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SEC Brings Another Travel And Entertainment FCPA Enforcement Action

World Tour

Yesterday, the SEC brought its 7th Foreign Corrupt Practices Act enforcement action of 2014.  Like the previous 6 enforcement actions (5 against companies and 1 against individuals), the enforcement action was resolved via the SEC’s administrative process.

Yesterday’s enforcement action against life-sciences company Bruker Corporation was primarily based on excessive travel and entertainment benefits provided to alleged Chinese “foreign officials.”  The same core conduct was the basis of the SEC’s other most recent FCPA enforcement (see here).

In summary fashion, the SEC’s order sates:

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Bruker. The violations took place from at least 2005 through 2011 and occurred throughout Bruker’s China operations. Employees of the China offices of four Bruker subsidiaries (collectively, the “Bruker China Offices”) made unlawful payments of approximately $230,938 to government officials (“Chinese government officials”) who were employed by state owned entities (“SOEs”) in China that were Bruker customers. These payments were made to obtain or retain business from the SOEs for the Bruker China Offices. Specifically, all of the Bruker China Offices provided non-business related travel to Chinese government officials, and one Bruker China Office also paid Chinese government officials under “research cooperation” ventures and “collaboration” agreements (collectively, the “Collaboration Agreements”) for which there was no legitimate business purpose. Bruker realized approximately $1.7 million in profits from sales contracts with SOEs whose officials received the improper payments.

The payments to the Chinese government officials were recorded as legitimate business and marketing expenses in the Bruker China Offices’ books and records, when in fact they were improper payments designed to personally benefit the officials. The Bruker China Offices’ books and records were consolidated into Bruker’s books and records, thereby causing Bruker’s books and records to be inaccurate. Bruker failed to devise and maintain an adequate system of internal accounting controls sufficient to prevent and detect the improper payments that occurred over several years.”

According to the SEC order:

‘Bruker manages its China operations through the Shanghai and Beijing representative offices of the Asia-based subsidiaries of four Bruker divisions: Bruker Optics, Bruker BioSpin, Bruker Daltonics, and Bruker Materials (formerly Bruker AXS).”

Under the heading “The Bruker China Offices Improperly Funded Leisure Travel for Chinese Government Officials,” the Order states:

“The Bruker China Offices funded leisure travel for Chinese government officials to visit the United States, the Czech Republic, Norway, Sweden, France, Germany, Switzerland and Italy. These leisure trips typically followed business-related travel funded by the Bruker China Offices. The Chinese government officials who went on the trips often authorized the purchase of products from the Bruker China Offices. For example, during 2006, as part of a sales contract with an SOE, a Bruker China Office paid for purported training expenses for a Chinese government official (who signed the sales contract on behalf of the SOE). In fact, the payment included reimbursement for sightseeing, tour tickets, shopping and other leisure activities in Frankfurt and Paris. Also, in 2007, a Bruker China Office paid for three Chinese government officials to visit Sweden for a conference, but included as part of the travel, several days of sightseeing in Sweden, Finland, and Norway.

The Bruker China Offices also funded certain trips for Chinese government officials that had no legitimate business component. For example, during 2009, a Bruker China Office paid for two Chinese government officials to travel to New York, despite the lack of any Bruker facilities there, and to Los Angeles, where they engaged in sightseeing activities. Also during 2009, a Bruker China Office paid for three Chinese government officials to visit destinations in Europe for sightseeing. In another instance, during 2010, a Bruker China Office paid for three Chinese government officials to visit Frankfurt, Heidelberg, Stuttgart, and Munich, in Germany, as well as Salzburg, Liz, Innsbruck, Graz, and Vienna, in Austria. And in 2011, a Bruker China Office paid for Chinese government officials from seven SOEs to go on sightseeing visits to Europe, including Austria, France, Switzerland, Italy, and the Czech Republic. In certain cases, the Chinese government officials who went on these trips were involved in purchasing products from the Bruker China Offices.

Overall, from 2005 through 2011, the Bruker China Offices paid approximately $119,710 to fund 17 trips for Chinese government officials that were for the most part not related to any legitimate business purpose. These trips were recorded in Bruker’s books and records as business expenses, without any indication that they were primarily for sightseeing and other nonbusiness related activities. Bruker improperly profited by $1,131,740 from contracts obtained from the SOEs whose officials participated on these trips.”

Under the heading, “A Bruker China Office Improperly Funneled Payments to Officials of SOEs Under the Guise of Collaboration and Research Agreements,” the Order states:

“From 2008 through 2011, a Bruker China Office paid $111,228 to Chinese government officials pursuant to 12 suspect Collaboration Agreements. Generally, under these Collaboration Agreements, the SOEs had to provide research on Bruker products, or had to use Bruker products in demonstration laboratories. However, the Collaboration Agreements did not specify the work product that the SOEs had to provide to be paid, and no work product was in fact provided to the Bruker China Office by the SOEs. Also, certain Collaboration Agreements were executed directly with a Chinese government official, rather than the SOE itself; in some cases, the Bruker China Office paid the Chinese government official directly. And at times, the Chinese government officials who signed the Collaboration Agreements or obtained payments under the Agreements were involved in purchasing products from the Bruker China Office. Bruker profited by approximately $583,112 from contracts improperly obtained from the SOEs whose officials received payments under the Collaboration Agreements.”

Under the heading, “Bruker Failed to Implement an Adequate Internal Controls System,” the Order states:

“From at least 2005 through 2011, Bruker failed to implement an adequate internal controls system to address the potential FCPA problems posed by its ownership of the Bruker China Offices, which sold their products primarily to SOEs. For example, Bruker did not translate its training presentations on FCPA, ethics, or compliance issues into local languages, including Mandarin. And although Bruker implemented an FCPA policy in 2006, it failed to translate that policy into Mandarin and relied mainly on its China-based managers to ensure that employees understood the potential FCPA implications of doing business with SOEs. Also, while Bruker periodically distributed its Code of Conduct (containing its gifts and entertainment policies) and employee handbook to employees worldwide, it again failed to translate these documents into local languages, including Chinese. Likewise, Bruker’s toll free employee hotline, which employees were to use to report complaints anonymously, was not provided in Mandarin, limiting its efficacy.

Bruker also failed to adequately monitor and supervise the senior executives at the Bruker China Offices to ensure that they enforced anti-corruption policies or kept accurate records concerning payments to Chinese government officials. The Bruker China Offices had no independent compliance staff or an internal audit function that had authority to intervene into management decisions and, if appropriate, take remedial actions. Bruker also failed to tailor its preapproval processes for conditions in China, instead allowing the Bruker China Offices approval over items such as nonemployee travel and changes to contracts. As a result, senior employees of the Bruker China Offices had unsupervised control over the compliance process; these employees in turn abused their privileges, approving suspect payments to Chinese government officials for non-business related travel and for purported Collaboration Agreements.”

