of services for Panalpina U.S.’s customers”;

Panalpina Transportes Mundiasis, Navegacao e Transitos, SARL (“Panalpina Angola”), a wholly-owned subsidiary and agent of PWT located in Luanda, Angola;

Panalpina Limitada (“Panalpina Brazil”), a wholly-owned subsidiary and agent of PWT located in Sao Paulo, Brazil;

Panalpina Azerbaijan LLC (“Panalpina Azerbaijan”), a wholly-owned subsidiary and agent of PWT located in Baku, Azerbaijan;

Panalpina Kazakhstan LLP (“Panalpina Kazakhstan”), a wholly-owned subsidiary and agent of PWT located in Almaty, Kazakhstan;

Panalpina World Transport Limited (Russia) (“Panalpina Russia”), a wholly-owned subsidiary and agent of PWT located in Moscow, Russia; and

Panalpina World Transport Limited (Turkmenistan) (“Panalpina Turkmenistan”), a wholly-owned subsidiary and agent of PWT located in Turkmenbashi, Turkmenistan.

The information refers to PWT and the above subsidiaries collectively as “Panalpina.”

The criminal information begins with a heading titled “Panalpina’s Culture of Corruption.” This section states as follows.

“Prior to 2007, dozens of employees throughout the Panalpina organization were involved in paying bribes to foreign offcials. Panalpina generally made payments on behalf of customers in order to circumvent the customs process for imports and exports of goods and items. Panalpina paid these bribes for various reasons, such as to cause officials to overlook insufficient, incorrect, or false documentation and to circumvent the local laws and inspections so as to allow the shipment of contraband (mainly unauthorized food and clothing). Panalpina also on occasion paid bribes to secure foreign government contracts for itself or to obtain favorable tax treatment by foreign governments.”

According to the information, “the highest levels of PWT’s leadership, including a former member of PWT’s Board of Directors (“Board Member A”), knew of and tolerated Panalpina’s payments of bribes.”

The information states as follows:

“Panalpina’s longstanding practice of making bribe payments in violation of the FCPA resulted from a variety of factors, including: (1) pressure from Panalpina’s customers to have services performed as quickly as possible, or to receive preferential treatment in obtaining services; (2) an inadequate compliance structure; (3) a corporate culture that tolerated and/or encouraged bribery prior to 2007 as customary and necessary in various markets; (4) the involvement of management in PWT’s Swiss headquarters that tolerated the improper payments prior to 2007; and (5) the involvement of Panalpina management in the U.S. and in other countries that encouraged the improper payments prior to 2007.”

According to the information, between 2002 and 2007 “Panalpina paid bribes to foreign officials valued at approximately $49 million” and “payments paid on behalf of Panalpina’s U.S. customers and their foreign subsidiaries accounted for approximately $27 million of these bribes payments.”

The criminal information (here) alleges bribery schemes in Nigeria, Angola, Brazil, Azerbaijan, Russia, Kazakhstan, and Turkenistan.

Nigeria

According to the information:

“Panalpina had a substantial number of oil and gas customers that shipped items into Nigeria, including customers in the United States. The goods shipped by Panalpina into Nigeria could only be imported into the jurisdiction if they satisfied the local statutory and regulatory requirements, which required product inspection, submission of satisfactory paperwork, and payment of customs duties and other taxes. Furthermore, once the items had been imported, they remained subject to local laws or regulations. Some of Panalpina’s customers, including its U.S. customers, sought to avoid local customs and import laws and processes by seeking to import goods without sufficient documentation, without being inspected, or without paying the required taxes, duties or fees. Panalpina used a portion of the revenue earned from its customers to make bribe payments to local customs officials in exchange for their cooperation in assisting Panalpina in circumventing these local legal or regulatory requirements on behalf of Panalpina’s customers. Panalpina sought reimbursement for these bribe payments through invoices that used false terms to characterize the bribe payments.”

According to the information, Panalpina used “approximately 160 different terms [internally and externally to invoice customers] to falsely describe the bribes it paid in Nigeria relating to the customs process.”

