Parker Drilling Resolves FCPA Enforcement Action Involving Conduct In Nigeria
It’s been quite a week on the FCPA enforcement front.
On Monday, the DOJ announced (here) criminal obstruction of justice charges against “Frederic Cilins a French citizen [for] attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”
Yesterday, it was reported (here) that former Siemens executive Uriel Sharef had, as expected, settled the SEC enforcement action against him by agreeing, without admitting or denying the SEC’s allegations, to pay a $275,000 penalty. (See here for the prior post discussing the DOJ’s and SEC’s December 2011 charges against Sharef and others).
Yesterday, the DOJ announced (here) that criminal charges “have been unsealed against one current and one former executive of the U.S. subsidiary of a French power and transportation company for their alleged participation in a scheme to pay bribes to foreign government officials.” The individuals are:
Frederic Pierucci (“a current company executive who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary) “who was charged in an indictment unsealed in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.” According to the DOJ, Pierucci, a French national, was arrested Sunday night at John F. Kennedy International Airport.
David Rothschild (“a former vice president of sales for the Connecticut-based U.S. subsidiary”) who pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA. The charges against Rothschild and his guilty plea were recently unsealed.
Future posts will explore in more detail each of the above developments.
Today’s post is about yesterday’s other FCPA development – the announcement of the long-expected enforcement action against Parker Drilling (a Houston-based oil drilling services company) for conduct in Nigeria.
As indicated in this DOJ release, the Parker Drilling action “stemmed from the DOJ’s Panalpina-related investigations.”
As detailed in this prior post, in November 2010, the DOJ and SEC announced coordinated FCPA enforcement actions against Swiss-based freight forwarder Panalpina and six oil and gas companies that utilized its services in connection with business in Nigeria. The November 2010 enforcement action resulted in approximately $237 million in combined DOJ/SEC settlement amounts. (For additional reading on these actions, please visit the CustomsGate tab under the search feature of this site or see here where all the prior actions are linked). As noted in this prior statistical post, Panalpina-related enforcement actions are one, of just a few unique events, that have given rise to the majority of FCPA enforcements since 2007, and Panalpina-related enforcement actions significantly contributed to the “spike” in FCPA enforcement actions in 2010.
Total fines and penalties in the Parker Drilling enforcement action were approximately $15.9 million (approximately $11.8 million in the DOJ enforcement action and approximately $4.1 million in the SEC enforcement action).
This post summarizes the DOJ’s and SEC’s allegations and resolution documents.
DOJ
The DOJ enforcement action involved a criminal information (here) against Parker Drilling resolved through a deferred prosecution agreement (here)
Criminal Information
Parker Drilling operated oil-drilling rigs in Nigeria owned by Parker Drilling (Nigeria Limited), a Nigerian entity and wholly-owned subsidiary of Parker Drilling Offshore International, Inc., (a Cayman Islands corporation wholly-owned by Parker Drilling). According to the information, “Parker Drilling ceased drilling operations in Nigeria in 2006” and the conduct at issues focused on two issues or events that occurred between 8 to 12 years ago.
First, the information, like the prior Panalpina-related enforcement actions, alleged conduct in connection with obtaining temporary importation permits (TIPs) in Nigeria for oil-drilling rigs. The information alleges that in 2001, Parker Drilling retained Panalpina to “obtain TIPs and TIP extensions on Parker Drilling’s behalf. According to the information, between 2001 and 2002:
“Panalpina obtained new TIPs for Parker Drilling’s rigs by submitting false paperwork on Parker Drilling’s behalf to avoid the time, cost, and risk associated with exporting the rigs and re-importing them into Nigerian waters (a process that Panalpina referred to as the ‘paper process’ or ‘recycling.’). Panalpina created and caused to be presented to Nigerian officials documents that reflected that the rigs had been physically exported and re-imported. In reality, the drilling rigs never left Nigerian waters.”
Second, and more significant in terms of the conduct alleged in the information, the DOJ alleges conduct in relation to the Nigerian “Panel of Inquiry for the Investigation of All Cases of Temporary Import Permits Issued Between 1984 to Year 2000” (the “TI Panel”). According to the information, the TI Panel was “presidentially appointed, operated under the auspices of the Nigerian President’s Office, and possessed the power to issue subpoenas and levy fines” in connection with certain duties and tariffs that the Nigerian Customs Service (“NCS”) collected or failed to collect between 1984 and 2000.
As to the TI Panel, the information alleges that beginning in 2002 the TI Panel began reviewing Parker Drilling. According to the information, thereafter Parker Drilling engaged Nigeria Outside Counsel (a Nigerian citizen based in Nigeria who advised Parker Drilling on customs and other matters in Nigeria) and a Nigeria Agent (a Nigerian and British citizen based in the U.K. to assist Parker Drilling in connection with customs matters in Nigeria) who represented Parker Drilling before the TI Panel.