Based on the above findings, the SEC’s Order finds that Bruker violated the FCPA’s books and records and internal controls provisions.

Under the heading, “Discovery, Internal Investigation, and Self-Reporting,” the Order states:

“Bruker discovered the improper payments to Chinese government officials during 2011 while investigating the misappropriation of company funds by certain employees of a Bruker China Office. Upon learning about these payments, Bruker’s board of directors promptly initiated an investigation, with the assistance of independent outside counsel and an independent forensic consulting firm. Bruker self-reported the preliminary results of its internal investigation to both the staff of the Commission and to the Department of Justice. Thereafter, Bruker, on its own initiative, undertook a broad review of the China operations of its other divisions. To the extent this internal review identified additional issues of concern, Bruker fully shared its findings with the staff.

As part of its internal review and investigation, Bruker promptly undertook significant remedial measures including terminating the senior staff at each of the Bruker China Offices. Bruker also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies, and implemented those enhancements in China, and thereafter around the world. These steps included: (1) instituting preapproval processes for nonemployee travel and significant changes to contracts; (2) establishing a new internal audit function and hiring a new director of internal audit who is charged with oversight over Bruker’s global compliance program, including FCPA compliance; (3) adopting an amended FCPA policy translated into local languages; (4) implementing an enhanced FCPA training program, which includes training programs in local languages as well as mandatory online employee training programs regarding ethics and FCPA compliance; (5) enhancing due diligence procedures for third-parties; and (6) implementing a new global whistleblower hotline.

Throughout the process, Bruker provided extensive, thorough, and real-time cooperation with the Commission. In addition to self-reporting to the Commission shortly after discovering the FCPA violations, Bruker voluntarily provided the Commission with real-time reports of its investigative findings; shared its analysis of important documents and summaries of witness interviews; expanded the scope of the investigation at the Commission’s request; and responded to the Commission’s requests for documents and information in a timely manner. These actions assisted the Commission in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

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

“Bruker’s lax internal controls allowed employees in its China offices to enter into sham ‘collaboration agreements’ to direct money to foreign officials and send officials on sightseeing trips around the world. The company has since taken significant remedial steps to revise its compliance program and enhance internal controls over travel and contract approvals.”

As noted in the release:

“The SEC’s order finds that Bruker violated the internal controls and books and records provisions of the [FCPA].  The company agreed to pay $1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty.  Bruker consented to the order without admitting or denying the findings, and the SEC considered the company’s significant remedial acts as well as its self-reporting and cooperation with the investigation when determining a settlement.”

Todd Cronan (Goodwin Procter) represented Bruker.

According to Bruker’s public disclosures, the company has spent approximately $22 million in pre-enforcement action professional fees and expenses.  For more on this dynamic, and how settlement amounts in an FCPA enforcement action are often only a relatively minor component of the overall financial consequences of FCPA scrutiny, see “Foreign Corrupt Practices Act Ripples.”

Yesterday, Bruker’s stock price fell 1.8%.

Bio-Rad Laboratories Agrees To Pay $55 Million To Resolve FCPA Enforcement Action

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against Bio-Rad Laboratories Inc. based on alleged conduct in Russia, Thailand and Vietnam.

The enforcement action involved a DOJ non-prosecution agreement and an SEC administrative order.  Bio-Rad agreed to pay approximately $55 million to resolve the alleged FCPA scrutiny ($14.35 million in the DOJ action; and $40.7 million in the SEC action).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents.

DOJ Enforcement Action

The enforcement action focused on the conduct of Bio-Rad Laboratorii OOO (“Bio-Rad Russia”) and Bio-Rad SNC as well as the alleged knowledge of certain Bio-Rad managers concerning various Russian business practices.

According to the NPA, Bio-Rad Russia is:

“[A] wholly owned subsidiary of BIO-RAD located in Moscow, Russia. Bio-Rad Russia primarily sold BIO-RAD clinical diagnostic products, such as HIV testing kits. Approximately 90% of its clientele were government customers, most notably the Russian Ministry of Health. In order to obtain certain Russian government contracts, Bio-Rad Russia was required to participate in public tender processes.”

According to the NPA, Bio-Rad SNC is:

“[A]n indirectly wholly-owned subsidiary of Bio-Rad headquartered in Marnes-la-Coquette, France.  Bio-Rad SNC manufactured, sold, and distributed Bio-Rad products worldwide.”

According to the NPA, Agent 1 (described as an agent retained by Bio-Rad SNC with respect to sales in Russia) assisted Bio-Rad Russia in connection with certain governmental sales in Russia and established Intermediary Companies (described as Agent 1 affiliated companies in Panama, the United Kingdom, and Belize) which Bio-Rad SNC retained “purportedly to perform extensive services on its behalf in Russia.”  However, according to the NPA, Intermediary Companies “were located offshore and had no employees aside from Agent 1.”  Moreover, according to the NPA, “Intermediary Companies used a phony address on its invoices that belonged to a Russian government agency.”

According to the NPA, Manager 1 (described as a high-level manager of Bio-Rad’s Emerging Markets sales region, which included Rusia, from 2004 to 2010 and based in Bio-Rad’s corporate offices in California) “authorized Bio-Rad SNC’ agreements with the Intermediary Companies without conducting any due diligence on the Intermediary Companies.”

According to the NPA,

“Bio-Rad SNC paid the Intermediary Companies a commission of 15-30% purportedly in exchange for various services outlined in the agency contracts, including acquiring new business by creating and disseminating promotional materials to prospective  customers, installing Bio-Rad products and related equipment, training customers on the installation and use of Bio-Rad products, and delivering Bio-Rad products.

The Intermediary Companies, however, lacked the capabilities to perform these contractually defined services. In some instances, the Intermediary Companies submitted invoices suggesting that they performed distribution services in connection with certain contracts. The Intermediary Companies did not perform these services, and would have been significantly overpaid even had they performed such services.”

According to the NPA:

“Manager 1, Manager 2 [described as a high-level accounting manager of Bio-Rad’s Emerging Markets sales region, which included Russia, from around 2004 to 2010 and based in Bio-Rad’s corporate offices in California] and Manager 3 [described as a high-level manager of Bio-Rad Russia from 2007 to 2011 and based in Moscow] reviewed and approved commission payments to Intermediary Companies, despite knowing that Intermediary Companies and Agent 1 were not performing the services from which they were being paid.”

