A Focus On FCPA Reform
The FCPA was enacted in 1977, amended in 1988, and amended again in 1998.
It is widely expected that an FCPA reform bill will be introduced this month. Who will introduce the reform bill, what specific amendments will it seek, will hearings be held, will the reform bill succeed? All interesting issues to monitor.
Against the backdrop of expected FCPA reform, several articles have been written in recent weeks. In this Politico article, Assistant Attorney General Lanny Breuer stated, “I don’t really accept the fact that the FCPA is truly a burden on American business.” Several former DOJ officials (not to mention many others) disagree. One of the more vocal proponents of FCPA reform has been former U.S. Attorney General Michael Mukasey who testified at the June House hearing on behalf of the U.S. Chamber of Commerce. (See here for links to his prepared statement as well an overview of the hearing). In the Politico article, Mukasey states that “nobody is looking to slacken in cases involving real bribery of public officials.”
Former Deputy Attorney General George Terwilliger, who also testified at the June hearing, is in favor of reforming the FCPA as well. Terwilliger recently penned a client alert (here) titled “Can the FCPA Be Good for Business?” Placing FCPA reform in the context of current economic conditions, Terwilliger stated as follows. “Those responsible for making and enforcing our laws are in a position to adopt laws and policies that can help foster, rather than inhibit, business growth. At the heart of that analysis, asking whether broad-ranging laws like the FCPA are functioning as an impediment to a restored economy is worthwhile.” Terwilliger adds that “because of its global impact on the expansion of U.S. businesses abroad, it is worth looking specifically at the FCPA as a case study for worthwhile reform initiatives.”
Continuing a theme he discussed during the June hearing, Terwilliger writes as follows. “One of the surest methods for US businesses to expand globally is through the acquisition of existing foreign companies. In many emerging markets, most acquisition targets are beyond the purview of the FCPA and thus unlikely to employ anti-corruption compliance policies. But these companies have become attractive targets because of their position in growth markets. Those markets are also noted as typically more corrupt than other, more established markets subject to closer scrutiny by governments. Preacquisition due diligence, looking specifically at indicia of potential FCPA compliance issues, can be an asset to decision making. But in most circumstances, the opportunity for the kind of in-depth examination that is likely to reveal potential FCPA compliance issues is quite limited. As a result, any acquisition abroad, and particularly those in emerging markets, can carry a ticking time bomb of FCPA compliance issues. I have advocated in congressional testimony that Congress amend the statute to provide a period of repose under the FCPA following an acquisition. The idea is that US companies, with notice to US enforcement authorities, would have a defined period after an acquisition in which to perform a rigorous FCPA compliance review of the acquired entity. If FCPA compliance issues were uncovered, the acquiring company would remediate them, and disclose both the existence of the problem and its remediation to the government. The acquiring company would be immune from civil or criminal enforcement as to matters uncovered during the review period, which could be on the order of 90 to 120 days. At its most elemental level, this procedure would serve the fundamental objectives of the FCPA, which are to root out and eliminate corruption in the global marketplace. That it may also tip the balance toward overseas expansion by reducing the risk of hidden FCPA liability is good for business and good for the US economy.”
Terwilliger’s acquisition period of repose concept has merit, however it would seem that such a concept could easily be embedded within a compliance defense rather than a separate FCPA amendment.
Other recent articles regarding FCPA reform include here from David Hilzenrath at the Washington Post and here from Dan Froomkin at the Huffington Post. Froomkin’s article is lengthy and contains views on both sides of the issues including those of Harvard Law Professor David Kennedy who correctly notes that the FCPA has “led to a quite remarkable network of measures across the world.” However, coverage regarding other OECD member countries that have adopted FCPA-like measures lacks any mention (as noted in this prior post) that many of those countries have embedded compliance-like defenses in their domestic laws. In addition, coverage regarding the U.K. Bribery Act also lacks any mention of the Act’s adequate procedures defense, a defense that undermines the foolish rhetoric that the Act is somehow the “FCPA on steroids.”
Terwilliger concludes his alert by rightly putting part of burden for FCPA reform on U.S. business. He states as follows. “US businesses can help themselves by advocating for reform of the FCPA’s terms and its enforcement. Until such reforms gain momentum, these companies will have to be prepared to face greater FCPA risk than is necessary as part of the price of moving businesses forward and bringing sustained growth to US companies and the economy—which is so dependent on them for job creation and expansion.”
However, what business or industry sector is going to step up to the plate and advocate for FCPA reform? The atmosphere is just too toxic to do so. Indeed, Froomkin begins his piece by noting that the U.S. Chamber is “taking on something as seemingly unassailable as an anti-bribery law.”
And therein lies the problem.
So I leave you with some guiding words from some of the major players the last time Congress undertook substantial FCPA reform in the 1980’s.
“The discussion which takes place during these hearings is not a debate between those who oppose bribery and those who support it. I see the major issue before us to be whether the law, including both its antibribery and accounting provisions, is the best approach, or whether it has created unnecessary costs and burdens out of proportion to the purposes for which it was enacted, and whether it serves our national interests.” “The thing that bothers me about this kind of a debate is that we tend to posture this thing as if somebody were for or against bribery. I think it is important to state for the record that bribery of any foreign official by any U.S. concern is bad for our national health, and it is something that we have got to stop, we have got to deal with, and we have, I think, gone a long way with the FCPA. What we proposed to do is to simplify that law and to make it workable so that we can set that standard in concrete from now on and not have the abuses that occurred prior to 1977, but not by stopping exports, but by stopping bribery. That is the objective.” (Senator Alfonse D’Amato – 1981).
“We’ve learned a great deal about the Foreign Corrupt Practices Act in the last three years. We’ve learned that the best of intentions can go awry and create confusion and great cost to our economy.” “Critics have attempted to characterize my bill as a signal to U.S. companies that they can return to the ‘bad old days’ of foreign bribery. That is not my intent, nor should it be the signal. I abhor bribery, whether domestic or foreign, but I also dislike confusion. Thus, my bill will eliminate uncertainty while maintaining strong prohibitions against bribery. The ambiguities and murkiness of the bill’s language have caused U.S. companies to withdraw from legitimate markets and contributed to the decline in the U.S. share of world exports. We need to end this confusion.” (Senator John Chafee – 1981).
