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The SEC Goes Searching

Last August (see here) when Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC would be creating a specialized FCPA unit he said, among other things, that:

“The Foreign Corrupt Practices Act unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practice Act…”

In February, Cheryl Scarboro (the head of the SEC’s FCPA Unit) similarly stated (here) that “the new unit will give us the resources and the ability to do even more going forward,” that the new unit will allow the SEC to do more industry investigations, and that one industry the SEC is focusing on is the pharmaceutical industry.

Given these comments, it should come as no surprise that a recent Wall Street Journal article notes that the SEC enforcement division sent letters “within the past two months” to several companies in the pharmaceutical and energy industries” “as part of an investigation by the SEC division that looks into potential violations of the FCPA.” According to the article, the letters ask the companies “about their internal controls to guard against bribery” specifically in terrorism-sponsor states such as Cuba, Iran, Sudan, and Syria. According to the article, “it isn’t clear which companies received the letters.” The article also notes that “the SEC probe, which is in its early stages, comes as the Justice Department’s criminal fraud section has sent letters in recent weeks to a number of pharmaceutical companies asking about payments made to foreign officials in several nations…” Both the SEC and DOJ declined to comment for the article.

Bribes for Books

A post earlier this week talked about the World Bank and other multilateral development banks (see here).

Fitting because recently the World Bank (see here) “debarred Macmillan Limited, a U.K. company, declaring the company ineligible to be awarded Bank-financed contracts for a period of six years in the wake of the company’s admission of bribery payments relating to a Trust Fund-supported education project in Southern Sudan.” According to the release, “the debarment can be reduced to three years subject to continued cooperation.”

In a press release yesterday (see here), the company said “the international publishing business, Macmillan Publishers Ltd UK (“Macmillan”), has today confirmed that it has voluntarily referred to the Serious Fraud Office its concerns over historic payments made by a subsidiary of its education business, Macmillan Education, to secure a contract in Southern Sudan.”

A Look Back (and Forward)

This week marks not only the end of a year, but also a decade.

So let’s take a look back at FCPA enforcement circa 2000.

In 2000, the FCPA was indeed “on the books” (the statute was enacted in 1977), yet there was little in terms of FCPA news or enforcement actions.

A “U.S. newspapers and wires” search for the FCPA in the 2000 picks up 64 “hits” and among the more noteworthy stories from that year were the following:

(1) BellSouth corporation disclosed that the SEC launched a probe into whether one of its Latin American subsidiaries violated the FCPA and the company also disclosed that its outside counsel had already investigated the conduct and found that no violations had occurred; and

(2) BF Goodrich Company announced that it was using a web-enabled training system to educate its employees about work-related legal issues including the FCPA.

One could even attend a few FCPA training sessions in 2000 as the search picked up programs sponsored by both the City of New York Bar and the Washington DC Bar.

There was even one FCPA enforcement action in 2000!

In December 2000, the SEC announced (here) the filing of a settled cease-and-desist proceeding against International Business Machines Corporation (“IBM”).

According to the SEC order (here), IBM violated the books and records provisions of the FCPA based on the conduct of its indirect, wholly-owned subsidiary, IBM-Argentina, S.A. The conduct involved “presumed illicit payments to foreign officials” in connection with a “$250 million systems integration contract” between Banco de la Nacion Argentina (“BNA”) (an apparent “government-owned commercial bank in Argentina) and IBM-Argentina.

The SEC order finds that, in connection with the contract, IBM-Argentina’s Former Senior Management (without the knowledge or approval of any IBM employee in the U.S.) caused IBM-Argentina to enter into a subcontract with an Argentine corporation (“CCR”) and that “money paid to CCR by IBM-Argentina in connection with the subcontract was apparently subsequently paid by CCR to certain BNA officials.”

According to the Order, IBM-Argentina paid CCR approximately $22 million under the subcontract and “at least $4.5 million was transferred to several BNA directors by CCR.”

According to the Order, the former Senior Management “overrode IBM procurement and contracting procedures, and hid the details of the subcontract from the technical and financial review personnel assigned to the Contract.” The Order finds that IBM-Argentina “recorded the payments to CCR in its books and records as third-party subcontractor expenses” and that IBM-Argentina’s financial results were incorporated into IBM’s financial results filed with the Commission.

Based on the above conduct, the SEC concluded that “IBM violated [the FCPA’s books and records provisions] by failing to ensure that IBM-Argentina maintained books and records which accurately reflected IBM-Argentina’s transactions and dispositions of assets with respect to the Subcontract.” IBM consented to a cease and desist order and consented to entry of a judgment ordering it to pay a $300,000 penalty.

A Washington Post article about the IBM action notes that it “is the SEC’s first in three years involving overseas bribery.”

In 2000, there were no DOJ FCPA prosecutions (against corporations or individuals).

The first DOJ corporate FCPA prosecution of this decade did not occur until 2002.

In that action (here) Syncor Taiwan, Inc. (a wholly-owned, indirect subsidiary of Syncor International Corporation) pleaded guilty to a one-count criminal information charging violations of the FCPA. According to the DOJ release, “[t]he company admitted making improper payments [approximately $344,110] to physicians employed by hospitals owned by the legal authorities in Taiwan for the purpose of obtaining and retaining business from those hospitals and in connection with the purchase and sale of unit dosages of certain radiopharmaceuticals.”

The release further notes that the company “made payments [approximately $113,000] to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medial imaging centers owned and operated by the defendant.”

Based on this conduct, the release notes that the company agreed to a $2 million criminal fine – “the maximum criminal fine for a corporation under the FCPA” (as noted in the release). The release also notes that “Syncor International has consented to the entry of a judgment requiring it to pay a $500,000 civil penalty, the largest penalty ever obtained by the SEC in an FCPA case.”.