The information alleges that in 2004 “the TI Panel concluded that Parker Drilling had violated [Nigerian law] with respect to several of its TIPS” and that the “TI Panel assessed a fine of $3.8 million against Parker Drilling.” The information then outlines a “bribery scheme,” that resulted in the TI Panel reducing Parking Drilling’s fine “to just $750,000.”
In connection with this “bribery scheme,” the information alleges conduct as to Employee A (a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria); Employee B (a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria); Executive A (a U.S. citizen based in Houston who performed financial and compliance functions for Parker Drilling between 2002 through 2005); Executive B (a U.S. citizen based in Houston who performed a legal function for Parker Drilling); U.S. Outside Counsel (a U.S. citizen and partner in a U.S. law firm who served as Parker Drilling’s outside counsel who provided legal and business advice to Parker Drilling on customs and other issues in Nigeria).
Specifically, the information alleges that U.S Outside Counsel suggested that Parker Drilling retain the Nigeria Agent to resolve its Nigerian customs issues even though Nigeria Agent’s “resume, which U.S. Outside Counsel provided to Parker Drilling, did not reflect any past experience in Nigeria or handling customs issues.” According to the information, Parker Drilling “conducted no additional due diligence into Nigeria Agent’s qualifications.”
The information alleges that “with one exception, Parking Drilling paid Nigeria agent indirectly through the U.S.-based law firm” and that “Executives A and B paid and caused to be paid all of Nigeria Agent’s expenses without receiving any invoices particularly describing the expenditures’ purposes.” According to the information, many of expenses related to food, entertainment, social events and the like and the information alleges various meetings the Nigeria Agent had with various Nigerian foreign officials.
The information further alleges that Parker Drilling’s treasurer informed Executive B “that the lack of invoices could raise an issue in Parker Drilling’s ongoing Sarbanes Oxley audit.” Thereafter, the information alleges, the Nigeria Agent sent an invoice and that Executive B “accepted the invoice and retained it in Parker Drilling’s files, knowing that the invoice did not accurately reflect the true purpose of Parker’s Drillings” prior payments to the Nigeria Agent.
The information then states as follows. “All told, Parker Drilling transferred and caused to be transferred to Nigeria Agent approximately $1.25 million to address Parker Drilling’s TI Panel issues” and that “Nigeria Agent succeeded in reducing Parker Drilling’s TI Panel Fines.”
Based on the above conduct, the information charges one count of violating the FCPA’s anti-bribery provisions. Although the above Panalpina-related allegations are incorporated by reference into the paragraphs charging the FCPA violation, the information specifically identifies only the TI Panel conduct and states as follows. “Parker Drilling made and cause to be made from the United States … a series of payments totaling approximately $1.25 million to Nigeria Agent, knowing that all or a portion of those payments would be given or used to procure goods and services that were to be given to a foreign government official in return for the diminution of a lawfully assessed fine.”
Deferred Prosecution Agreement
The above charge against Parker Drilling was resolved via a DPA in which Parker Drilling admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the information.
The DPA has a term of three years and under the heading “relevant considerations” it states as follows.
“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) the Company’s cooperation, including conducting an extensive internal investigation and collecting, analyzing, and organizing voluminous evidence and information for the Department; (b) the Company has engaged in extensive remediation, including ending its business relationships with officers, employees or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts; (c) the Company has retained a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel; (d) the Company has already significantly enhanced and is committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth [elsewhere in the DPA]; (e) the Company has implemented a compliance-awareness improvement initiative and program that includes issuance of periodic anti-bribery compliance alerts; (f) the Company has already implemented many of the elements described [elsewhere in the DPA]; and (g) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”.
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $14.7 million to $29.4 million. The DPA then states as follows.
“The Company agrees to pay a monetary penalty in the amount of $11,760,000, an approximately 20% reduction off the bottom of the fine range […]. The Company and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the Company’s cooperation, extensive remediation, committment to continue to enhance its compliance program, and culpability relative to other companies examined in this investigation.”
During the period of the DPA, Parker Drilling will have annual reporting obligations to the DOJ concerning its remediation and implementation of various compliance measures. As is typical in FCPA DPAs, Parker Drilling also agreed to a “muzzle clause” (see this prior post for more information).
SEC
In a related enforcement action based on the same core conduct, the SEC brought a civil complaint (here) against Parking Drilling.
The introductory paragraph of the complaint states as follows.
“This matter involves violations of the Foreign Corrupt Practices Act (“FCPA”) by Defendant Parker Drilling Company. In 2004, through its outside counsel, Parker Drilling retained a Nigerian agent to assist the company with customs disputes related to the importation of its drilling rigs into Nigeria. During the course of the agent’s work, two Parker Drilling executives knowingly paid the agent large sums of money through its outside counsel for, among other things, the “entertainment” of Nigerian foreign officials in an effort to obtain their influence in resolving the customs disputes.”
The SEC complaint also contains a paragraph with the same general Panalpina-related allegations as alleged in the DOJ’s criminal information.