The information alleges that “the bribes paid by Panalpina relating to the customs process were paid to officials in the Nigerian Customer Service (“NCS”), a Nigerian government agency” responsible for “assessing and collecting duties and tariffs on goods imported into Nigeria.”

According to the information, between 2002 and 2007, “Panalpina paid over $30 million in bribes to Nigerian government officials” and “payments made on behalf of Panalpina’s U.S. customers and their foreign subsidiaries accounted for at least $19 million of these bribe payments.”

The information describes four types of “bribery payments” in Nigeria – (1) Pancourier; (2) Temporary Import Permits payments; (3) “special” and other bribe payments; and (4) “recurring payments to government officials.” According to the DPA statement of facts “the overall largest category of payments, accounting for the largest amount of bribes, related to securing Temporary Importation Permits on behalf of its customers” and “those bribes ranged in value from $5,000 to over $75,000 per transaction.”

Pancourier

“Pancourier” was Panalpina’s “express courier service” that certain Panalpina customers used instead of “the normal shipping process” to “import goods or contraband into Nigeria without complying with Nigerian customs law.” According to the information, “Panalpina charged its customers a premium for this service and explained that no government receipt or paperwork would be available from NCS for the goods that were imported.” The information alleges that “Panalpina typically billed its customers for two separate charges” (1) a charge based on the weight of the shipment; and (2) a “special fee” that was a “bribe paid to the NCS officials for the purpose of securing an improper advantage for the customer.”

According to the information, between 2002 and 2007 “Panalpina, through Panalpina Nigeria, paid hundreds of bribes to NCS officials in relation to the Pancourier service.”

Special and Other Improper Payments

The information states as follows:

“In addition to the Pancourier service, Panalpina also offered standard freight forwarding and shipping services. For standard Panalpina freight forwarding and shipping, once the goods arrived at their destination, a Panalpina Nigeria employee would ensure that the goods cleared customs. The clearance process typically required the submission of documents, an inspection of the product being shipped, and the payment of any customs and other fees associated with the importation of that product. The goods shipped by Panalpina frequently encountered delays in clearng customs for various reasons, including insufficient or missing documentation or delays due to the legally-required inspection process. Panalpina customers often sought to avoid local customs and import laws and processes to expedite their shipments into Nigeria. Panalpina made cash bribe payments, through Panalpina Nigeria, to local government officials, including NCS employees, to expedite customs clearance, avoid the required cargo inspections, avoid fines, duty payments, and tax payments, and to circumvent permit requirements and other legal requirements.”

According to the information, between 2002 and 2007, “Panalpina, through Panalpina, Nigeria, paid thousands of bribes on behalf of its customers to Nigerian government officials to resolve these types of customs and immigration matters.”

Temporary Import Permits Payments

The information states as follows:

“Another service offered by Panalpina involved obtaining Temporary Import Permits (“TIPs”) required under Nigerian law to import high-value special equipment, such as rigs and other large vessels, into Nigerian water. A TIP could be extended through two six-month extensions (known as “TIP extensions”). Vessels imported under a TIP (and TIP extensions) could not remain in Nigeria longer than the period allowed for by the TIP and/or TIP extensions. Upon expiration, the vessel was required to be exported from Nigeria and, if appropriate, the customer could re-apply for a new TIP. Panalpina, through Panalpina Nigeria, made improper payments to Nigerian government officials to assist some of its customers to circumvent TIP regulations. Specifically, Panalpina Nigeria made payments to NCS officials, on behalf of customers, to extend TIPs without complying with Nigerian TIP regulations. As a result, the customers avoided the time and cost of removing vessels upon the expiration of the TIP, as was otherwise required by Nigerian law.”

According to the information, between 2002 and 2007, “Panalpina, through Panalpina Nigeria, paid over a hundred bribes to Nigerian government officials on behalf of Panalpina’s customers to improperly secure TIPs and TIP extensions.”