The NPA further states that Manager 1, Manager 2, and Manager 3 used the code word “bad debt” when communicating with each other to refer to the Intermediary Companies’ commission payments.  According to the NPA, Manager 2 “instructed lower-level Bio-Rad SNC finance employees to ‘talk with codes’ when communicating about the Intermediary Companies’ invoices and that Manager 3 requested that Intermediary Company invoices be paid in installments of less than $200,000 each so as to avoid additional approvals required by Bio-Rad policy for payment over $200,000.

According to the NPA,

“The payments to the Intermediary Companies were made by Bio-Rad SNC and falsely recorded as “commission payments” in its books. Moreover, Manager 1 and Manager 2, who falsely described the commission payments as “bad debt” in e-mails, knew that Bio-Rad SNC maintained the bogus contracts with the Intermediary Companies, as well as the numerous associated false invoices Bio-Rad SNC had paid, as part of its books and records. Bio-Rad SNC’s books, records, and financial accounts were consolidated into Bio-Rad’s books and records and reported by Bio-Rad in its financial statements. Thus, Manager 1 and Manager 2 knowingly caused BIO-RAD to falsify its books and records.”

The NPA further states:

“Bio-Rad maintained a set of corporate policies, but Bio-Rad’s international offices were given autonomy by the company to implement and maintain adequate controls. However, Manager 1 and Manager 2 failed to implement adequate controls for Bio-Rad’s Emerging Markets sales region, including controls related to its operations in Russia where those managers knew that the failure to implement these controls allowed Agent 1 and the Intermediary Companies to be paid significantly above-market commissions for little or no services that were supported by false contracts and invoices. For example, Manager 1 and Manager 2 did not put in place a system of controls to conduct due diligence on third party agents, such as the Intermediary Companies, to ensure documentation supporting payments to third parties, or to monitor such payments. Nor did the company implement adequate testing of the controls that should have been in place.

Manager 1 and Manager 2’s knowing failure to implement adequate internal accounting controls with respect to Russia was due, at least in part, to their desire to continue to obtain and retain contracts with the Russian government. Bio-Rad Russia won 100% of its government contracts when Agent 1 was involved and lost its first major Russian government  contract after terminating Agent 1 in or around 2010.”

According to the NPA:

“In addition to the knowing failure to implement an adequate system of internal accounting controls, prior to the discovery of the misconduct in Bio-Rad did not maintain an adequate compliance program. The company did not provide any FCPA training to its employees and, although Bio-Rad had a business ethics policy and code of conduct that prohibited bribery and was posted on the company’s intranet site, many employees of Bio-Rad and its subsidiaries were unaware of its existence. Moreover, the code was only available in English despite the fact that a significant number of employees working for Bio-Rad’ss overseas subsidiaries did not speak or understand English well enough to understand the code.”

“Bio-Rad also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct. However, Manager 1 and Manager 2 did not take steps to ensure such compliance in Emerging Markets, and Bio-Rad did not take sufficient steps to monitor its international offices. As a result, Bio-Rad’s international offices did not undertake appropriate risk-based due diligence in connection with the retention of agents and business partners and, further, did not have distribution and agency agreements with appropriate anti-corruption terms. Bio-Rad also did not undertake periodic risk assessments of its compliance program. Bio-Rad’s failure to maintain an adequate compliance program significantly contributed to the company’s inability to prevent the misconduct in Russia, as well as improper payments to government officials in Vietnam and Thailand.”

The NPA states as follows.

“The [DOJ] enters into this Non-Prosecution Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) following discovery of potential FCPA violations during the course of an internal audit, the Company’s audit committee retained independent counsel to conduct an internal investigation and voluntarily disclosed to the [DOJ] the misconduct described in the Statement of Facts; (b) the Company has fully cooperated with the [DOJ’s] investigation, including conducting an extensive internal investigation in several countries, voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, summarizing its findings, translating numerous documents, and providing timely reports on witness interviews for the [DOJ]; (c) the Company has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional FCPA compliance procedures, including due diligence and contracting procedures for intermediaries, instituting heightened review of proposals and other transactional documents for all Company contracts, closing its Vietnam office after learning of improper payments by its Vietnam subsidiary, and conducting extensive anti-corruption training throughout the global organization; (d) the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment B to this Agreement; and (e) the Company has agreed to continue to cooperate with the [DOJ] in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to possible violations of the FCPA …”.

Pursuant to the NPA, which has a term of two years, Bio-Rad admitted, accepted and acknowledged that it was responsible for the acts of its employees and agents as set forth in the Statement of Facts.  The NPA also contains a “muzzle clause” in which Bio-Rad expressly agree[d] that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for the Company make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company …”.

In the NPA, Bio-Rad also agreed to undertake a host of compliance enhancements and report to the DOJ during the two-year term of the NPA “regarding mediation and implementation of the compliance program and internal controls, policies and procedures” described in the NPA.

In the DOJ release, Assistant Attorney General Leslie Caldwell stated:

“Public companies that cook their books and hide improper payments foster corruption.  The department pursues corruption from all angles, including the falsification of records and failure to implement adequate internal controls.   The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”

Special Agent in Charge David Johnson of the FBI’s San Francisco Field Office stated:

“The FBI remains committed to identifying and investigating violations of the Foreign Corrupt Practices Act. This action demonstrates the benefits of self-disclosure, cooperation, and subsequent remediation by companies.”

The release further states:

“The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation.  That cooperation included voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, and summarizing the findings of its internal investigation.  In addition, Bio-Rad has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional due diligence and contracting procedures for intermediaries, and conducting extensive anti-corruption training throughout the organization.”

SEC Enforcement Action

The SEC’s order is based on the same core conduct alleged in the DOJ action as relevant to Russia business and also contains allegations concerning conduct in Vietnam and Thailand.