“… There are many people that are extremist, and there are others who get carried away by their enthusiasm who are going to argue that even if we change the provisions in the present act, that are unnecessary or ambiguous or uncertain, that even though we are not doing so, we are legalizing bribery. That strikes me as the worst kind of demagoguery, because it implies that everything that Congress has done in the past is perfect. And does anybody believe that?” (Senator John Heinz – 1981).
And my personal favorite.
“Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.” (Honorable William Brock – U.S. Trade Representatives – 1983).
It will be an interesting Fall. Feel free to make your voice heard on FCPA reform issues on this site. E-mail me at mjkoehle@butler.edu.
“Rapid Multinational Expansion Through Mergers and Acquisitions” Leads to FCPA Enforcement Action Against Diageo
The Foreign Corrupt Practices Act is of course no laughing matter. Yet if an FCPA joke book is ever written there is surely to be an entry about the Indian and Korean military officials, a Thai lobbyist, and a Korean Customs official, who while on a purely recreational side-trip to Budapest, stopped in a bar, nibbled on some rice cakes, downed a Guinness and talked about product labeling, excise taxes, and transfer pricing.
Yesterday, the SEC announced (here) an FCPA books and records and internal controls enforcement action against Diageo PLC via an administrative cease and desist order. Diageo, headquartered in London, has American Depository Shares registered with the SEC and traded on the New York Stock Exchange and is thus an “issuer” under the FCPA.
In summary fashion, the Order (here) stated as follows.
“This matter concerns multiple violations of the Foreign Corrupt Practices Act (“FCPA”) by Respondent Diageo, one of the world’s largest producers of premium alcoholic beverages. Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”
“In India, from 2003 through mid-2009 Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages. Increased sales from these payments yielded more than $11 million in ill-gotten gains. In Thailand, from 2004 through mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied extensively on Diageo’s behalf in connection with multi-million dollar pending tax and customs disputes, contributing to Diageo’s receipt of certain favorable dispositions by the Thai government. With respect to South Korea, in 2004, Diageo paid 100 million won (KRW) (over $86,000) to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also paid over $100,000 in travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”
“Diageo and its subsidiaries failed to account accurately for these illicit payments in their books and records. Exercising lax oversight, Diageo also failed to devise and maintain internal accounting controls sufficient to detect and prevent the payments.”
As set forth in the SEC’s order, “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.” Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”
India
As to India, the SEC stated as follows. “From at least 2003 through June 2009, DI paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around New Delhi. DI also paid an estimated $186,299 (representing 23% of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. DI made the payments to increase government sales orders of its products, and to secure favorable product placement and promotion within the stores.”
The SEC further stated as follows. “During the same six-year period (2003 – 2009), Diageo, through DI, also reimbursed an estimated $530,955, and made plans to reimburse an additional $79,364, in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (“CSD”). The payments, made with DI’s knowledge and authorization, were designed to: (i) foster the promotion of Diageo products in the CSD’s canteen stores (analogous to the U.S. military’s post exchanges); (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favorable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote good will through the distribution of Diwali and New Year’s holiday gifts to CSD employees.”
The SEC also stated as to India as follows. “Diageo failed to ensure that DI properly accounted for a number of additional, improper payments to government officials who controlled administrative functions vital to DI’s business. From at least 2003 through 2008, Diageo, through DI, reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in the North Region of India and in the State of Assam for the purpose of securing label registrations for Diageo products.” In addition, the SEC Order stated as follows. “… [F]rom at least 2003 through June 2009, Diageo, through DI, paid an estimated $78,622 in extra commissions to its distributors in the North Region to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals.”
Thailand
As to Thailand, the SEC Order stated as follows. “From April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately $12,000 per month for 49 months, for a total of $599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the $599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT. At various times the Thai Official served as Deputy Secretary to the Prime Minister, Advisor to the Deputy Prime Minister, and Advisor to the Ministry of Agriculture and Cooperatives. The Thai Official also served on a committee of the ruling Thai Rak Thai political party, and as a member and/or advisor to several state-owned or state-controlled industrial and utility boards. DT’s senior management knew that the Thai Official was a government officer during its engagement of the Consulting Firm. The Thai Official was the brother of one of DT’s senior officers at that time. Several members of Diageo’s global and regional management attended meetings with the Thai Official and senior members of the Thai government. The Thai Official provided extensive lobbying services on behalf of Diageo and DT in connection with several important tax and customs disputes that were pending between Diageo and the Thai government. For example, with respect to excise taxes, the Thai Official coordinated and attended numerous meetings between senior Thai government officials and senior Diageo and DT management, including two meetings in April and May 2005 with Thailand’s then Prime Minister. In May 2005, shortly following the meetings arranged by the Thai Official, the Prime Minister made a radio address publicly endorsing Diageo’s position in favor of a “specific” approach (based on quantity) rather than an “ad valorem” approach (based on price) to calculating excise taxes. On Diageo’s behalf, the Thai Official also met repeatedly with senior commerce, finance, and customs authorities in charge of the transfer pricing and import tax disputes, as well as with members of the Thai parliament. The Thai Official’s services contributed to Diageo’s successful resolution of several components of these disputes. For example, during 2004 and 2005 Diageo and DT were actively engaged in a dispute with the Thai government over the appropriate transfer pricing formula applied to One Liter bottles of Johnnie Walker Red Label and Black Label Scotch whiskey. Based in part on the Thai Official’s lobbying efforts, the Thai government accepted important aspects of DT’s transfer pricing method and released over $7 million in bank guarantees that DT had been required to post while the tax dispute was pending.”