Under the heading “Remedial Efforts” the complaint states as follows.
“Parker Drilling demonstrated significant cooperation and conducted an extensive internal investigation. Since the time of the conduct noted in this Complaint, Parker Drilling has made significant enhancements to its global anti-corruption compliance program, including: retaining a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee and full-time staff to assist him; enhancing anti-corruption due diligence requirements for relationships with third parties; increasing compliance monitoring and corporate auditing specifically tailored to anti-corruption; implementing a compliance awareness initiative that includes issuance of periodic anti-bribery compliance alerts; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”
Based on the above conduct, the SEC charged an FCPA anti-bribery violation and an FCPA books and records and internal controls violation. Other than restating the language of the books and records and internal controls provisions, the SEC complaint does not contain any specific allegations concerning these charges.
As noted in this SEC release, Parker Drilling agreed to pay disgorgement of 3,050,00 plus pre-judgment interest of $1,040,818, and consented to the entry of a final judgment permanently enjoining it from future FCPA violations.
Mitchell Ettinger, Saul Pilchen and Stephanie Cherny (Skadden, Arps) represented Parker Drilling.
Parker Drilling in this release stated as follows.
“After an extensive investigation, with which we fully cooperated, we are pleased to have reached agreement with the DOJ and the SEC, and we will continue to maintain a vigorous FCPA compliance program, to emphasize the importance of compliance and ethical business conduct, and to enhance our compliance efforts.”
Parker Drilling had previously disclosed that the DOJ and SEC’s investigations concerned “certain of our operations relating to countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria.”
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.
A Focus On SEC FCPA Individual Actions
Posts earlier this week (here and here) highlighted various facts and figures concerning DOJ FCPA individual prosecutions. This post focuses on SEC FCPA individual actions.
Like the DOJ, the SEC frequently speaks in lofty rhetoric concerning its focus on holding individuals accountable under the FCPA. For instance, in connection with the recent Garth Peterson enforcement action, Robert Khuzami (then Director of the SEC’s Division of Enforcement) stated (here) that the case “illustrates the SEC’s commitment to holding individuals accountable for FCPA violations.” Likewise, in connection with the 2011 SEC action against Paul Jennings, Cheryl Scarboro (then Chief of the SEC’s Foreign Corrupt Practices Act Unit) stated (here) that the SEC “will vigorously hold accountable” individuals for FCPA violations.
Since 2005, the SEC has charged 49 individuals with FCPA civil offenses. The breakdown is as follows.
- 2005 – 1 individual
- 2006 – 8 individuals
- 2007 – 7 individuals
- 2008 – 5 individuals
- 2009 – 5 individuals
- 2010 – 7 individuals
- 2011 – 12 individuals
- 2012 – 4 individuals
Similar to the prior DOJ figures, most of the individuals charged – 33 (or 67%) were charged since 2008. Thus, on one level the SEC is correct when it states that individual prosecutions are a focus at least as measured against the historical average given that between 1978 and 2004 the SEC charged 32 individuals with FCPA civil offenses.
Yet on another level, a more meaningful level given that there was much less overall enforcement of the FCPA between 1978 and 2004, the SEC’s statements (like the prior DOJ statements about its focus on individuals) represent hollow rhetoric as demonstrated by the below figures.
Of the 33 individuals charged with civil FCPA offenses by the SEC since 2008:
- 7 individuals were in the Siemens case;
- 4 individuals were in the Willbros Group case;
- 4 individuals were in the Alliance One case;
- 3 individuals were in the Maygar Telekom case; and
- 3 individuals were in the Noble Corp. case.
In other words, 64% of the individuals charged by the SEC with FCPA civil offenses since 2008 have been in just five cases.
Considering that there has been 57 corporate SEC FCPA enforcement actions since 2008, this is a rather remarkable statistic. Of the 57 corporate SEC FCPA enforcement actions, 45 (or 79%) have not (at least yet) resulted in any SEC charges against company employees. This figure is thus higher than the 74% figure (here) highlighted earlier this week regarding the DOJ. This is notable given that the SEC, as a civil law enforcement agency, has a lower burden of proof in an enforcement action.
Once again, like with the DOJ figures, one can ask the “but nobody was charged” question.
Yet, like with the DOJ figures and as highlighted in yesterday’s post (here), there is an equally plausible reason why so few individuals have been charged in connection with many corporate SEC FCPA enforcement actions. The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.
With the SEC, the issue is not so much NPAs or DPAs (the SEC has used such a vehicle just once to resolve an FCPA enforcement action – Tenaris 2011), but rather the SEC’s neither admit nor deny settlement policy. For more on this policy and its impact of SEC enforcement actions, see pgs. 946-955 of my article “The Facade of FCPA Enforcement.” In the article, I discuss the affidavit of Professor Joseph Grundfest (Standford Law School and former SEC Commissioner) in SEC v. Bank of America and how SEC enforcement actions “typically omit mention of valid defenses and of countervailing facts or mitigating circumstances that, if proven at trial, could cause the Commission to lose it case.” In the article, I also discuss the SEC’s frank admission in the Bank of America case that a settled SEC enforcement action “does not necessarily reflect the triumph of one party’s position over the other.” Individuals in an SEC FCPA enforcement, even if only a civil action, and even if allowed to settle on similar neither admit nor deny terms, have their personal reputation at stake and are thus more likely than corporate entities to challenge the SEC and force it satisfy its burden of proof at trial as to all FCPA elements.