In summary fashion, the SEC’s order states:

“From approximately 2005 to 2010, subsidiaries of Bio-Rad made unlawful payments in Vietnam and Thailand to obtain or retain business. During the same period, Bio-Rad’s subsidiary paid certain Russian third parties, disregarding the high probability that at least some of the money would be used to make unlawful payments to government officials in Russia. With respect to Russia, one of Bio-Rad’s foreign subsidiaries paid three off-shore agents (the“Russian Agents”) for alleged services in connection with sales of its medical diagnostic and life science equipment to government agencies. These agents were not legitimate businesses, and despite receiving large commissions, they did not provide the contracted-for services. In paying these agents, Bio-Rad’s foreign subsidiary demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of the commissions to pay foreign officials to obtain profitable government contracts. The General Manager (“GM”) of Bio-Rad’s Emerging Markets sub-division and the Emerging Markets Controller, both employees of the parent company (collectively, “the Emerging Markets managers”) ignored red flags, which permitted the scheme to continue for years. In Vietnam and Thailand, Bio-Rad’s foreign subsidiaries used agents and distributors to funnel money to government officials. In total, Bio-Rad made $35.1 million in illicit profits from these improper payments.

In violation of Bio-Rad’s policies, Bio-Rad’s foreign subsidiaries did not record the payments in their own books in a manner that would accurately or fairly reflect the transactions. Instead they booked them as commissions, advertising, and training fees. These subsidiaries’ books were consolidated into the parent company’s books and records. During the relevant period, Bio-Rad also failed to devise and maintain adequate internal accounting controls.”

As to the Vietnam and Thailand conduct, the SEC’s order focuses on Bio-Rad Laboratories (Singapore) Pte. Limited (“Bio-Rad Singapore”) described as a wholly-owned subsidiary located in Singapore and Diamed South East Asia Ltd. (“Diamed Thailand”) described as  a 49%-owned subsidiary of Diamed AG (Switzerland) that was acquired by Bio-Rad in October 2007.  According to the order, local majority owners ran Diamed Thailand’s operations until 2011, when Bio-Rad bought out their interest in the company.

Under the heading “Facts in Vietnam,” the order states:

“From at least 2005 to the end of 2009, Bio-Rad maintained a sales representative office in Vietnam. A country manager supervised the Vietnam Office’s sales activities, and was authorized to approve contracts up to $100,000 and sales commissions up to $20,000. Vietnam’s country manager reported to Bio-Rad Singapore’s Southeast Asia regional sales manager (“RSM”), who in turn reported to the Asia Pacific GM.

From 2005 through 2009, the country manager of the Vietnam office authorized the payment of bribes to government officials to obtain their business. At the direction of the country manager, the sales representatives made cash payments to officials at government-owned hospitals and laboratories in exchange for their agreement to buy Bio-Rad’s products.

In 2006, the RSM first learned of this practice from a finance employee. She raised concerns about it to the Vietnam Office’s country manager, who informed her that paying bribes was a customary practice in Vietnam. On or about May 18, 2006, the Vietnamese country manager wrote in an email to the RSM and the Bio-Rad Singapore finance employee that paying third party fees “[wa]s outlawed in the Bio-Rad Business Ethics Policy,” but that Bio-Rad would lose 80% of its Vietnam sales without continuing the practice. In that same email, the country manager proposed a solution that entailed employing a middleman to pay the bribes to Vietnamese government officials as a means of insulating Bio-Rad from liability. Under the proposed scheme, Bio-Rad Singapore would sell Bio-Rad products to a Vietnamese distributor at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes.

The RSM and the Asia Pacific GM were aware of and allowed the payments to continue. Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

Under the heading “Facts in Thailand,” the order states:

“Bio-Rad acquired a 49% interest in Diamed Thailand as part of its acquisition of Diamed AG (Switzerland) in October 2007. Bio-Rad performed very little due diligence on Diamed Thailand prior to the acquisition.

Diamed Thailand’s local majority owners managed the subsidiary. Bio-Rad’s Asia Pacific GM was responsible for working and communicating with Diamed Thailand’s majority owners and distributors.

Prior to the October 2007 acquisition, Diamed Thailand had an established bribery scheme, whereby Diamed Thailand used a Thai agent to sell diagnostic products to government customers. The agent received an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.

The scheme continued even after Bio-Rad acquired Diamed Thailand. Diamed Thailand renewed the contract with the distributor in June 2008, but unbeknownst to Bio-Rad, the distributor was partially owned by one of Diamed Thailand’s local Thai owners.

Bio-Rad’s Asia Pacific GM learned of Diamed Thailand’s bribery scheme while attending a distributor’s conference in Bangkok in March 2008. At the conference, Diamed Thailand’s local manager informed him that some of Diamed Thailand’s customers received payments, which the Asia Pacific GM understood to mean kickbacks. The Asia Pacific GM instructed Bio-Rad Singapore’s controller to investigate the matter. The controller confirmed to the Asia Pacific GM that Diamed Thailand was bribing government officials through the distributor. Despite these findings, the Asia Pacific GM did not instruct Diamed Thailand to stop making the improper payments to the distributor.

From 2007 to early 2010, Diamed Thailand improperly paid a total of $708,608 to the distributor, generating gross sales revenues of $5.5 million to Diamed Thailand. These  payments were recorded as sales commissions. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

The SEC’s order found that:

“Bio-Rad violated [the FCPA’s anti-bribery provisions] because Bio-Rad’s Emerging Markets managers demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of Bio-Rad Russia’s sales commission payments to bribe Russian government officials in exchange for awarding the company profitable government contracts. These managers knew the Russian Agents operated as mere shell entities. They also knew that, among other things, the commissions were large, and that the Russian Agents did not have the resources to perform any of the contracted-for services set forth in their agreements. Nevertheless, the managers approved all of their agreements, and authorized $4.6 million in payments to the Russian Agents’ off-shore accounts even though many of the payment requests and invoices raised substantial questions as to their legitimacy. Finally, the same Emerging Markets managers communicated about the Russian Agents under cover of secrecy, which further calls in question their legitimacy. These red flags surfaced repeatedly over a five year period.”

The SEC’s order also found violations of the books and records and internal controls provisions based on the Russia, Vietnam, and Thailand conduct.  As to internal controls, the order states:

“[A]lthough [Bio-Rad] had an ethics policy prohibiting the payment of bribes and various policies and procedures requiring accurate books and records, its systems of internal controls proved insufficient to provide reasonable assurances that such payments would be detected and prevented.”

Under the heading, “Self-Disclosure, Cooperation and Remedial Efforts,” the order states:

“Bio-Rad made an initial voluntary self-disclosure of potential FCPA violations to the Commission staff and the Department of Justice in May 2010, and immediately thereafter Bio-Rad’s audit committee retained independent counsel to conduct an investigation of the alleged violations. The audit committee conducted a thorough internal investigation, and subsequently expanded it voluntarily to cover a large number of additional potentially high-risk countries. The investigation included over 100 in-person interviews, the collection of millions of documents, the production of tens of thousands of documents, and forensic auditing. Bio-Rad’s cooperation was extensive, including voluntarily producing documents from overseas, summarizing its findings, translating numerous key documents, producing witnesses from foreign jurisdictions, providing timely reports on witness interviews, and making employees available to the Commission staff to interview.