Payment of Bribes to Secure a Contract

The information alleges that between November 2003 and August 2005, “Panalpina promised to pay $50,000 to a National Petroleum Investment Management Services official (the “NAPIMS Official) in exchange for the official’s assistance in securing the award by NAPIMS of a logistics contract to Panalpina.” According to the information, “Panalpina was awarded a global framework logistics contract in or around November 2003” and “in or around November 2005, PWT directed the $50,000 bribe payment to be made to the NAPIMS Official in cash.”

The information states that NAPIMS supervised and managed Nigeria’s investment in the oil and gas industry and NAPIMS officials had the authority to approve or disapprove logistics contracts awarded for certain projects.

Recurring Payments to Government Officials

Although referenced in the information, the information does not contain any detail about such payments.

However, the DPA’s statement of facts states as follows.

“Panalpina Nigeria made improper payments to a wide variety of Nigerian officials, including, but not limited to, NCS offcials, Port Authority offcials, Maritime Authority officials, Police officials, Deparment of Petroleum officials, Immigration Authority officials, and National Authority for Food and Drug Control officials. Most of these improper payments were tied to specific transactions, however, Panalpina Nigeria also provided certain officials weekly or monthly allowances to ensure the officials would provide preferential treatment to Panalpina and its customers. Between in or around 2002 and in or around 2007, Panalpina made hundreds of improper weekly and monthly payments to Nigerian government officials.”

Angola

The information charges that between 2002 and 2008 “Panalpina Angola paid approximately $4.5 million in bribes to Angolan government officials.” Two types of payments are described: “Customs and Immigration Payments” and “Payments to Secure Contracts.”

Customs and Immigration Payments

According to the information, the payments were made to “Angolan government officials responsible for customs and immigration matters” and the purpose of the payments was to “cause such officials to: overlook incomplete or inaccurate documentation; avoid levying proper customs duties; or avoid imposition of fines relating to the failure of Panalpina Angola, or its customer, to comply with legal requirements.” According to the information, Panalpina Angola paid “hundreds of bribes” ranging from “de minimus amounts to $25,000 per transaction.”

Payments to Secure Contracts

The information charges that between December 2006 and March 2008, “Panalpina Angola paid over $300,000 to two Angolan government officials responsible for Angolan oil and gas operations to secure two separate logistics contracts.” According to the information, the officials “had the authority to approve or disapprove the retention of logistics companies to provide services for projects that Panalpina sought to secure.” According to the information, in connection with certain of these payments, Panalpina Angola “invoiced an Angolan government-controlled entity for a non-existent employee (referred to as the ‘ghost employee’) who was allegedly dedicated to the Angolan entity to work on the logistics for the particular project.”

Azerbaijan

The information states as follows.

“Between in or around 2002 and in or around 2007, Panalpina Azerbaijan paid approximately $900,000 in bribes to Azeri government officials responsible for assessing and collecting duties and tariffs on imported goods. […] The purpose of many of the bribes paid to the Azeri government officials was to cause these officials to overlook incomplete or inaccurate documentation; avoid levying proper customs duties; or avoid imposition of fines relating to the failure of Panalpina, or its customer, to comply with legal requirements. In addition, Panalpina also made bribe payments to Azeri tax officials to secure preferential treatment for Panalpina Azerbaijan.”

Brazil

The information states as follows.

“Between in or around 2002 and in or around 2007, Panalpina Brazil paid over $1 millon in bribes to Brazilian govermnent officials responsible for assessing and collecting duties and tariffs on imported goods on behalf of its customers. […] The purpose of many of these bribes was to expedite the customs clearance process; to avoid the imposition of fines and penalties; to circumvent Brazilian law requirements for customs declaration of courier shipments; to permit shipments to be imported in Brazil without an import license; and to allow exports from Brazil of goods originally imported without accurate and complete documentation. Many of the bribe payments made by Panalpina Brazil on behalf of its customers were in connection with shipments to Brazil originating with Panalpina U.S. from the United States.”