South Korea
As to Korea, the SEC Order stated as follows. “Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula. In April 2004, following a year of intense negotiations and lobbying by DK, the South Korean government granted DK a rebate of approximately $50 million. In July 2004, three months after DK received the tax rebates, a DK manager (the “Manager”) paid an apparent reward of 100 million KRW ($86,339) to a Korean Customs Service official (the “Customs Official”) who had played a key role in the transfer pricing negotiations. With the approval of DK’s then chief financial officer, the Manager generated 60 million KRW ($51,802) of the payment by means of a surreptitious cash kickback scheme. The Manager solicited an inflated invoice from DK’s third-party customs brokerage firm (the “Customs Broker”), which had provided DK with consulting services during the transfer pricing negotiations. As orchestrated, DK paid an inflated invoice amount to the Customs Broker, which then gave 60 million KRW ($51,802) in cash back to the Manager. The Manager funded the remaining 40 million KRW ($34,537) of the total reward amount from personal sources. The Manager then provided the Customs Official with 100 million KRW ($86,339) in the form of ten bank checks of approximately 10 million KRW ($8,634) each.”
The SEC Order further stated as follows. “During the course of the transfer pricing negotiations in 2003 and 2004, DK also paid $109,253 in travel and entertainment costs for Korean customs and other government officials. Some of these expenses were unapproved and constituted improper inducements of the South Korean officials. For example, in December 2003, the Customs Official and several official colleagues traveled to Scotland with DK employees. The purported reason for the trip was to inspect Diageo’s Windsor Scotch production facilities as part of the transfer pricing negotiations. During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side-trip to Prague and Budapest.”
In addition, the SEC Order stated as follows regarding gifts to Korean military officers. “From at least 2002 through at least 2006, Diageo, through DK, routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments. Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained. Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.”
Based on the above conduct, the SEC found FCPA violations, but only FCPA books and records and internal control violations. The absence of FCPA anti-bribery violations against Diageo and the referenced entities would seem to be the result of a lack of a U.S. nexus as to the payments. Even though the FCPA was amended in 1998 to provide an alternative nationality jurisdiction test as to U.S. issuers and domestic concerns, the FCPA retains a territorial U.S. nexus jurisdictional test as to non-U.S. issuers such as Diageo that are nevertheless subject to the FCPA.
As to the FCPA violations, the SEC order states as follows. “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials. Instead, Diageo, through DI, DT, and DK, disguised the improper payments as legitimate vendor expenses or recorded them under misleading rubrics such as “factory expenses,” “telephone expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit payments were not recorded at all.” The SEC Order further states as follows. “As evidenced by the extent and duration of the wrongful payments and their improper recordation, Diageo failed to devise and maintain sufficient internal accounting controls.”
The SEC Order mentions Diageo’s cooperation and “certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”
As is common in all SEC FCPA enforcement actions, Diageo settled the matter without admitting or denying the SEC’s findings. Per the SEC Order, Diageo shall pay disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil monetary penalty of $3,000,000.
In a press release (here) Diageo stated as follows. “Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct.”
Diageo’s most recent Annual Report (Sept. 2010) stated as follows.
“As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators’ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo’s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations.”
The U.K. Bribery Act Goes Live
At the time of this post, the U.K. Bribery Act has been live for about ten hours, yet there has not been an enforcement action. Given that the Act is not retrospective and applies only to bribes paid after July 1st, this is hardly surprising, but I hope you appreciate the Friday humor.
U.K. corporates and others subject to the Bribery Act are doing business around the world, including in high-risk jurisdictions, and a healthy dose of corporate hospitality is no doubt occurring at Wimbledon. In other words, the world has not changed.
Today, of course, is the day the U.K. Bribery Act finally goes live.
As explained is this U.K. Ministry of Justice circular, “the Bribery Act replaces the offences at common law and under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 (known collectively as the Prevention of Corruption Acts 1889 to 1916) with a new consolidated scheme of bribery offences.”
The FCPA-like provision of the Bribery Act is Section 6 described in the circular as follows. “Section 6 is designed to deal with the corruption of decision making in publicly funded business transactions through the personal enrichment of foreign public officials by those seeking business opportunities. The offence is committed where a person offers, promises or gives a financial or other advantage to a foreign public official with the intention of influencing the official in the performance of his or her official functions. There must also be an intention to obtain or retain business or a business advantage on the part of the perpetrator. However, the offence is not committed where the official is permitted or required by the applicable written law to be influenced by the advantage.”
As to corporate liability, the circular states as follows. “The Bribery Act includes a new form of corporate criminal liability where there is a failure to prevent bribery perpetrated on behalf of a “relevant commercial organisation” (Section 7). This new corporate liability for bribery […] does not in any way change the existing common law principle governing the liability of corporate bodies for criminal offences that require the prosecution to prove a fault element or ‘mens rea’ in addition to a conduct element. This common law principle, sometimes referred to as the “identification principle”, will therefore continue to operate so that where there is evidence to prove that a person who is properly regarded as representing the “directing mind” of the body in question possessed the necessary fault element required for the offence charged the corporate body may be proceeded against.”
As to the Section 7 offense, the circular states as follows. “The offence at section 7 of the Act creates a new form of corporate criminal liability. The offence applies only to a “relevant commercial organisation” as defined at section 7(5) and focuses on a failure by such an organisation to prevent a person “associated with” it from committing a section 1 or 6 bribery offence in order to obtain or retain business or an advantage in the conduct of business for that organisation. It creates direct rather than vicarious liability and its commission does not amount to the commission of a substantive bribery offence under section 1 or 6. A commercial organisation will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place designed to prevent persons associated with it from bribing.”
As Michael Volkov (here) nicely stated – “The longest pre-game show in history is drawing to a close. The new world will shortly be upon us. Will the UK Bribery Act be a game-changer or will it fizzle out like Y2K? Everyone has their predictions; everyone has their focus and emphasis.”
Here is my two cents.