Bio-Rad also undertook significant and extensive remedial actions including: terminating problematic practices; terminating Bio-Rad employees who were involved in the misconduct; comprehensively re-evaluating and supplementing its anticorruption policies and procedures on a world-wide basis, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing FCPA compliance procedures, including the further development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries and policies concerning hospitality, entertainment, travel, and other business courtesies; and conducting extensive anticorruption training throughout the organization world-wide.”

As noted in the SEC’s release:

“[Bio-Rad] agreed to pay $40.7 million in disgorgement and prejudgment interest to the SEC … The company also must report its FCPA compliance efforts to the SEC for a period of two years.”

In the SEC release, Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated:

“Bio-Rad Laboratories failed to detect a bribery scheme and did not properly address red flags that such a scheme was underway. “This enforcement action, which reflects credit for Bio-Rad’s cooperation in our investigation, reiterates the importance of all companies ensuring they have the proper internal controls to prevent FCPA violations.”

Bio-Rad was represented by Douglas Greenburg (Latham & Watkins).

In this release, Norman Schwartz (Bio-Rad President and Chief Executive Officer) stated:

“The actions that we discovered were completely contrary to Bio-Rad’s culture and values and ethical standards for conducting business. We took strong, decisive action to end the problematic practices and prevent anything like this from happening in the future, including terminating involved employees and committing substantial resources to strengthening our compliance functions and financial controls. Bio-Rad prides itself on operating with the highest levels of integrity, and I am pleased that this settlement fully resolves the government’s FCPA investigation and puts this matter behind us.”

The release further states:

“Bio-Rad discovered the potential FCPA violations and self-reported them to the DOJ and SEC in May 2010. The Company subsequently conducted a thorough global investigation with the assistance of independent legal and forensic specialists, terminated involved employees and third party agents, and significantly enhanced its internal controls, procedures, training and compliance functions designed to prevent future violations. The settlement fully resolves all outstanding issues related to these investigations.”

On the day the FCPA enforcement action was announced Bio-Rad’s stock closed up .5%.

As Foreign Scrutiny Grows, Dollars Continue To Flow In The U.S.

This 2012 post highlighted the origins and prominence of an enforcement theory in this new era of Foreign Corrupt Practices Act enforcement.

The enforcement theory is that employees (such as physicians, nurses, mid-wives, lab personnel, etc.) of various foreign health care systems are “foreign officials” under the FCPA.  The prior post detailed eleven corporate enforcement actions in which the enforcement theory was used, in whole or in part, and since then four additional corporate enforcement actions (Stryker, Philips Electronics, Tyco and Eli Lilly) have been based, in whole or in part, on the same enforcement theory.  Perhaps telling, the DOJ has never charged an individual based on this FCPA enforcement theory.

In most of the corporate enforcement actions based on the enforcement theory, the “things of value” provided to the alleged “foreign officials” have included consulting opportunities and services contracts and payment of travel and entertainment expenses such as  wine, speciality foods, visits to bath houses, card games, karaoke bars, door prizes, spa treatments and cigarettes.

The enforcement theory continues to be the reason certain companies are under FCPA scrutiny as evidenced by the on-going FCPA scrutiny of GlaxoSmithKline and Sanofi to name just a few (see here).

Yet as this foreign scrutiny of pharmaceutical and other healthcare related companies continues, the dollars continue to flow in the United States.

Recently, the Wall Street Journal ran articles here (“Doctors Net Billions From Drug Firms”) and here (“Payments Reveal Range of Doctors’ Ties With Industry”) based on information from “a new federal government transparency initiative mandated in the 2010 Affordable Care Act which required manufacturers of drugs and medical devices to disclose the payments they make to physicians and teaching hospitals every year.

In the words of the Wall Street Journal:

“The payments and so-called transfers of value to an estimated 546,000 doctors and 1,360 teaching hospitals include such items as free meals that company sales representatives bring to physicians’ offices, fees paid to doctors to speak about a company’s drug to other doctors at restaurants, and compensation for clinical trial research and consulting fees. Some doctors earned tens of thousands of dollars annual from drug companies by flying to various cities to give paid speeches, while some surgeons received even larger amounts from medical device makers, partly from royalties on products they helped develop.”

In short, many of the “things of value” are similar to those alleged in FCPA enforcement actions involving foreign physicians and other healthcare personnel.

Against this backdrop, it is interesting to note that in the United States approximately 20% of hospitals are owned by state or local governments (see here). In addition, approximately 150 more medical centers are run by the Veterans Health Administration (see here).

Presumably then, a healthy percentage of the “things of value” are going to U.S. officials – at least so long as one applies the FCPA enforcement theory to the U.S. context.

Yet, one should not hold their breath waiting for enforcement actions under 18 U.S.C 201, the U.S. domestic bribery statute with very similar elements to the FCPA’s anti-bribery provisions.  Nor should one hold their breath as to any books and records or internal controls enforcement actions regarding such payments by issuer companies.

But the question is why?

Assuming that foreign physicians and healthcare personnel are indeed “foreign officials” under the FCPA, why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official?  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

For numerous other prior posts on the “double standard,” see this tag.

Next Up – Stryker

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). Then it was Pfizer / Wyeth (see here  – $60 million in combined fines and penalties in August 2012).  Then it was Eli Lilly (see here – $29 million in combined fines and penalties in December 2012).

Next up, in the recent sweep of pharmaceutical / healthcare and medical device companies is Stryker Corporation.

Yesterday, the SEC announced that Stryker agreed to pay $13.2 million to resolve an SEC Foreign Corrupt Practices Act enforcement action via an administrative cease and desist order in which the company neither admitted or denied the SEC’s allegations.

The conduct at issue focused on various Stryker subsidiaries.  There is no allegation in the SEC’s order concerning Stryker Corp. itself other than the following.

“The financial results of all of the Stryker subsidiaries discussed herein were consolidated into Stryker’s financial statements.  Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within a given country. During the relevant period, each of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anti-corruption, but these policies were inadequate and insufficiently implemented on the regional and country level. Accordingly, Stryker failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that the company maintained accountability for its assets and that transactions were executed in accordance with management’s authorization.”