In other words, and like in the DOJ context, perhaps the more appropriate question is not “but nobody was charged,” but rather – do SEC neither admit nor deny FCPA settlements represent provable FCPA violations.
It is also interesting to analyze the 12 instances since 2008 where an SEC corporate FCPA enforcement action resulted in related charges against company employees. With the exception of Siemens, KBR/Halliburton and Magyar Telekom, the corporate SEC FCPA enforcement actions resulting in related charges against company employees occurred in what can only be described as relatively minor (at least from a settlement amount perspective) corporate enforcement actions. These actions are: Faro Technologies, Willbros Group, Nature’s Sunshine Products, United Industrial Corp., Pride Int’l., Noble Corp., Alliance One, Innospec, and Watts Water.
[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]
SEC Enforcement Of The FCPA – Year In Review
Foreign Corrupt Practices Act enforcement, it is not just about the DOJ. Granted, as a civil enforcement agency its sticks are less sharp than the DOJ’s, but the SEC also claims a significant piece of the FCPA enforcement pie (query whether it should – but that is a subject for another day – for instance as discussed in “The Story of the Foreign Corrupt Practices Act” the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions).
Today’s post is a year in review of SEC FCPA Enforcement. (See here for a similar post for 2011 and here for a similar post for 2010). Stay tuned for a similar post on DOJ FCPA enforcement in 2012.
Settlement Amounts
In 2012, the SEC collected approximately $118 million in 8 corporate FCPA enforcement actions. By comparison, in 2011 the SEC collected approximately $148 million in 13 corporate FCPA enforcement actions. In 2010, the SEC collected approximately $530 million in 19 corporate FCPA enforcement actions.
The range of SEC FCPA enforcement actions in 2012 was, on the high end, $45.1 million in the Pfizer enforcement action, and on the low end, $2 million in the Oracle enforcement action.
Three corporate FCPA enforcement actions from 2012 were SEC only (Oracle, Allianz, and Eli Lilly).
Of the 8 corporate enforcement actions from 2012, only 4 (Smith & Nephew, Biomet, Tyco, and Eli Lilly) included FCPA anti-bribery charges. In other words, 4 SEC FCPA enforcement actions charged FCPA books and records and internal controls violations only, yet in those enforcement actions, the SEC collected approximately $57.4 million in disgorgement and prejudgment interest. This is noteworthy because many question, and rightfully so, whether disgorgement is an appropriate remedy in cases that do not charge FCPA anti-bribery violations. See here for a prior post on so-called “non-bribery disgorgement” cases. In 2011, 8 of the 13 SEC FCPA corporate enforcement actions charged FCPA books and records and internal controls violations only and the SEC collected approximately $51 million in disgorgement and prejudgment interest in those non-bribery disgorgement cases.
Of the $118 million the SEC collected in 2012 corporate FCPA enforcement actions, approximately $75 million (64%) were in two enforcement actions (Pfizer and Eli Lilly). Of the $118 million, approximately $104 million (88%) were in enforcement actions against pharmaceutical or other health care related companies. All of these enforcement actions were based, in whole or in part, on the enforcement theory that employees of various foreign health care systems (such as physicians, nurses, mid-wives, lab personnel, etc.) are “foreign officials” under the FCPA. See this prior post which traced the origins and prominence of this enforcement theory.
The $118 million the SEC collected in 2012 FCPA enforcement actions breaks down as follows: $16 million in civil penalties and $102 million in disgorgement and prejudgment interest. Thus, 86% of SEC FCPA settlement amounts in 2012 consisted of disgorgement and prejudgment interest. In 2011, disgorgement and prejudgment interest comprised 94% of SEC FCPA enforcement settlement amounts and in 2010, disgorgement and prejudgment interest comprised 96% of SEC FCPA enforcement settlement amounts If one tries to analyze why some SEC FCPA enforcement actions in 2012 included a civil penalty, disgorgement and prejudgment interest (Allianz and Eli Lilly), whereas other enforcement actions included only disgorgement and prejudgment interest (Smith & Nephew, Biomet, Orthofix, Pfizer, and Tyco), whereas other enforcement actions included only a civil penalty (Oracle), good luck and please enlighten us all with your insight.
Corporate vs. Individual Actions
Of the 8 SEC corporate FCPA enforcement actions from 2012, 0 (0%) have involved, at present, related SEC charges against company employees. In 2011, just 2 of the 13 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees and in 2010, just 3 of the 19 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees.