Kazakhstan

The information states as follows.

“Between in or around 2002 and in or around 2007, Panalpina Kazakhstan paid over $4 milion in bribes to Kazakh governent officials, including, for example, payments to Kazakh government officials responsible for assessing and collecting duties and tariffs on imported goods and officials responsible for administering and enforcing Kazakhstan tax policy. […] The purpose of many of the bribes paid to the Kazakh government officials was to cause officials to overlook incomplete or inaccurate documentation; avoid levying proper customs duties; and avoid imposition of fines relating to the failure of Panalpina, or its customer, to comply with legal requirements.”

According to the information, the payments “ranged from several hundred dollars to $50,000 per transaction.”

The information further states that “Panalpina Kazakhstan paid bribes to Kazakhstan officials responsible for administering Kazkhstan tax policy in conjunction with its annual tax audits to minimize the duration and depth of the audits as well as to reduce proposed fines.”

Russia

The information states as follows.

“Between in or around 2002 and in or around 2007, Panalpina Russia paid over $7 milion in bribes to Russian government officials responsible for assessing and collecting duties on imported goods. […] The purpose of many of the bribes paid to the Russian government officials was to avoid delays, administrative fines, and other legal action as a result of missing, incomplete or erroneous documentation; to avoid problems arising out of the improper use of a TIP; and to bypass the customs process in total.”

Turkmenistan

The information states as follows.

“Between in or around 2002 and in or around 2009, Panalpina Turkmenistan paid over $500,000 in cash bribes to: (i) Turkmen government officials responsible for assessing and collecting duties and tariffs on imported goods in order to expedite the release of shipments and undocumented shipments and to circumvent the official Turkmen customs and immigration regulations; (ii) Turkmen government officials responsible for auditing, assessing, and collecting taxes on economic activity in Turkmenistan to minimize the duration of audits and investigations and to reduce proposed fines; and (iii) Turkmen govermnent officials responsible for enforcing Turkmenistan labor, health, and safcty laws, including through the use of audits and inspections, to minimize the duration of audits and investigations and to reduce the proposed fines.”

Based on all of the above conduct, the information charges conspiracy to violate the FCPA’s anti-bribery provisions. In addition, as to the Nigeria conduct, the information charges FCPA anti-bribery violations.

As to a U.S. nexus (a requirement for an entity such as PWT to be in violation of the FCPA’s anti-bribery provisions under 78dd-3), the information merely alleges that in November 2003 “a Panalpina U.S. employee located in Houston, Texas, sent an e-mail to a Panalpina employee based in Switzerland advising that the NAPIMS Official would award a logistics contract with the Nigerian government to Panalpina in exchange for a bribe of $50,000” and that in November 2003 “Panalpina employees based in Switzerland, Panalpina U.S. employees located in Houston, Texas, and others participated in a conference call to discuss the $50,000 payment to the NAPIMS Official.”

PWT DPA

The DOJ’s charges against PWT were resolved via a deferred prosecution agreement (see here).

Pursuant to the DPA, PWT admitted, accepted and acknowledged that it was responsible for the acts of its directors, officers, employees, subsidiaries, agents and consultants as set forth above.

The DPA’s statement of facts contains a separate section titled “Panalpina U.S.’s Assistance to its Issuer-Customers in Circumventing Books and Records Controls.” This section states that between 2002 and 2007 “Panalpina U.S. provided services to over 40 customers that were issuers” and that “in total, Panalpina paid approximately $27 million in bribes to foreign officials on behalf of these issuer-customers.”

In pertinent part, the statement of facts state as follows.

“Many of Panalpina U.S.’s issuer-customers knew, or were aware of facts indicating a high probability, that Panalpina was paying bribes on their behalf. Further, those issuer-customers with knowledge of the bribe payments failed to properly record the payments in their books and records.”