As with any new law, there is likely to be a learning phase for both the enforcement agencies and those subject to the law. That was certainly the case in the U.S. in the years following passage of the FCPA in 1977. Thus, it very well may be the case that there are no enforcement actions for some time (recognizing that it often takes a few years from beginning of an inquiry to resolution of an action). Thus the greatest immediate impact of the Bribery Act is sure to be the compliance ethic it inspires. I expect that the enforcement actions that may develop over time to focus on egregious instances of corporate conduct on which no reasonable minds would disagree. I do not get the sense, based on public comments of the Ministry of Justice and the Serious Fraud Office, that the envelope will be pushed too far in the early years of the Bribery Act.
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See here for the text of Richard Alderman’s (Director of the U.K. Serious Fraud Office) recent speech on the Bribery Act.
In a signature departure from U.S. enforcement policy concerning merger and aquisition issues, Alderman stated as follows. “I know that there are many occasions when an acquiring company takes over a target company and discovers either before or after the event that there are serious problems about corrupt activities in the target company. My view is that when an ethical acquiring company identifies these issues, then it is in everyone’s interest that that acquiring company gets on and sorts out the problems that it has inherited. I have difficulty in seeing that any SFO investigation at the corporate level would be justified although I would have to consider carefully the position of any individuals.” (As highlighted in this recent post, several FCPA enforcement actions have been based on successor liability theories).
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In this speech, Alderman stated the following regarding the “foreign public official” term in the Bribery Act.
“Who then is a foreign public official? This is the subject of litigation at the moment in the US and I am following this with interest. The test I use is one that was set out by the OECD in the commentary on the OECD Convention. What we look at is whether or not the foreign State is in a position to influence the foreign company. We therefore look at the relationship between the company and the State to see whether effectively this commercial organisation is being run by the State. This can lead us into some tricky areas. We have received questions about banking officials in countries where the State has a very major interest in the Bank and exercises that interest very actively. Are those officials foreign public officials? Our view is that in those circumstances the individual is likely to be a foreign public official. On the other hand if the State has a major interest but does not control the operations of the Bank, then I think we could have a different situation.”
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Keeping with today’s U.K. theme, earlier this week Bloomberg reported (here) that the SFO is assisting the SEC “on inquiries involving financial institutions and whether bribes were paid in transactions with sovereign wealth funds.”
As previously reported by the Wall Street Journal (see here) the SEC is “examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya’s sovereign wealth fund.” The SFO’s inquiry appears to be related to HSBC Holdings Plc’s interactions with Libya’s sovereign wealth fund.
Other financial services firms that have reportedly received letters of inquiry from the SEC include Bank of America, Morgan Stanley, and Citigroup.
*****
A good holiday weekend to all.
Johnson & Johnson Enforcement Action Focuses on Health Care Providers As “Foreign Officials”
That was quite the 72-hour period for FCPA enforcement last week. On Wednesday, it was JGC Corporation of Japan ($218.8 million in criminal fines). On Thursday, it was Comverse Technologies ($2.8 million in combined DOJ and SEC fines, penalties, and disgorgement). On Friday, it was Johnson & Johnson ($70 million in combined DOJ and SEC fines, penalties and disgorgement – plus approximately $7.9 million in a related U.K. Serious Fraud Office civil recovery).
This post analyzes the Johnson & Johnson enforcement action. Separate posts regarding the Comverse and JGC Corp. enforcement actions will follow later this week.
*****
Johnson & Johnson (“J&J), a global pharmaceutical, consumer product, and medical device company, resolved enforcement actions focused on business conduct in Greece, Poland, Romania. The enforcement actions also resolved an investigation of Johnson & Johnson subsidiary companies in the United Nations Oil for Food Program in Iraq.
The J&J enforcement action involved both a DOJ and SEC component. Total settlement amount was $70 million ($21.4 million criminal fine via a DOJ deferred prosecution agreement; $48.6 million in disgorgement and prejudgment interest via a SEC settled complaint).
This post summarizes the DOJ, SEC and SFO enforcement actions.
DOJ
The DOJ enforcement action involved a criminal information (here) against DePuy Inc. (a wholly-owned subsidiary of J&J and a global manufacturer and supplier of orthopedic medical devices) resolved through a deferred prosecution agreement (here).
Criminal Information
The background section of the information begins as follows. “Greece has a national healthcare system wherein most Greek hospitals are publicly owned and operated. Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their official capacities. Therefore, such HCPs in Greece are “foreign officials” as that term is defined in the FCPA.”
The conduct at issue focuses on Depuy International. In 1998, J&J acquired DePuy, including its subsidiary Deputy International (a U.K. company).
According to the information, between 1998 through 2006, DePuy and others conspired to “secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employed Greek HCPs.”
The information alleges that “DePuy, its executives, employees, and subsidiaries agreed to sell products to Company X [an agent and distributor for DePuy and its subsidiaries in Greece until 2001 when it was acquired by DePuy and named DePuy Medec and later renamed DePuy Hellas] at a 35% discount, then paid 35% of sales by Company X to an off-shore account of Company Y [based in the Isle of Man and a consultant for DePuy International in Greece until 1999] in order to provide off-the-books funds to Agent A [a Greek national who was the beneficial owners of both Company X and Y] for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”
The information further alleges that “DePuy, its executives, employees, and subsidiaries agreed to pay Agent A and Agent B [a Greek national who acted as a consultant to DePuy International and DePuy Hellas] a percentage of the value of sales of DePuy products in Greece in order to provide funds to Agent A and Agent B for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”
The information further alleges that between 2002 and 2006 “approximately £500,000 was withdrawn by DePuy Hellas MD [a Greek National who was an employee of Company X until it was acquired by J&J when she became the Managing Director of DePuy Hellas] and others and used to cover payments owed to HCPs by the agents but not yet paid.”
The information charges as follows. “In total, from 1998 to 2006, defendant DePuy, DePuy International, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of approximately $16.4 million in cash incentives to publicly-employed Greek HCPs to induce the purchase of DePuy products. In order to conceal the payments, DePuy Hellas and DePuy International falsely recorded the payments in their books and records as “commissions.””