In 2012, the SEC did charge 3 individuals (Thomas O’Rourke, Mark Jackson, and David Ruehlen) in connection with the 2010 Noble Corporation enforcement action. Without admitting or denying the SEC’s allegations, O’Rourke agreed to resolve the matter by paying a $35,000 civil penalty. The SEC’s case against Jackson and Ruehlen remains pending. (See here for the most recent post). In addition, as noted in this prior post, the SEC also charged Subramanian Krishnan (former CFO of Digi International) with aiding and abetting violations of the FCPA’s books and records provisions and substantive FCPA internal controls violations. However, as noted in the prior post, it was unclear as to the nature of the SEC’s allegations. This action appears to have been a “non-FCPA, FCPA enforcement action” as the action is not listed on the SEC’s FCPA website.
Voluntary Disclosures
Of the 8 corporate SEC FCPA enforcement actions in 2011, 4 enforcement actions (50%) (Orthofix, Pfizer, Tyco, and Oracle) were the result of corporate voluntary disclosures. 3 enforcement actions (38%) (Smith & Nephew, Biomet and Eli Lilly) appear to have been based on corporate disclosures following an industry sweep (a sweep that may have been prompted by Johnson & Johnson’s voluntary disclosure – see here for the prior post). 1 enforcement action (Allianz) was based on the SEC opening an investigation after receiving an anonymous complaint of possible FCPA violations
This remainder of this post provides an overview of corporate SEC FCPA enforcement in 2012.
Eli Lilly (December 20th)
See here for the prior post.
Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.
Settlement: Approximately $29.4 million (approximately $14 million in disgorgement, approximately $6.7 million in prejudgment interest, and an $8.7 million civil penalty)
Disclosure: According to the company’s disclosures, it was first notified of an investigation in August 2003.
Individuals Charged: No.
Related DOJ Enforcement Action: No.
Allianz (December 17th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.
Settlement: Approximately $12.4 million (approximately $5.3 million in disgorgement, approximately $1.8 million in prejudgment interest, and a civil penalty of approximately $5.3 million).
Disclosure: According to the SEC – “In response to the March 2009 Whistleblower complaint, Allianz convened a Whistleblower Committee to do an internal investigation and retained counsel to conduct an internal investigation of Utama’s payment practices in Indonesia. Allianz did not report the conduct to the Commission staff. In April 2010, the staff opened an investigation after receiving an anonymous complaint of possible FCPA violations.”
Individuals Charged: No.
Related DOJ Enforcement Action: No.
Tyco International (September 24th)
See here for the prior post.
Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.
Settlement: Approximately $13.1 million ($10.5 million in disgorgement and approximately $2.6 million in prejudgment interest).
Disclosure: Voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Oracle (August 16th)
See here for the prior post.
Charges: Settled civil complaint charging violations of the FCPA’s books and records and internal controls provisions.
Settlement: $2 million civil penalty.
Disclosure: Voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: No.
Pfizer (August 7th)
See here for the prior post.
Charges: Settled civil complaint against Pfizer charging violations of the FCPA’s books and records and internal controls provisions. Settled civil complaint against Wyeth charging violations of the FCPA’s books and records and internal controls provisions.
Settlement: As to Pfizer, approximately $26.3 million ($16 million in disgorgement and $10.3 in prejudgment interest). As to Wyeth, approximately $18.8 million ($17.2 million in disgorgement and $1.6 million in prejudgment interest).
Disclosure: Voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes as to Pfizer, no as to Wyeth.
Orthofix International (July 10th)
See here for the prior post.
Charges: Settled civil complaint charging violations of the FCPA’s books and records and internal controls provisions.
Settlement: $5.2 million (approximately $5 million in disgorgement and approximately $240,000 in prejudgment interest).
Disclosure: Voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Biomet (March 26th)
See here for the prior post.
Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.
Settlement: $5.5 million ($4.4 million in disgorgement and $1.1 million in prejudgment interest).
Disclosure: Industry sweep inquiry followed by disclosure of misconduct at issue, including a portion of which that was voluntarily disclosed.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Smith & Nephew (Feb. 6th)
See here for the prior post.
Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.
Settlement: $5.4 million ($4,028,000 in disgorgement and $1,398,799 in prejudgment interest).
Disclosure: Industry sweep inquiry followed by disclosure of misconduct at issue.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Next Up – Eli Lilly
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).
Next up is Eli Lilly in a Foreign Corrupt Practices Act enforcement action announced last week by the SEC. This post goes long and deep as to the SEC’s allegations which resulted in a $29 million settlement.
In summary, the SEC alleges in a civil complaint (here) as follows.