“Many of Panalpina’s issuer-customers were aware of the bribes paid by Panalpina. Importantly, those issuer-customers with strong compliance programs or rigorous audit standards were either not offered services such as Pancourier, which included improper payments to governent officials, or Panalpina paid bribes on the issuer-customer’s behalf but would not invoice the issuer-customer for the payment.”

“Panalpina US., through the local Panalpina affiiates, knowingly and substantially assisted the issuer-customers in violating the FCPA’s books and records provisions by masking the true nature of the bribe payments in the invoices submitted to the issuer-customers. By providing an invoice to the issuer-customer for what appeared to be a legitimate payment, the customer could use that invoice as support for recording a particular charge as a legitimate service in its corporate books and records when, in fact, the invoice was for a bribe.”

The statement of facts then describe how Panalpina Nigeria specifically assisted Customer A (Shell) and Customer B (Tidwater) in making bribe payments for Pancourier services and TIP payments.

The DPA’s statement of facts provides further information about “Panalpina’s Corporate Culture and Senior Management Knowledge.” According to the statement of facts: “Prior to 2007 a culture of corruption within Panalpina emanated from senior level management in Switzerland who tolerated bribery as business as usual in various markets. This trickled down to other Panalpina employees who accepted bribery as a part of Panalpina’s standard business practice.” According to the statement of facts: “Many employees openly used the terms ‘apples,’ ‘interventions,’ ‘special handling,’ and ‘evacuations’ on a daily basis in conversations, written correspondence, and e-mail exchanges” even though “most employees understood that these terms referred to cash payments provided to government officials in exchange for preferential treatment.”

The term of the DPA is three years and seven months and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and PWT. Among the factors stated are the following.

(a) PWT conducted comprehensive anti-bribery compliance investigations of operations of PWT’s subsidiaries in seven countries, as well as separate investigations related to U.S. and Swiss operations;

(b) PWT conducted a review of certain transactions and operations conducted by its subsidiaries or agents in another 36 countries;

(c) PWT promptly and voluntarily reported its findings from all investigations to the Department, including arranging to provide information from foreign jurisdictions which significantly facilitated the Department’s access to such information;

(d) PWT mandated employee cooperation from the top down and ensured the availabilty of more than 300 employees and former employees for interviews during and following the investigations;

(e) PWT instituted a limited employee amnesty program to encourage employee cooperation with the investigations;

(f) PWT expanded the scope of the investigations where necessary to ensure thorough and effective review of potentially improper practices, and promptly and voluntarily reported any improper payments identified after internal and Department investigations had begun;

(g) After initially not cooperating with the investigation for several months, PWT fully cooperated with the Department’s investigation of this matter, as well as the SEC’s investigation, and on the whole exhibited exemplary
cooperation with the Departent’s investigation;

(h) PWT provided substantial assistance to the Department and the SEC in its investigation of its directors, officers, employees, agents, lawyers, consultants, contractors, subcontractors, subsidiaries and customers relating to violations of the FCPA;

(i) PWT undertook substantial remedial measures [the DPA then lists 10 such measures including “of its own initiative and at a substantial cost, PWT closed down its operations and withdrew from Nigeria to avoid potential ongoing improper conduct”]; and

(j) PWT agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of PWT and its directors, officers, employees, agents, lawyers, consultants, subcontractors, subsidiaries, and customers relating to violations of the FCPA.

As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $72.8 million to $145.6. Pursuant to the DPA, PWT agreed to pay a monetary penalty of $70.56 million. However, the DOJ and PWT agreed “that any criminal penalty that is imposed by the Court and paid by Panalpina U.S., in connection with its guilty plea and plea agreement entered into simultaneously herewith will be deducted from the $70,560,000 criminal penalty required by this Agreement.” Because the Panalpina Inc. plea agreement (which relates only to Nigeria conduct) contemplates a payment of $70,560,000, the effect of the above clause is that PWT will end up paying $0 for the non-Nigeria conduct described in the DPA.

Also of note, even though the DPA states that PWT did not initially cooperate with the DOJ’s investigation for several months, PWT nevertheless received sentencing credit for “fully cooperating” in the DOJ’s investigation.