As to a U.S. nexus, the information describes the following: certain phone calls made to Executive B (a U.S. citizen and officer and senior executive of DePuy) in Indiana to discuss the Company X acquisition and due diligence on Greek Agent A; e-mails sent to Executive B in Indiana regarding Agent A or Greek business in general; e-mails Executive A (a British citizen who was an officer and senior executive in charge of DePuy at the time it was purchased by J&J and who retained that position until 1999 when he became a senior executive at J&J retaining control of DePuy and its related operating companies) sent or received in New Jersey regarding Agent A.
Based on the above allegations, the information charges: (i) a conspiracy to violate the FCPA’s anti-bribery and books and records provisions; and (ii) a substantive FCPA anti-bribery violation.
DPA
The DOJ’s charges against DePuy were resolved via a deferred prosecution agreement (dated January 14, 2011) between the DOJ and J&J, its subsidiaries, and its operating companies “relating to illegal conduct committed by certain J&J operating companies and subsidiaries.” In addition to DePuy Inc., other operating companies named are Cilag AG International and Janssen Pharmaceutica N.V.
Pursuant to the DPA, J&J admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, and agents, and wholly-owned subsidiaries and operating companies” as set forth in a Statement of Facts attached to the DPA.
The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors.
(a) J&J voluntarily and timely disclosed the majority of the misconduct described in the Information and Statement of Facts [Note – the Iraq Oil for Food conduct was not voluntarily disclosed];
(b) J&J conducted a thorough internal investigation of that misconduct;
(c) J&J reported all of its findings to the Department;
(d) J&J cooperated fully with the Department’s investigation of this matter;
(e) J&J has undertaken substantial remedial measures as contemplated by [the DPA];
(f) J&J has agreed to continue to cooperate with the Department in any investigation of the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA and related statutes;
(g) J&J has cooperated and agreed to continue to cooperate with the SEC and, at the direction of the Department, foreign authorities investigating the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to corrupt payments;
(h) J&J has cooperated and agreed to continue to cooperate with the
Department in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets;
“(i) J&J has also agreed to resolve related cases being investigated by the SEC and the United Kingdom Serious Fraud Office (the “SFO”); and
(j) Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participation in federal health care programs pursuant to 42 U.S.C. § 1320a-7(a).
With respect to the corporate compliance reporting obligations imposed on J&J by the DPA, the agreement states as follows.
(i) J&J has already engaged in significant remediation of the misconduct described in the Statement of Facts and reviewed and improved its compliance program and implementation thereof;
(ii) J&J conducted an extensive, global review of all of its operations to determine if there were problems elsewhere and has reported on any areas of concerns to the Department and the SEC;
(iii) J&J has and will undertake enhanced compliance obligations
described in [the DPA];
(iv) J&J’s cooperation during this investigation and its substantial assistance in investigations of others has been extraordinary; and
(v) J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”
As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $28.5 million to $57 million. Pursuant to the DPA, J&J agreed to pay a monetary penalty of $21.4 million (25% below the minimum amount suggested by the guidelines). The DPA states as follows. “J&J and the Department agree that this fine is appropriate given J&J’s voluntary and thorough disclosure of the misconduct at issue, the nature and extent of J&J’s cooperation in this matter, penalties related to the same conduct in the United Kingdom and Greece, J&J’s cooperation in the Department’s investigation of other companies, and J&J’s extraordinary remediation.”
Pursuant to the DPA, J&J agreed to self-report to the DOJ “periodically, at no less than six-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance measures” described in the DPA.
As is standard in FCPA DPAs, J&J agreed not to make any public statement “contradicting the acceptance of responsibility” by J&J as set forth in the DPA.
The Statement of Facts attached to the DPA include, in addition to the Greece conduct described above, conduct relating to Poland, Romania and in connection with the U.N. Oil for Food Program in Iraq.
Poland
As to Poland, the DPA states, in summary fashion as follows.
“Poland has a national healthcare system. Most Polish hospitals are owned and operated by the government and most Polish HCPs [health care providers] are government employees providing health care services in their official capacities. Therefore, most HCPs in Poland are “foreign officials” as defined by the FCPA.”
“Polish hospitals purchase their medical products through a tender process, whereby suppliers of medical products compete for business by submitting bids to tender committees. Each tender committee may be associated with one or more hospitals.”
“In general, the tender committees evaluate the competitive bids and select the winning supplier for each purchase. Because most Polish hospitals are government owned, the tender committees effectively determine, on behalf of the government, from whom the government will purchase medical products.”
“J&J Poland [a wholly owned subsidiary of J&J] made payments and provided things of value to publicly-employed Polish HCPs, in the form of “civil contracts,” travel sponsorships, and donations of cash and equipment, to corruptly influence the decisions of HCPs on tender committees to purchase medical products from J&J Poland.”
As to civil contracts, the DPA states as follows.
“J&J Poland engaged in professional services contracts with publicly-employed Polish HCPs, known as “civil contracts.” The contracts were purportedly for professional services including lecturing, leading workshops, and conducting clinical trials.”
“J&J Poland did not require that its sales representatives provide proof that the work, for which payment had been made, was actually ever performed.”
“From January 2000 until June 2006, J&J Poland awarded civil contracts to publicly-employed Polish HCPs to corruptly influence them, in their official capacities as members of tender committees, in order to induce those HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”
As to travel, the DPA states as follows.
“J&J Poland sponsored some publicly-employed Polish HCPs to attend conferences in order to corruptly influence them, in their official capacities as members of tender committees, in order to induce the HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”
As to “Total Improper Payments in Poland,” the DPA states as follows.
“In total, from in or around 2000 to in or around 2007, J&J Poland and its employees authorized the payment, directly or indirectly, of approximately $775,000 in improper payments, including direct payments and travel, to publicly-employed Polish HCPs to induce the purchase of J&J products.”
Romania
As to Romania, the DPA states as follows.
“The national healthcare system in Romania is almost entirely state-run. The healthcare system is funded by the National Health Care Insurance Fund (“CNAS”), to which employers and employees make mandatory contributions. Most Romanian hospitals are owned and operated by the government and most HCPs in Romania are government employees. Therefore, most HCPs in Romania are “foreign officials” as defined by the FCPA.”