In summary fashion, the SEC order states:

“From approximately August 2003 to February 2008 (the “relevant period”), Stryker made approximately $2.2 million in unlawful payments to various government employees including public health care professionals (collectively, the “foreign officials”) in Mexico, Poland, Romania, Argentina, and Greece. Stryker incorrectly described these expenses in the company’s books and records as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made by Stryker to obtain or retain business. Stryker earned approximately $7.5 million in illicit profits as a result of these payments.  During the relevant period, Stryker incorrectly described unlawful payments to foreign officials in its accounting books and records in violation of [the FCPA’s books and records provisions] and failed to devise and maintain an adequate system of internal accounting controls in violation [of the FCPA’s internal controls provisions.]”

Under the heading “Unlawful Payments In Mexico,” the order states:

Between March 2004 and January 2007, Stryker’s wholly-owned subsidiary in Mexico (“Stryker Mexico) made three payments totaling more than $76,000 to foreign officials employed by a Mexican governmental agency (the “Mexican Agency”) responsible for providing social security for government employees. Stryker made these payments to win bids to sell its medical products to certain public hospitals in Mexico. Stryker Mexico earned more than $2.1 million in profits as a result of these illicit payments.  These payments were made at the direction of Stryker Mexico employees, including country level management, and paid to the foreign officials through third party agents. For example, in January 2006, Stryker Mexico learned that the Mexican Agency was threatening to revoke a contract that Stryker Mexico had won to provide knee and hip products to certain public hospitals unless Stryker Mexico paid an employee of the Mexican Agency.  As a result of the demand by the employee of the Mexican Agency, Stryker Mexico directed its outside counsel in Mexico (the “Mexican Law Firm”) to make payment to the employee, on Stryker Mexico’s behalf, in order for Stryker to keep the winning bid.  At Stryker Mexico’s direction, the Mexican Law Firm paid the foreign official approximately $46,000 on behalf of Stryker Mexico and, as a result of this payment, the Mexican Agency did not revoke Stryker Mexico’s status as the winning bidder. The Mexican Law Firm then invoiced Stryker Mexico for $46,000 for purported legal services rendered, even though no such services were provided. Stryker Mexico recorded these improper payments as legitimate legal expenses in its books and records.  Stryker Mexico earned over $1.1 million in illicit profits on this contract alone. Stryker Mexico made two additional payments through intermediaries during the relevant period in much the same fashion, with the purpose of retaining or obtaining business from public hospitals. The additional payments were in excess of $34,000 and earned Stryker illicit profits of nearly $1 million.”

Under the heading “Improper Payments in Poland,” the order states:

“Between August 2003 and November 2006, Stryker’s wholly-owned subsidiary in Poland (“Stryker Poland”) made 32 improper payments to foreign officials in Poland for the purpose of obtaining or retaining business at public hospitals. In total, Stryker Poland made approximately $460,000 in unlawful payments resulting in more than $2.4 million of illicit profits. These improper payments were recorded in Stryker’s books and records as legitimate expenses, including reimbursement for business travel, consulting and service contract payments, and charitable donations.  For example, in May 2004, Stryker Poland paid for a foreign official then employed as the director of a public hospital in Poland, and her husband, to travel to New York City and Aruba. Although the official purpose of the trip was for the foreign official to attend a single-day tour of Stryker’s manufacturing and research facility in Mahwah, New Jersey, Stryker paid for the couple’s six-night stay at a hotel in New York City, attendance at two Broadway shows, and a five-day trip to Aruba before their return flight to Poland.  According to Stryker Poland’s records, expenses for the trip, including airfare, accommodations, and entertainment, totaled approximately $7,000, all of which Stryker Poland recorded as legitimate travel expenses.  Stryker Poland’s internal documents confirm a quid pro quo arrangement between Stryker Poland and the foreign official. For example, the form containing the schedule for the foreign official’s facility tour states that the purpose of the visit was to “strengthen [the public doctor’s] conviction that Stryker products are the best solution for her hospital,” and notes that “we won a big tender for [one product] (about $350,000) and in this year they are going to buy our products for $500,000.”  Stryker Poland also made additional improper travel payments, payments under purported consulting agreements totaling approximately $47,000, and gifts and donations of nearly $400,000, each of which was made to a state-employed healthcare professional for the purpose of Stryker Poland’s obtaining or retaining the business of public hospitals.”

Under the heading “Improper Payments in Romania,” the order states:

“From at least 2003 through July 2007, Stryker’s wholly-owned subsidiary in Romania (“Stryker Romania”) made 192 improper payments to foreign officials totaling approximately $500,000 in order to obtain or retain business with affiliated public hospitals.  Stryker Romania recorded these payments as legitimate sponsorships of foreign officials’ attendance, travel and lodging at conferences, and medical events, when in reality they were illicit payments made to obtain or retain business.  As a result of these payments, Stryker Romania earned more than $1.7 million in illicit profits.  For example, in April 2004, a Stryker Romania salesperson submitted a form to sponsor a foreign official’s lodging abroad to attend a conference. The form stated that a “business benefit[]” from the sponsorship was that, in return, Stryker Romania would receive a contract for the sale of a particular medical device. In addition, Stryker Romania internally discussed that the foreign official in question was “waiting to be confirmed as chief physician” at a public hospital, “thus becoming important” for an upcoming bid for a contract. Stryker Romania recorded the payment as a legitimate business travel expense even though its own internal documents demonstrated that the payment was made with the purpose of obtaining future business.”

Under the heading “Unlawful Payments in Argentina,” the order states:

“Between 2005 and 2008, Stryker’s wholly-owned subsidiary in Argentina (“Stryker Argentina”) made 392 commission payments, or “honoraria,” to physicians employed in the public healthcare system in order to obtain or retain business with affiliated public hospitals. Unlike traditional honorarium payments that are made in exchange for the provision of a service (such as making a speech), these honoraria were commissions that were calculated as a percentage of a total sale to a particular hospital and then paid to the public doctor associated with the sale. Stryker Argentina routinely made these payments by check to doctors at rates between 20% and 25% of the related sale. In total, Stryker Argentina made more than $966,500 in improper honoraria payments during the relevant period, causing Stryker Argentina to earn more than $1.04 million in profits from the public hospitals with which the doctors were associated. Stryker Argentina booked these payments as commission expenses in an account entitled “Honorarios Medicos,” when in fact they were unlawful payments made to compensate doctors for purchasing Stryker products.”