Pursuant to the DPA, PWT agreed to a host of compliance undertakings and to report to the DOJ (during the term of the DPA) “on its progress and experience in implementing and, as appropriate, enhancing its compliance policies and procedures.”

The DPA references three tolling agreements agreed to between January 2008 and October 2010.

As is standard in FCPA DPAs, PWT agreed not to make any public statement “contradicting the acceptance of responsibility by PWT as set forth” in the DPA and PWT further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

Panalpina U.S. Criminal Information

The criminal information (here) describes “Panalpina U.S.’s Actions to Conceal Bribes on Behalf of Its Issuer-Customers in Nigeria.” Separate sections concern “Pancourier Express Courier Payments” and “Temporary Importation Payments.”

Count One of the information charges Panalpina U.S., a non-issuer, with conspiring and agreeing with Customer A [Shell] and Customer B [Tidewater] “to knowingly falsify and cause to be falsified books, records, and accounts which were required, in reasonable detail, to accurately and fairly reflect the transactions and dispositions of the assets of Customer A, Customer B, and other issuers” in violation of the FCPA’s books and records provisions.

Count Two of the information charges Panalpina U.S. with aiding and abetting FCPA books and records violations by aiding, abetting, and assisting Customer A [Shell] “in mischaracterizing payments for freight forwarding costs as ‘administration/transport charges’ in Customer A’s books and records when, in truth and in fact, Customer A knew that these payments were bribes, paid through Panalpina Nigeria, intended to be transferred to NCS officials.”

Panalpina U.S. Plea Agreement

The above criminal charges against Panalpina U.S. were resolved via a plea agreement (see here).

As stated in the plea agreement, the fine range for Panalpina U.S.’s conduct under the U.S. Sentencing Guidelines was $72.8 million to $145.6. Pursuant to the plea agreement, Panalpina U.S. agreed to pay a monetary penalty of $70.56 million.

In an “Agreed Motion to Waive the Presentence Report” (here) the DOJ states as follows.

“…Panalpina’s cooperation and remediation in this matter has been exemplary. Panalpina provided substantial assistance to the Deparment in its investigations relating to these matters. In addition, where Panalpina encountered evidence of new violations in the course of its internal investigation, it expanded the scope of the investigation accordingly and reported the new findings to the Department. Panalpina acknowledged and accepted responsibility for misconduct, investigated and identified the nature and extent of the misconduct, and undertook comprehensive global remediation and training during the course of the investigation. Panalpina’s remediation was global and included a dramatic change in its busincss model, paricularly in higher risk countries.”

As to how the DOJ’s investigation of PWT and its related entities began, the Report states as follows. “In approximately 2006, the Department opened an investigation into Panalpina’s business practices based on evidence obtained through several Panalpina customers indicating Panalpina had paid bribes to foreign government officials on behalf of its customers.”

The Report continues as follows. “In total, between in or around 2002 and in or around 2007, Panalpina paid bribes to offcials in at least seven countries, including Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan. Approximately $27,000,000 of that total related directly to, and was paid on behalf of, customers that were US. issuers or “domestic concerns” within the meaning of the FCPA.

The Report contains a footnote that states “a small number of improper payments continued into 2008 and 2009.” As to these payments, the Report notes elsewhere as follows. “Despite PWT’s and Panalpina U.S.’s extensive efforts to transform its compliance program, during the course of the investigation, PWT uncovered a few instances in which employees were continuing to pay bribes to foreign officials. This improper conduct, although limited, continued to occur into 2008 and early 2009. Upon discovery, PWT took swift action to stop the payments, to disclose the conduct to the Department, to terminate and/or reprimand the employees implicated in the conduct, and to retrain employees in the relevant countries regarding the importance of adhering to PWT’s compliance rules and regulations.”

As to Panalpina’s “Cooperation and Assistance” the Report states as follows.