“Eli Lilly and Company violated the Foreign Corrupt Practices Act in connection with the activities of its subsidiaries in China, Brazil, Poland, and Russia. Between 2006 and 2009, employees of Lilly’s China subsidiary falsified expense reports in order to provide improper gifts and cash payments to government-employed physicians. In 2007, a pharmaceutical distributor hired by Lilly in Brazil paid bribes to government health officials in a Brazilian state in order to assure sales of a Lilly product to state government institutions. In Poland, between 2000 and 2003, Lilly’s subsidiary made eight payments totaling approximately $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities at the same time that the subsidiary was seeking the official’s support for placing Lilly drugs on the government reimbursement list. Finally, Lilly’s subsidiary in Russia paid millions of dollars to off-shore entities for alleged “services” beginning as early as 1994 and continuing through 2005 in order for pharmaceutical distributors and government entities to purchase Lilly’s drugs. In some instances, the off-shore entities appear to have been used to funnel money to government officials or others with influence in the government in order to obtain business for the subsidiary. These off-shore entities rarely provided the contracted-for services. Moreover, between 2005 and 2008, contemporaneous with requests to government officials to support the government’s purchase or reimbursement of Lilly’s products, the subsidiary in Russia made proposals to government officials about how the company could donate to, or otherwise support, various initiatives that were affiliated with, or important to, the government officials. As a result of this conduct, Lilly violated [the FCPA’s internal controls provisions] by failing to have an adequate internal controls system in place to detect and prevent illicit payments. Lilly violated [the FCPA’s books and records provisions] by improperly recording each of those payments in its accounting books and records. Lilly also violated the [FCPA’s anti-bribery provisions] in connection with certain activities of its subsidiary in Russia.”
As indicated by the above paragraph, conduct in Poland, China, and Brazil gave rise to FCPA books and records and internal controls violations only.
Poland
The SEC’s allegations relating to Poland are substantively identical to allegations made against Schering-Plough in this 2004 FCPA enforcement action.
In pertinent part, the SEC alleges in its complaint against Eli Lilly as follows.
“During 2000 through 2003, Lilly’s wholly-owned subsidiary in Poland (“Lilly- Poland”) made eight payments totaling approximately $39,000 to the Chudow Castle Foundation (“Chudow Foundation”), a small charitable foundation in Poland that was founded and administered by the Director of the Silesian Health Fund (“Director”). The Director established the Chudow Foundation in 1995 to restore the Chudow Castle in the town of Chudow and other historic sites in the Silesian region of Poland.
The Silesian Health Fund (“Health Fund”) was one of sixteen regional government health authorities in Poland during the period. Among other things, the Health Fund reimbursed hospitals and healthcare providers for the purchase of certain approved products. The Health Fund, through the allocation of public money, exercised considerable influence over which pharmaceutical products local hospitals and other healthcare providers in the region purchased.
Beginning in early 2000 and into 2002, Lilly-Poland was in negotiations with the Health Fund over, among other things, the Heath Fund’s financing of the purchase of Gemzar, one of Lilly’s cancer drugs, by public hospitals and other healthcare providers. Those negotiations occurred primarily between a team manager at Lilly-Poland (“Lilly Manager”) and the Director. Continuing at intervals throughout these negotiations, the Director asked that Lilly Poland contribute to the Chudow Foundation. The initial request came directly from the Director and the subsequent requests came from the Chudow Foundation.
The Lilly-Poland Manager knew that the Director had established the Chudow Foundation and that it was a project to which he was devoted and lent much effort. The Manager requested the approval of payments to the Chudow Foundation. The Manager falsely described the first payment as being for the purchase of computers for the Chudow Foundation. The second Lilly-Poland payment request falsely characterized the proposed payment as “[t]o support foundation in its goal to develop activities in [Chudow Castle].” That request documentation also noted that the “value of the request” was “[i]ndirect support of educational efforts of foundation settled by Silesia [Health Fund].” Similarly, the remaining payments were mischaracterized as monies paid by Lilly-Poland to secure the use of the Chudow Castle for conferences after its renovation. No such conferences took place.
Lilly-Poland eventually made a total of eight payments to the Chudow Foundation, starting in June 2000 and ending in January 2003. […] The Manager requested the approval of the payments to the Chudow Foundation with the intent of inducing the Health-Fund Director to allocate public monies to hospitals and other health care providers in the Health Fund for the purpose of purchasing Gemzar.
China
As to China, the SEC alleges, in full, as follows.
“Lilly’s wholly-owned subsidiary through which it does business in China (“Lilly- China”) employs more than one-thousand sales representatives whose main focus is on marketing Lilly products to government-employed health-care providers. During the relevant period, the sales representatives worked from regional offices and traveled throughout the country, interacting with the health-care providers in order to convince them to prescribe Lilly products. The sales representatives were directly supervised by District Sales Managers who, in tum, were supervised by Regional Managers. Sales representatives paid out-of-pocket for their travel expenses and submitted receipts and other documentation to the company for reimbursement.
Between 2006 and 2009, various sales representatives and their supervisors abused the system by submitting, or instructing subordinates to submit, false expense reports. In some instances, Lilly-China personnel used reimbursements from those false reports to purchase gifts and entertainment for government-employed physicians in order to encourage the physicians to look favorably upon Lilly and prescribe Lilly products.