“From in or around 2005 through in or around 2008, J&J Romania [a wholly owned subsidary] employees made arrangements with J&J Romania distributors for the distributors, on behalf of J&J Romania, to provide cash payments and gifts to publicly-employed Romanian HCPs in exchange for prescribing certain pharmaceuticals manufactured by J&J subsidiaries and operating companies.”
As to “Total Improper Payments in Romania,” the DPA states as follows.
“In total, from in or around July 2005 to in or around mid-2008, J&J Romania and its employees authorized the payment, directly or indirectly, of approximately $140,000 in incentives to publicly-employed Romanian HCPs to induce the purchase of pharmaceuticals manufactured by J&J subsidiaries and operating companies.”
Oil for Food Program
As to the U.N. Oil for Food Program, the DPA states as follows.
“Between in or around December 2000 and in or around March 2003, Janssen [a wholly-owned subsidiary of J&J headquarted in Belgium] and Cilag [a wholly-owned subsidiary of J&J headquartered in Switzerland] were awarded 18 contracts for the sale of pharmaceuticals to the Iraqi Ministry of Health State Company for Marketing Drugs and Medical Appliances (“Kimadia”) under the [Oil for Food Program], with a total contract value of approximately $9.9 million, which generated approximately $6.1 million in profits. Janssen and Cilag secured these contracts through the payment of approximately $857,387 in kickbacks to the government of Iraq.”
“The kickbacks were paid to the government of Iraq through JC-Lebanon Agent [a Lebanese citizen who was an agent for both Janssen and Cilag in Iraq]. The kickbacks were concealed from the United Nations by inflating Janssen and Cilag’s contract prices by 10%.”
The DPA concludes with a section titled “Books and Records” that states as follows.
“In order to conceal the payments to the Greek, Polish, and Romanian HCPs on the books and records of J&J and its subsidiaries, the payments were misrepresented as, among other things, “commissions,” “civil contracts,” “travel,” “donations,” and “discounts.””
“In order to conceal the kickback payments made to the Iraqi government through JC-Lebanon Agent for contracts under the OFFP on the books and records of Janssen and Cilag, the payments were misrepresented as “commissions.””
“At the end of J&J’s fiscal year from in or around 1998 to in or around 2007, the books and records of DePuy International, DePuy Hellas, J&J Poland, J&J Romania, Janssen, and Cilag, including those containing false characterizations of kickback and bribe payments given to the Iraqi government and Greek, Polish, and Romanian officials, were incorporated into the books and records of J&J for purposes of preparing J&J’s year-end financial statements, which were filed with the Securities and Exchange Commission.”
The DOJ’s release (here) states as follows.
“Johnson & Johnson has admitted that its subsidiaries, employees and agents paid bribes to publicly-employed health care providers in Greece, Poland and Romania, and that kickbacks were paid on behalf of Johnson & Johnson subsidiary companies to the former government of Iraq under the United Nations Oil for Food program. Johnson & Johnson, however, has also cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry. As [the DPA] reflects, we are committed to holding corporations accountable for bribing foreign officials while, at the same time, giving meaningful credit to companies that self-report and cooperate with our investigations.” “The agreement recognizes J&J’s timely voluntary disclosure, and thorough and wide-reaching self-investigation of the underlying conduct; the extraordinary cooperation provided by the company to the department, the SEC and multiple foreign enforcement authorities, including significant assistance in the industry-wide investigation; and the extensive remedial efforts and compliance improvements undertaken by the company. In addition, J&J received a reduction in its criminal fine as a result of its cooperation in the ongoing investigation of other companies and individuals, as outlined in the U.S. Sentencing Guidelines. J&J’s fine was also reduced in light of its anticipated resolution in the United Kingdom. Due to J&J’s pre-existing compliance and ethics programs, extensive remediation, and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, J&J was not required to retain a corporate monitor, but it must report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement.”
SEC
The SEC’s civil complaint (here) is based on the same core set of facts contained in the above DPA and alleges, in summary, as follows.
“This matter concerns violations of the Foreign Conupt Practices Act by J&J as a result of the acts of its subsidiaries to obtain business for J&J’s medical device and pharmaceutical segments.”
“Since at least 1998 and continuing to early 2006, J&J’s subsidiaries, employees and agents paid bribes to public doctors in Greece who selected J&J surgical implants for their patients. Further, J&J’s subsidiaries and agents paid bribes to doctors
and public hospital administrators in Poland who awarded tenders to J&J from 2000 to 2006. J&J’s subsidiaries and agents also paid bribes to public doctors in Romania to prescribe J&J pharmaceutical products from 2002 to 2007. Finally, J&J’s subsidiaries and agent paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program (“Program”) from 2000 to 2003.”
As to Greece, the SEC complaint alleges as follows.
“One of J&J’s product lines is surgical implants such as artificial knees, hips and other products that surgeons implant into patients. Surgical implants are a lucrative, but competitive business. In many countries, orthopedic surgeons control which implants they use.”
“In 1998, J&J acquired another medical device company, DePuy Inc., a NYSE company. A top DePuy executive then went on to become a top J&J executive in the United States in J&J’s medical device and diagnostics business (“Executive A”). At the time of the acquisition, DePuy was engaged in a widespread bribery scheme in Greece to sell its implants. Executive A and DPI executives knowingly continued that scheme. From 1998 to 2006, J&J earned $24,258,072 in profits on sales obtained through bribery.”
The SEC complaint alleges that “J&J’s internal audit group discovered the payments to Greek doctors in early 2006 after receiving a whistleblower complaint.” According to the complaint, “the issue of payments to surgeons had been previously raised in an anonymous 2003 letter to a different internal audit team concerning a related J&J subsidiary in Greece … however, that team concentrated their investigation on allegations about a possible conflict ofinterest by local management and J&J did not fully investigate the alleged payments to doctors.”
As to Poland, the SEC complaint alleges as follows.