“The Department initiated its investigation of Panalpina in or around mid-2006 based on conduct disclosed by Panalpina customers. Panalpina learned of the
investigation in or around late-2006 from its customers. Despite knowledge of the investigation, Panalpina did not voluntarily disclose the conduct to the Department and did not stop the illegal payment of bribes that was occurring on multiple continents. In or about early-2007, the Department requested documents and information from Panalpina; however, at that time, Panalpina exhibited a reluctance to cooperate with the investigation. Thereafter, Panalpina engaged and instructed its legal counsel (“Counsel”) to conduct a comprehensive internal investigation, and ultimately authorized Counsel to report the findings to the Department and SEC. Thereafter, Panalpina exhibited exemplary cooperation with the Department and SEC, and conducted a comprehensive internal investigation that fully supported and paralleled the Department’s investigation. Specifically, Panalpina engaged Counsel to lead investigations encompassing 46 jurisdictions and hired an outside audit firm to perform forensic analysis and other support tasks. Panalpina’s internal investigation included a comprehensive review of operations in nine countries – the United States, Switzerland, Nigeria, Brazil, Angola, Russia, Kazakhstan, Turkmenistan, and Azerbaijan – and a detailed review of 102 additional issues in another 36 countries. Panalpina expanded the scope of its internal investigation where necessary, and promptly and voluntarly reported its findings from all investigations to the Department and SEC in over 60 meetings and calls. When potential issues were identified in countries not subject to a full investigation, Panalpina thoroughly investigated and remediated those issues. Panalpina voluntarily supplied to the Department and the SEC information from interviews and documentary evidence regarding potential violations by Panalpina customers and third parties used as conduits for improper payments and for facilitating improper transactions. Panalpina provided substantial assistance to the Department and SEC in the investigation of its own directors, officers, and employees, mandated employee cooperation from the top down, and made over 300 current and former employees available for interviews to Counsel, the Department, and the SEC during and after the internal investigation. Panalpina also adopted a limited employee amnesty program to encourage employee cooperation with the internal investigation.”

The Report further notes as follows. “On September 30, 2010, in an unelated matter, PWT was charged in a three-count criminal information with fixing prices on surcharges added to air cargo shipments in certain trade lanes, in violation of Title 15, United States Code, Section 1. See United States v. Panalpina World Transport (Holding) Ltd., 10270-RJ (D.D.C.). The Company has agreed to plead guilty and to pay a fine of $11,947,845. No date has yet been set for entry of
the plea or sentencing.”

SEC

The SEC’s civil complaint (here) alleges, in summary, as follows.

“Between 2002 and continuing until 2007, Panalpina, Inc. engaged in a series of transactions whereby it directed business to affiliated companies within the Panalpina Group, which then used part of the revenues generated from this business to pay a significant number of bribes to government officials in countries including Nigeria, Angola, Brazil, Russia, and Kazakhstan. These bribes were paid by the Panalpina Group companies in order to assist Panalpina, Inc.’ s issuer customers in obtaining preferential customs, duties, and import treatment in connection with international freight shipments. The practice of Panalpina Group companies making these payments was known to certain Panalpina, Inc. employees, including some
members of Panalpina, Inc.’s management. Although the reasons for the bribes, and the payment schemes themselves, differed from jurisdiction to jurisdiction and transaction by transaction, most shared several similarities. The issuer customers often used Panalpina, Inc. or other Panalpina Group companies to ship goods from the United States, or elsewhere, to another jurisdiction or sought Panalpina, Inc.’s assistance in obtaining customs or logistics services in the country to which the goods were shipped. However, for various reasons including delayed departures, insufficient or incorrect documentation, the nature of the goods being shipped and imported, or the refusal of local government officials to provide services without unofficial payments, Panalpina, Inc.’ s issuer customers sometimes faced delays in importing the goods. In other cases, Panalpina, Inc.’s issuer customers sought to avoid local customs duties or inspection requirements or otherwise sought to import goods in circumvention of local law. In order to secure the importation of goods under these circumstances, Panalpina, Inc.’ s issuer customers often authorized Panalpina, Inc. and the local affiliated Panalpina Group companies (e.g., Panalpina Nigeria) to bribe local government offcials. These cash payments to government officials were typically made by employees of the local affiliated Panalpina Group companies. The affiliated Panalpina Group companies generally invoiced the issuer customers for the bribes, along with other legitimate fees, either directly or through an affiliated billing entity (“Affiliated Billing Entity”). These invoices, which contained both legitimate and illegitimate costs incurred by the Panalpina Group companies, inaccurately referred to the payments as ‘local processing,’ ‘special intervention,’ ‘special handling,’ and other seemingly legitimate fees. In reality, these payments were bribes to local government officials in order to secure improper benefits for the issuer customers.”