Under the heading “Unlawful Payments in Greece,” the order states:

“In 2007, Stryker’s wholly-owned subsidiary in Greece (“Stryker Greece”) made a sizeable and atypical donation of $197,055 to a public university (the “Greek University”) to fund a laboratory that was then being established by a foreign official who served as a prominent professor at the Greek University, and was the director of medical clinics at two public hospitals affiliated with the Greek University.  As a result of this donation, Stryker Greece earned a total of $183,000 in illicit profits.  The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business from the public hospitals with which the foreign official was affiliated, in exchange for making the donation to the foreign official’s pet project. In an email from the country manager of Stryker Greece to the regional manager, the country manager emphasized that she believed the donation to the Greek University was necessary to secure future sales for Stryker Greece. The country manager wrote: “I think that anything below 30K will leave [the foreign official] disappointed. He did promise that he would direct his young assistants into using our trauma and sports medicine products. [The foreign official] is . . . difficult to get as a ‘friend’ and really tough to have as a disappointed customer.”  The regional manager asked,  “What do we get for the sponsorship – or is it just a gift?” The country manager confirmed the quid pro quo, stating, “For the sponsorship we get the Spine business and a promise for more products in his Department. . .”  At a later date, another country manager stated, “I am willing to support what [the foreign official] is asking for in order to secure the sales he is bringing in.” The regional manager then approved the request. Soon thereafter, the country manager said of his meeting with the foreign official: “Things went well (how couldn’t they—I offered him the amount he is asking for . . .). . . . My impression is that we will sta rt business again.”  Stryker Greece made the donation to the Greek University in three installments, each of which was improperly booked as a legitimate marketing expense in an account entitled “Donations and Grants.”

Based on the above allegations, the SEC found that Stryker violated the FCPA’s books and records and internal controls provisions.

In the SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated:

“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed.  Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”

As noted in the SEC’s release, the administrative order “requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million.  Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of the FCPA’s books and records and internal controls provisions.

The Stryker action is yet another example of the SEC obtaining a disgorgement remedy without finding or charging violations of the FCPA’s anti-bribery provisions.  (See here for a prior post on no-charged bribery disgorgement).

The SEC order also contains a separate section titled “Stryker’s Remedial Efforts” and states:

“In response to the Commission’s investigation, Stryker retained outside counsel to assist Stryker in conducting an internal investigation into Stryker’s compliance with the FCPA in the jurisdictions that were the subject of the staff’s inquiry, as well as in jurisdictions where issues arose through Stryker’s audit and hotline processes. Stryker voluntarily produced reports and other materials to the Commission staff summarizing the findings of its internal investigation. In total, Stryker produced over 800,000 pages of documents at Stryker’s expense, including courtesy translations of numerous key documents.  Since the time of the conduct detailed above, Stryker implemented a company wide anti-corruption compliance program, which includes: (a) enhanced corporate policies and standard operating procedures setting forth specific due diligence and documentation requirements for relationships with foreign officials, health care professionals, consultants, and distributors; (b) compliance monitoring and corporate auditing specifically tailored to anticorruption, including the hiring of a chief compliance officer and a sizeable full-time dedicated staff in both its internal audit and compliance functions to ensure FCPA compliance and the implementation of periodic self-assessments; (c) enhanced financial controls and governance; (d) expanded anti-corruption training to all Stryker employees; and (e) the maintenance of an Ethics Hotline which serves as a mechanism for employees to report any actual or suspected illegal or unethical behavior.  In addition to its internal anti-corruption enhancements, from 2007 through the present, Stryker engaged a third-party consultant to perform FCPA compliance assessments and compile written reports for Stryker’s operations in dozens of foreign jurisdictions across the world at least annually. Stryker voluntarily produced documents that permitted the Commission staff to assess how Stryker’s internal audit and compliance functions used the results of each of the assessments to implement additional enhancements to its infrastructure, to target jurisdictions for future assessments, and to create management action plans in collaboration with local management.  Based on the improvements described above, Stryker has demonstrated a commitment to designing and funding a meaningful compliance program in order to prevent and detect violations of the FCPA and other applicable anti-bribery laws.”

In this Wall Street Journal Risk and Compliance post, a Stryker spokesperson stated that the company “was advised that the Justice Department closed its investigation.”

Matthew Kipp (Skadden) represented Stryker.

Stryker’s November 2007 quarterly filing stated:

“In October 2007, the Company disclosed that the United States Securities and Exchange Commission has made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries.”

Thus, the time period from first instance of public disclosure of FCPA scrutiny to actual settlement was 6 years.

Yesterday Stryker’s stock was up approximately .07%.

*****

A few upcoming events that may be of interest to East Coast readers.

On Wednesday, October 30th, Brooklyn Law School will host a panel discussion of practitioners, in-house counsel, and professors titled “New Developments in FCPA Enforcement” (see here for more information).

On Saturday, Nov. 10th, I will be participating in a panel titled “Anti-Corruption Initiatives in the Arab World” as part of Harvard’s Arab Weekend.  (To learn more about the event and the other panelists, see here).

Philips Resolves First Corporate FCPA Enforcement Action Of The Year

A Netherlands-based company with shares listed on the New York Stock Exchange is the parent of a group of companies including a Polish subsidiary that sells medical equipment to Polish healthcare facilities.  Between six and fourteen years ago “in at least 30 transactions” employees of the Polish subsidiary, without any mention of parent company knowledge or approval, “made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded” to the subsidiary.

The end result?

Why of course $4,515,178 to the U.S. treasury.

Recently the SEC issued (here) an administrative cease and desist order against Koninklijke Philips Electronics N.V. (“Philips”).  The action is the first corporate FCPA enforcement action of 2013.

The SEC Order states, in pertinent part, as follows.

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Philips. The violations took place through Philips’s operations in Poland from at least 1999 through 2007. The violations relate to improper payments made by employees of Philips’s Polish subsidiary, Philips Polska sp. z o.o. (“Philips Poland”) to healthcare officials in Poland regarding public tenders proffered by Polish healthcare facilities to purchase medical equipment.”

[…]

“Since at least 1999, Philips has participated in public tenders to sell medical equipment to Polish healthcare facilities. From 1999 through 2007, in at least 30 transactions, employees of Philips Poland made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded to Philips.”

“Representatives of Philips Poland entered into arrangements with officials of various Polish healthcare facilities whereby Philips submitted the technical specifications of its medical equipment to officials drafting the tenders who incorporated the specifications of Philips’ equipment into the contracts. Incorporating the specifications of Philips’ equipment in the tenders’ requirements greatly increased the likelihood that Philips would be awarded the bids.”

“Certain of the healthcare officials involved in the arrangements with Philips also decided whom to award the tenders, and when Philips was awarded the contracts, the officials were paid the improper payments by employees of Philips Poland.”