In one sales area, in 2006 and 2007, a District Sales Manager for Lilly’s diabetes products instructed subordinates to submit false expenses reports and provide the reimbursement money to her. She then used the reimbursements to purchase gifts, such as wine, specialty foods and a jade bracelet, for government-employed physicians. At least five sales representatives in the oncology sales group submitted false expense reports and then used those reimbursements to provide meals, visits to bath houses, and card games to government-employed physicians.
Similarly, in three other provinces, three sales representatives submitted false expense reports and then used the reimbursements to provide government-employed physicians with visits to bath houses and karaoke bars. In another city, five sales representatives submitted false reimbursements and then their Regional Manager used the money to provide door prizes and publication fees to government-employed physicians. In another city, seven sales representatives and the District Sales Manager for the diabetes sales team used reimbursements to buy meals and cosmetics for government-employed physicians.
Between 2008 and 2009, members of Lilly-China’s “Access Group,” which was responsible for expanding access to Lilly products in China by, among other things, convincing government officials to list Lilly products on government reimbursement lists, engaged in similar misconduct. At least six members of the sixteen-member Access Group, including two associate access directors, falsified expense reports and used the proceeds to provide gifts and entertainment to government officials in China. The gifts included: spa treatments, meals, and cigarettes.
Although the dollar amount of each gift was generally small, the improper payments were wide-spread throughout the subsidiary. Lilly has terminated, or otherwise disciplined, the various employees who submitted false expense reports and/or used the proceeds to provide gifts and services to government officials.”
Brazil
As to Brazil, the SEC alleges, in full, as follows.
“Between 2007 and 2009, Lilly-Brazil distributed drugs in Brazil through third party distributors who then resold those products to both private and government entities. As a general rule, Lilly-Brazil sold the drugs to the distributors at a discount; the distributors then resold the drugs to the end users at a higher price and took the discount as their compensation. Lilly-Brazil negotiated the amount of the discount with the distributor based on the distributor’s anticipated sale. The discount to the distributors generally ranged between 6.5% and 15%, with the majority of distributors in Brazil receiving a 10% discount.
In early 2007, at the request of one of Lilly-Brazil’s sales and marketing managers at the time, Lilly-Brazil granted a nationwide pharmaceutical distributor, unusually large discounts of 17% and 19% for two of the distributor’s purchases of a Lilly drug, which the distributor then sold to the government of one of the Brazilian states. Lilly-Brazil’s pricing committee approved the discounts without further inquiry. The policies and procedures in place to flag unusual distributor discounts were deficient. They relied on the representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions. In May 2007, Lilly sold 3,200 milligrams of the drug to the distributor for resale to the Brazilian state; in August 2007, Lilly-Brazil sold 13,500 milligrams of the drug to the distributor for resale to the Brazilian state. Together the sales were valued at approximately $1.2 million.
The distributor used approximately 6% of the purchase price (approximately $70,000) to bribe government officials from the Brazilian state so that the state would purchase the Lilly product. The Lilly-Brazil sales and marketing manager who requested the discount knew about this arrangement.”
Russia
As to Russia, in pertinent part, the SEC complaint alleges as follows.
“From 1994 through 2005, Lilly-Vostok, a wholly-owned subsidiary of Lilly, sold pharmaceutical products either directly to government entities in the former Soviet Union or through various distributors, often selected by the government, who would then resell the products to the government entities. Along with the underlying purchase contract with the government entity or distributor, Lilly-Vostok sometimes entered into another agreement with a third-party selected by a government official or by the government-chosen pharmaceutical distributor. Generally, these third-parties, which had addresses and bank accounts located outside of Russia, were paid a flat fee or a percentage of the sale. These agreements were referred to as “marketing” or “service” agreements. In total, Lilly-Vostok entered into over 96 such agreements with over 42 third-party entities between 1994 and 2004.
Lilly-Vostok had little information about these third-party entities, beyond their addresses and bank accounts. Rarely did Lilly-Vostok know who owned them or whether the entities were actual businesses that could provide legitimate services. Senior management employees in Lilly-Vostok’s Moscow branch assisted in the negotiation of these agreements. The contracts themselves were derived from a Lilly-Vostok-created template and enumerated various broadly-defined services, such as ensuring “immediate customs clearance” or “immediate delivery” of the products; or assisting Lilly-Vostok in “obtaining payment for the sales transaction,” “the promotion of the products,” and “marketing research.”
Contrary to what was recorded in the company’s books and records, there is little evidence that any services were actually provided under any of these third-party agreements. Indeed, in many instances, the “services” identified in the contract were already being provided by the distributor, a third-party handler (such as an international shipping handler) or Lilly itself. To the extent services such as expedited customs clearance or other services requiring interaction with government officials were provided, Lilly-Vostok did not know or inquire how the third party intended to perform their services.