“Employees of … a J&J subsidiary, bribed publicly-employed doctors and hospital administrators to obtain business. [Subsidiary] executives running three business lines oversaw the creation of sham contracts and travel documents and also the creation of slush funds as a means to funnel bribe payments to doctors and
administrators. From 2000 to 2006, J&J earned $4,348,000 in profit from its sales through the bribery.”
“The bribery appears to have stopped when Polish prosecutors began to investigate payments to doctors.”
As to travel issues, the SEC complaint alleges as follows.
“[Subsidiary] also paid for public doctors and hospital administrators to travel to medical conventions in Poland and abroad in order to influence tender committee decisions in their favor. Sponsored doctors were taken on trips in exchange for influencing the doctors’ decisions to purchase J&J’s medical products or to award hospital tenders to J&J. Some of the trips were to the United States for conferences. Some of the trips were to tourists areas in Europe, and some included spouses and family members to what amounted to vacations.”
As to Romania, the SEC complaint alleges as follows.
“Employees of … a J&J subsidiary, bribed publicly-employed doctors and pharmacists to prescribe J&J products that the company was actively promoting. The employees worked with [the subsidiary’s] local distributors to deliver cash to publicly-employed doctors who ordered J&J drugs for their patients. [The subsidiary] also provided travel to certain doctors who agreed to prescribe J&J products. From 2000 to 2007, J&J earned $3,515,500 in profit from its sales through the bribery.”
As to Iraq Oil for Food conduct, the SEC complaint alleges as follows.
“J&J participated in the Program through two of its subsidiaries, Cilag AG International and Janssen Pharmaceutica N.V. (collectively “Janssen-Cilag”). During the program, Janssen-Cilag sold pharmaceuticals to an arm of the Iraqi Ministry of Health known as Kimadia. Janssen-Cilag conducted business with Kimadia in Iraq through a Lebanese agent (the “Agent”). The Agent’s primary contact with the J&J companies was an area director at Janssen-Cilag’s office in Lebanon.”
“In total, secret kickback payments of approximately $857,387 were made in connection with nineteen Oil for Food contracts. The payments were made through the Agent to Iraqi controlled accounts in order to avoid detection by the U.N. The fee was effectively a bribe paid to the Iraqi regime, which were disguised on J&J’s books and records by mischaracterizing the bribes as legitimate commissions.”
“In order to generate funds to pay the bribes and to conceal those payments, Janssen-Cilag and its agent inflated the price of the contracts by at least ten percent before submitting them to the U.N. for approval. J&J’s total profits on the contracts were $6,106,255.”
Under the heading “Anti-Bribery Violations” the complaint alleges as follows.
“J&J, through its subsidiaries and agents, knowingly allowed its employees and third parties to pay Greek and Polish public doctors and public hospital administrators for the purpose of obtaining or retaining business.”
“Executive A, a U.S. resident and a senior executive at J&J, approved the arrangements with the Greek Agent in Greece. Executive A and DPI executives knew that the Greek Agent was bribing Greek doctors. In addition, Polish doctors were bribed to use J&J products in return for trips. Use of the mails and interstate commerce was also used to facilitate the bribery schemes in both Greece and Poland.”
Under the hearing “Failure to Maintain Its Books and Records” the complaint alleges as follows.
“J&J’s subsidiaries made numerous illicit payments for the purpose of obtaining contracts in Iraq, Romania, Greece, and Poland. J&J’s books and records did not reflect the true nature of those payments. For example, they did not record that a portion of its payments to the Greek and Iraqi agents constituted reimbursements for bribes, and they did not record the true terms of the civil contract payments to Polish doctors. Efforts were made to obscure the purpose of trips to the United States and abroad. Certain J&J subsidiaries created false contracts, invoices, and other documents to conceal the true business arrangement it had with its consultants and distributors to pay bribes. False travel documents were created, and petty cash was used to pay bribes. United Nations contracts were also falsified.”
Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint alleges as follows.
“J&J failed to implement internal controls to detect or prevent bribery. The conduct was widespread in various markets, Greece, Poland, Romania, and Iraq. The conduct involved employees and managers of all levels. False documents were routinely created to conceal the bribery in each country.”
“Rather than cease the bribery that was happening at DePuy prior to J&J’s acquisition, J&J through its subsidiaries, employees and agents allowed the bribery to continue. They created sham businesses and entered into contracts that were merely
conduits to allow the bribery to flourish. They failed to conduct due diligence on the Greek Distributor. The Company also paid its consultant outside of Greece to avoid detection of bribery. The Company had two different J&J corporate entities make
payments to the Greek Agent to conceal the amount of money that was being funneled to
doctors as bribes.”
“[Polish subsidiary] entered into fake civil contracts with Polish doctors and J&J also created false travel arrangements in Poland and Romania to create slush funds.”
“Cilag and Janssen paid bribes to Iraq despite the fact that trade sanctions were in place against doing business in Iraq. Cilag and Janssen falsified their contracts with the United Nations to conceal the kickbacks being paid to Iraq.”
Based on the above allegations, the SEC charged J&J with FCPA anti-bribery violations and FCPA books and records and internal control violations.
Without admitting or denying the SEC’s allegations, J&J agreed to an injunction prohibiting future FCPA violations and agreed to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest.
The SEC’s release (here) contains the following statement from Robert Kuzami (Director of the SEC’s Division of Enforcement): “The message in this and the SEC’s other FCPA cases is plain – any competitive advantage gained through corruption is a mirage. J&J chose profit margins over compliance with the law by acquiring a private company for the purpose of paying bribes, and using sham contracts, off-shore companies, and slush funds to cover its tracks.” In the release, Cheryl Scarboro (Chief of the SEC Enforcement Divisions FCPA Unit) stated as follows. “Bribes to public doctors can have a detrimental effect on the public health care systems that potentially pay more for products procured through greed and corruption.”
The SEC release states as follows.
“J&J voluntarily disclosed some of the violations by its employees and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.”