“The improper payments made by employees of Philips Poland to the Polish healthcare officials usually amounted to 3% to 8% of the contracts’ net value.”

“At times, Philips Poland employees also kept a portion of the improper payments as a “commission.” The Philips Poland employees involved in the improper payments often utilized a third party agent to assist with the improper arrangements and payments to Polish healthcare officials.”

“The improper payments made by employees of Philips Poland to Polish healthcare officials were falsely characterized and accounted for in Philips’s books and records as legitimate expenses. At times those expenses were supported by false documentation created by Philips Poland employees and/or third parties. Philips Poland’s financial statements are consolidated into Philips’ books and records.”

Under the heading “Discovery, Internal Investigation and Self Report,” the Order states as follows.

“Philips became aware of misconduct by Philips Poland employees in August 2007, when Polish officials conducted searches of three of Philips’ offices in Poland and arrested two Philips Poland employees.”

“In response to the search of Philips’ offices and arrests of its employees, Philips conducted an internal audit in 2007. Philips failed to discover the improper payments to Polish healthcare officials in its internal audit, but terminated and disciplined several Philips Poland employees and made substantial changes to Philips Poland’s management and significant revisions to the company’s internal controls.”

“In December 2009, the Prosecutor’s Office in Poznan, Poland, indicted 23 individuals, including three former Philips Poland employees and 16 healthcare officials, for violating laws related to public tenders for the purchase of medical equipment. That indictment described the improper payments discussed in this Order.”

“In response to the Polish authorities’ indictment, Philips conducted an internal investigation. The findings of the investigation supported the allegations of the 2009 indictment and revealed that Philips Poland employees had made unlawful payments to Polish healthcare officials, that its books, records and accounts failed to accurately account for the improper payments and that its internal controls failed to ensure that transactions were properly recorded by Philips in its books and records.”

“In early 2010, Philips self-reported its internal investigation to the staff of the Commission and to the Department of Justice. As the internal investigation progressed, Philips shared the results of the investigation with the staff and undertook significant remedial measures.”

Under the heading “Remedial Measures,” the Order states as follows.

“In response to its internal audit and investigation, Philips terminated and disciplined several Philips Poland employees and installed new management at Philips Poland, as stated above. Philips also retained three law firms and two auditing firms to conduct the investigation and design remedial measures to address weaknesses in its internal controls. Included in changes to internal controls, Philips established strict due diligence procedures related to the retention of third parties, formalized and centralized its contract administration system and enhanced its contract review process, and established a broad-based verification process related to contract payments. In addition, Philips has made significant revisions to its Global Business Principles policies and continually revises the policies to keep them current and relevant. Philips also established and enhanced an anti-corruption training program that includes a certification process and a variety of training applications to ensure broad-based reach and effectiveness.”

Based on the above conduct, the SEC found that Philips violated the FCPA’s books and records and internal control provisions.  The Order states as follows.

“Employees of Philips Poland made improper payments to healthcare officials in Poland to increase the likelihood that Philips would be awarded public tenders to sell medical equipment to Polish healthcare facilities. The payments were improperly recorded in Philip’s books and records as legitimate expenses. Philips Poland employees also utilized falsified records to support the false accounting entries. Accordingly, as a result of its misconduct, Philips failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected its transactions and the disposition of its assets …”

“Philips Poland’s improper payments to healthcare officials in Poland related to at least 30 public tenders over a period of eight years. Philips’s internal controls failed to detect or prevent the improper payments and false recordings of those transactions during that time. As a result, Philips failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded by Philips in its books and records. Philips also failed to implement an FCPA compliance and training program commensurate with the extent of its international operations. Accordingly, Philips violated [the internal control provisions].”

Without admitting or denying the SEC’s findings, Philips consented to entry of the Order prohibiting future FCPA violations and agreed to pay disgorgement of $3,120,597 and prejudgment interest of $1,394,581.  The Order further states that Philips “acknowledges that the Commission is not imposing a civil penalty based upon its cooperation in a Commission investigation and related enforcement action.”

A few random comments regarding the Philips FCPA enforcement action.

As noted in the SEC Order, Philips retained “three law firms and two auditing firms to conduct the investigation and design remedial measures.”  Wow.  There is a reason I call it FCPA Inc. and the business of bribery.

Just what does the SEC mean when it says that Philips failed to implement an FCPA compliance and training program “commensurate with the extent of its international operations.”  As noted in this prior post discussing how the November 2012 FCPA Guidance can be used as a useful measuring stick for future enforcement activity, I highlighted the following statements from the Guidance.

“The ‘in reasonable detail’ qualification [of the FCPA’s books and records provisions] was adopted by Congress ‘in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.’ […] The term ‘reasonable detail’ is defined in the statute as the level of detail that would ‘satisfy prudent officials in the conduct of their own affairs.’ Thus, as Congress noted when it adopted this definition, ‘[t]he concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.’” (Pg. 39)

“Like the ‘reasonable detail’ requirement in the books and records provision, the [FCPA’s internal control provisions] defines ‘reasonable assurances’ as ‘such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.’ The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provisions gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.” (Pg. 40)

The Philips enforcement action involved Polish healthcare officials.  As noted in this prior post, in 2012, 50% of corporate FCPA enforcement actions involved, in whole or in part, foreign health care providers.

The Philips enforcement action is similar to prior SEC administrative actions against foreign issuers Allianz and Diageo (see here and here for prior posts).  As noted in the previous posts, contrary to popular misperception, the FCPA’s anti-bribery provisions apply to foreign issuers only to the extent “mails or any means or instrumentality of interstate commerce” are used in connection with the improper payments.  The SEC’s Order in the Philips action does not contain any findings concerning any U.S. nexus in regards to the payments at issue.

Despite the absence of FCPA anti-bribery charges or findings, the SEC still sought a disgorgement remedy.  The Philips enforcement action is thus another example of “no-charged bribery disgorgement.”  See here for criticism of such actions by various Debevoise & Plimpton attorneys, including Paul Berger (here) a former Associate Director of the SEC Division of Enforcement.  The article concluded that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” The article noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Because the conduct at issue in the Philips enforcement action occurred between six to fourteen years ago, you may be wondering about statute of limitations issues given the Supreme Court’s recent Gabelli decision.  As noted in this prior post, from the perspective of SEC FCPA enforcement against corporations, the Gabelli case is, unfortunately, unlikely to have much impact.  Cooperation will continue to be the name of the game and corporations facing FCPA scrutiny will likely continue to waive statute of limitations arguments or otherwise toll statute of limitations as evidence of their cooperation.

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