By engaging in this conduct, the SEC alleged that Panalpina, “while acting as an agent of its issuer customers” violated the FCPA’s anti-bribery provisions and aided and abetted its issuer customers’ violations of the FCPA’s anti-bribery provisions and books and records and internal control provisions. The SEC complaint specifically states that “neither Panalpina, Inc. nor PWT is an issuer for purposes of the FCPA.”

As to Pancourier payments, the complaint alleges that in order to assist its issuer customers avoid certain Nigerian legal requirements, “Panalpina Inc. would ship the product to Nigeria wrapped in a distinctive manner so that customs officials would recognize it as a Pancourier shipment and not inspect it, require a Form M, or otherwise subject it to normal customs procedures. In order to secure its preferential treatement, Panalpina Nigeria made regular improper cash payments to Nigerian customs officials.”

The SEC complaint also describes “additional bribes paid on behalf of issuer customers in Nigeria, Angola, and Brazil” including temporary importation payments described as “the largest category of customs-related payments made by Panalpina Nigeria on behalf of the issuer customers.” The complaint also describes “pre-release, intervention, evacuation, and special payments” made by Panalpina Nigeria to “Nigerian government officials on behalf of the issuer customers to secure the release of goods from customs prior to the completion of the inspection process” and to “secure improper benefits for the issuer customers.”

The Angola payments related to immigration matters “in order to obtain visas for the issuer customers on an emergency basis, often requesting that the visa be issued same-day, in contravention of Angolan law;” and customs matters “in order to assist the issuer customers to import goods into Angola without complying with Angolan law.” The complaint also describes “other payments” in Angola including “unofficial payments to Angolan military officials on behalf of the issuer customers in order to permit them to use military cargo aircraft to transport their commercial goods.”

The Brazil payments related to “improper payments to Brazilian government officials on behalf of its issuer customers in order to expedite the customs clearance process, and where necessary, to resolve customs and import-related issues.”

The complaint also alleges that between 2002 and 2007 “Panalpina Kazakhstan and Panalpina Russia made or authorized the making of several types of improper payments on behalf of issuer customers to government officials in Russia, Kazakhstan, and other parts of Central Asia, in order to assist the issuer customers improperly import goods into these jurisdictions or to obtain other types of improper benefits.”

According to the SEC, “Panalpina Inc. obtained improper benefits totatling at least $11,329,369 from the illegal conduct” described in the complaint.

Without admitting or denying the SEC’s allegations, Panalpina agreed to an injunction prohibiting future FCPA violations and agreed to pay disgorgement of $11,329,369.

In a press release (here), Panalpina CEO, Monika Ribar stated as follows. “The settlement of these claims marks the closing of an extremely burdensome chapter in Panalpina’s history and the end of a very demanding three-year effort to address and eliminate serious concerns. Now it is time for us to look to the future and to build on the strong and sustainable compliance culture we have put in place. We are also looking forward to strengthened relationships with our customers who have ceased or reduced business activities with Panalpina due to the investigation. Based on new leadership and significant enhancements of our compliance systems we are a much stronger company today.”

Richard Dean (here) and Douglas Tween (here) both of Baker & McKenzie represented the Panalpina entities.

Powered by WordPress. Designed by WooThemes