SFO
On the same day as the above U.S. enforcement actions, the U.K. SFO announced (here) a Civil Recovery Order against DePuy International Limited “in which DePuy International Limited will pay £4.829 million [approximately $7.9 million], plus prosecution costs, in recognition of unlawful conduct relating to the sale of orthopaedic products in Greece between 1998 and 2006.”
According to the SFO release, the SFO “launched an investigation into the activities of DePuy International Limited in October 2007 following a referral from the DOJ.” Richard Alderman, Director of the SFO, stated as follows. “When Johnson & Johnson reported the DePuy corruption, the DOJ informed the SFO of issues within our jurisdiction. We worked with the DOJ to find a solution that served both the interests of justice and the company’s desire to put illegal activity behind it and move on. I believe the order approved […] will illustrate to other companies how the SFO works closely with organisations across the world in enforcing the highest ethical standards, but is willing to engage and listen to companies that come to us with problems and help them find solutions.”
The SFO release further states as follows. “On the facts of this case, criminal sanction of the Greek conduct has been achieved by the conclusion of a Deferred Prosecution Agreement with DePuy International Limited’s parent company and the DOJ. The Director of the Serious Fraud Office has concluded that a prosecution was therefore prevented in this jurisdiction by the principles of double jeopardy. The underlying purpose of the rule against double jeopardy is to stop a defendant from being prosecuted twice for the same offence in different jurisdictions. The DOJ Deferred Prosecution Agreement has the legal character of a formally concluded prosecution and punishes the same conduct in Greece that had formed the basis of the Serious Fraud Office investigation. […] Consequently the Serious Fraud office is satisfied that the most appropriate sanction is a Civil Recovery Order, under the Proceeds of Crime Act 2002.”
As highlighted in this prior post, in April 2010, former DePuy executive Robert Dougall pleaded guilty to conspiring with others “to make corrupt payments and/or give other inducements” to “medical professionals within the Greek state health care system” contrary to Section 1 of the UK Prevention of Corruption Act of 1906.
*****
Eric Dubelier (Reed Smith – see here – a former DOJ enforcement attorney) represented J&J.
J&J’s press release (here) notes as follows. “In 2007, Johnson & Johnson voluntarily disclosed to the DOJ and the SEC that subsidiaries outside the United States were believed to have made improper payments in connection with the sale of medical devices. In the course of comprehensive compliance efforts and reports into the Company, similar issues in additional markets and businesses were identified and brought to the attention of the agencies.” William Weldon, Chairman and Chief Executive Officer of J&J stated as follows. “More than four years ago, we went to the government to report improper payments and have taken full responsibility for these actions. We are deeply disappointed by the unacceptable conduct that led to these violations. We have undertaken significant changes since then to improve our compliance efforts, and we are committed to doing everything we can to ensure this does not occur again. I know that these actions are not representative of Johnson & Johnson employees around the world who do what is honest and right every day, in the conduct of our business and in service to patients and customers worldwide. We will continue to demonstrate that Johnson & Johnson is a company that embraces responsible corporate behavior.”
Acquiring a Deferred Prosecution Agreement
In November 2010, Pride International Inc. was one of several companies to resolve a coordinated FCPA enforcement action involving (at least in part) the use of Panalpina services.
As noted in this prior post, the Pride enforcement action included not only Nigeria – Panalpina related conduct, but also conduct relating to contract extensions in Venezuela, bribing an administrative law judge in India, customs duties in Mexico, as well as other improper conduct in other countries.
The enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $56.2 million ($32.6 million criminal fine via a DOJ plea agreement and deferred prosecution agreement; $23.5 million in disgorgement and prejudgment interest via a SEC settled complaint).
The three year DPA (here) imposed on Pride a host of compliance undertakings including reporting to the DOJ on an annual basis (during the term of the DPA) “on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures.”
On February 7th, Pride announced (here) a definitive merger agreement by which U.K. based Ensco (plc) will acquire Pride in a cash and stock transaction expected to close in the second quarter of 2011. The release states as follows. “The transaction will create the second largest offshore driller in the world with 74 rigs spanning all of the strategic, high-growth markets around the globe.”
So what will happen to Pride’s DPA obligations?
A common clause in DPA’s is a sale or merger clause.
In the Pride DPA, it states as follows.
Sale or Merger of Pride International
“Pride International agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger or transfer (including the sale, merger, or transfer of unincorporated branches), it shall include in any contract for sale, merger or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement.”
Sure enough, Section 5.15 of the “Agreement and Plan of Merger” (here) states as follows.
“Deferred Prosecution Agreement. Effective as of the Effective Time, Parent [Ensco] agrees to be bound, and the Surviving Entity shall continue to be bound, by the obligations of the Company [Pride] set forth in the Deferred Prosecution Agreement, dated November 4, 2010, between the Company and the U.S. Department of Justice, to the extent required thereby.”
Pride’s FCPA compliance obligations and undertakens may not be the only FCPA-related issues on Ensco’s plate.
Ensco has ADR’s traded on the U.S. market and “following disclosures by other offshore service companies announcing internal investigations involving the legality of amounts paid to and by customs brokers in connection with temporary importation of rigs and vessels into Nigeria, the Audit Committee of our Board of Directors and management commenced an internal investigation in July 2007.”
Ensco’s most recent quarterly filing (here) states as follows.
“Our internal investigation has essentially been concluded. Discussions were held with the authorities to review the results of the investigation and discuss associated matters during 2009 and the first half of 2010. On May 24, 2010, we received notification from the SEC Division of Enforcement advising that it does not intend to recommend any enforcement action. We expect to receive a determination by the United States Department of Justice in the near-term. Although we believe the United States Department of Justice will take into account our voluntary disclosure, our cooperation with the agency and the remediation and compliance enhancement activities that are underway, we are unable to predict the ultimate disposition of this matter, whether we will be charged with violation of the anti-bribery, recordkeeping or internal accounting control provisions of the FCPA or whether the scope of the investigation will be extended to other issues in Nigeria or to other countries. We also are unable to predict what potential corrective measures, fines, sanctions or other remedies, if any, the United States Department of Justice may seek against us or any of our employees.”