From this retrospective, two issues jump out.

First, as demonstrated by the IBM action, the notion that an issuer may be strictly liable for a subsidiary’s (even if indirect) violations of the FCPA books and records is nothing new. (See here for a prior post on this issue).

Second, as demonstrated by the Syncor action, DOJ’s interpretation of the “foreign official” element to include non-government employees employed by state-owned or state-controlled entities stretches back to earlier this decade. (See here for prior posts on this issue).

This retrospective also highlights just how significantly FCPA enforcement has changed this decade.

For starters, the same “U.S. newspapers and wires” search for the FCPA (year to date) picks up nearly 700 “hits” (a ten-fold increase from ten years ago). In addition, if one wanted to, one could attend (it seems) an FCPA seminar, training session, bar event, etc. every week in a different state.

Further, I bet my Jack LaLanne Power Juicer received this holiday season that if the IBM enforcement action were to have recently occurred, the SEC would have also charged FCPA internal control violations as well as sought a significant disgorgement penalty given that the alleged improper payments in that matter helped secure a $250 million contract.

Moreover, the $2 million “maximum criminal fine for a corporation under the FCPA” (as noted in the Syncor DOJ release) seems laughable when viewed in the context of the $450 million Siemens criminal fine (Dec. 2008) or the $402 million Kellogg Brown & Root criminal fine (Feb. 2009). Also laughable is the $500,000 “largest penalty ever obtained by the SEC in an FCPA case” (as noted in the Syncor release) when viewed in the context of the $350 million Siemens penalty or the $177 million KBR/Halliburton penalty.

Has the conduct become more egregious during this decade or have enforcement theories and strategies simply changed? I doubt it is the former.

Why have enforcement theories and strategies changed? One of the best, candid explanations I’ve heard recently is that FCPA enforcement for the government “is lucrative.” (See here).

One of the great legal “head-scratchers” of this decade is how DOJ and SEC’s enforcement of the FCPA against business entities has taken place almost entirely outside of the normal judicial process due to the fact that corporate FCPA prosecutions are resolved through non-prosecution or deferred prosecution agreements, settled through SEC cease and desist orders, or otherwise resolved informally. The end result is that in many cases, the FCPA means what DOJ and SEC says it means.

My hope for the New Year and decade is that many of the untested and unchallenged legal theories which are now common in FCPA enforcement will actually be subject to judicial scrutiny and interpretation.

A Few Questions From the Back Row

Today, Assistant Attorney General Lanny Breuer gave a keynote address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (see here for his address).

In addition, to talking about the unique FCPA compliance risks facing the pharmaceutical industry, Breuer also discussed general FCPA topics such as compliance and voluntary disclosure. Whether you are in the pharma industry or not, you probably want to take a look at what he had to say.

Here is what Breuer had to say about the “foreign official” element of an FCPA anti-bribery violation.

“…who exactly qualifies as a ‘foreign official’ in the context of a public health system, and what constitutes a corrupt offer or payment that violates the FCPA? Of course, the answers to those questions depend on the facts and circumstances of every case, and I can’t give you binding guidance from the podium today.”

Breuer also said:

“…consider the possible range of ‘foreign officials’ who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.”

If I had attended the address, I would have raised my hand and asked these questions (perhaps someone did).

Why can’t the DOJ give binding guidance (or even just guidance) on the meaning of the “foreign official” element?”

You say that “doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities” are included in the range of “foreign officials who are covered by the FCPA.” However, isn’t that merely the DOJ’s interpretation of the statute, and an untested and unchallenged interpretation at that? Before companies are subject to an FCPA enforcement action based on this theory, shouldn’t there at least be some judicial acceptance of this theory? If you believe there has been, can you please provide the case cites? Is DOJ willing to make public its legal analysis and rationale for this theory?

Pfizer Under Scrutiny in the Philippines

A question often posed at FCPA conferences to U.S. enforcement attorneys is – “how do you find out about potential FCPA violations?” The usual answers are: a company self-reports, a competitor or disgruntled employee blows the whistle, or foreign law enforcement agencies contact the DOJ or SEC. I’ve never heard though of a foreign legislator issuing a press release and sending a letter to the DOJ and the Commerce Department accusing a U.S. company of violating the FCPA. That is until now.

Earlier this week, Senator Mar Roxas (Philippines) issued a press release (see here) demanding that Pfizer Inc. open its records to a congressional committee investigating Pfizer’s lobbying of the Philippine government in connection with the passage and implementation of the Cheaper Medicines Law (the “Law”). In addition, the release notes that Roxas also sent separate letters to the U.S. Department of Justice and the U.S. Commerce Department. According to the release, in the letters Roxas states his belief that Pfizer’s activities in connection with passage and implementation of the Law “are unethical and violate not only Philippine Anti-Corruption Laws, but also the U.S. Foreign Corrupt Practices Act” and he specifically requests “any assistance that [the DOJ] can extend in looking into allegations of bribery against Pfizer…”.

Time will tell whether a future FCPA enforcement action against Pfizer is on the horizon. If there is one, it will not be the first time a U.S. company is subjected to FCPA scrutiny for its efforts to influence foreign legislation impacting its business. In January 2005, Monsanto Co. agreed to pay $1.5 million to settle an FCPA enforcement action based on allegations that it made improper payments to a senior Indonesian environmental official to persuade the official to repeal an environmental impact study requirement that was making it difficult for the company to sell its genetically modified crops in that country. (See here, here and here).

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