Contemporaneous documents reflect that Lilly-Vostok employees viewed the payments as necessary to obtain the business from the distributor or government entity, and not as payment for legitimate services.
The SEC also alleges that in 1997 and in 1999 Lilly conducted a business review of Lilly-Vostok. According to the SEC, the reports raised concerns about Lilly-Vostok’s business practices and the reports “recommended that Lilly-Vostok modify its internal controls to ensure that [certain third-party] services were documented” and to “assure itself that [certain third-party] agreements accurately and fairly reflect the services to be provided.”
However, the SEC alleged as follows.
“Lilly did not curtail the use of marketing agreements by its subsidiary or make any meaningful efforts to ensure that the marketing agreements were not being used as a method to funnel money to government officials, despite recognition that the marketing agreements were being used to “create sales potential” or “to ‘support’ activities leading to agreement-signing” with government entities. In fact, during the 2000-2004 period — after the above-described reports, but prior to the company ending use of the agreements– Lilly-Vostok entered into the three most expensive of these arrangements.”
The three arrangements are as follows.
First, the SEC alleged that in response to a 2002 Russian Ministry of Health tender, the ministry selected a “large Russian pharmaceutical distributor” for which to purchase the products and the distributor in turn negotiated with Lilly-Vostok for the purchase of diabetes products. According to the SEC, the distributor required Lilly-Vostok, “as a condition of their agreement” to enter into various agreements with an entity incorporated in Cyprus.
According to the SEC.
“Lilly’s due diligence regarding the entity in Cyprus was limited to ordering a Dun and Bradstreet report and conducting a search using an internet service to scan publicly available information. Neither the Dun and Bradstreet report nor the internet search revealed the Cyprus entity’s beneficial owner or anything about its business. Nonetheless, pursuant to the terms of its arrangement with the distributor, Lilly-Vostok paid the entity in Cyprus over $3.8 million in early 2003.
The Cyprus entity was, in fact, owned by the Russian businessman who was the owner of the distributor. There is no evidence of services provided to Lilly-Vostok by the Cyprus entity in consideration for Lilly-Vostok’s $3.8 million in payments. Lilly’s books and records improperly reflected these payments as payments for services.”
Second, the SEC alleges “at least two instances” involving foreign government officials and alleges as follows.
“Between 2000 and 2005, Lilly-Vostok sold significant amounts of pharmaceutical products to a major Russian pharmaceutical distributor for resale to the Russian Ministry of Health. The pharmaceutical distributor was owned and controlled by an individual who, at the beginning of the distributor’s relationship with Lilly-Vostok, was a close adviser to a member of Russia’s Parliament. In 2003, this official became a member of the upper house of Russia’s Parliament. Throughout the period, this official exercised considerable influence over government decisions relating to the pharmaceutical industry in Russia.
As part of most of the sales arrangements with the distributor, the official demanded that Lilly-Vostok enter into separate “marketing” agreements with entities with addresses and bank accounts in Cyprus. Under the arrangement, Lilly-Vostok paid the Cypriot entities up to thirty percent of the sales price of the underlying sales contracts in return for the Cypriot entities entering into an agreement “to offer all assistance necessary” in various areas like storage, importation and payment.
In conjunction with outside counsel, Lilly-Vostok conducted limited due diligence on these third-parties. However, the due diligence did not identify the beneficial owners of these third-parties or determine whether the third-parties were able to provide the contracted-for assistance. Nonetheless, Lilly-Vostok concluded that it could proceed with the transactions and paid the Cypriot entities over $5.2 million. In fact, the Cypriot entities were owned by an individual associated with the distributor controlled by the member of the upper house of Russia Parliament. The Cypriot entity transferred the payments from Lilly-Vostok to other off-shore entities.”
Third, the SEC alleges “in connection another series of contracts, from 2000 through 2004, Lilly-Vostok sold products to a distributor, headquartered in Moscow, which was wholly-owned by a Russian government entity.
The SEC alleged as follows.
“The purchase agreements were signed on the government-owned distributor’s behalf by its General Director. As part of the arrangement, the government-owned distributor selected a third-party entity with an address in the British Virgin Islands (“the BVI entity”) with which Lilly-Vostok entered into agreements for the broadly defined “services” enumerated in the Lilly-Vostok template (see above). Under the terms of the agreements between Lilly-Vostok and the BVI entity, Lilly-Vostok was to pay the BVI entity up to 15% of the price of the product purchased by the government-owned distributor. Accordingly, from 2000 through 2005, Lilly-Vostok made approximately 65 payments to the BVI entity totaling approximately $2 million.
There is no evidence that the BVI entity performed any of the services listed in its agreement with Lilly-Vostok. There is also no evidence that Lilly-Vostok performed any due diligence or inquiry as to whether the BVI entity was able or did perform the contracted-for services. Lastly, there is no evidence that Lilly-Vostok performed any due diligence or inquiry into the identity of the beneficial owner of the BVI entity. In fact, the beneficial owner of the BVI entity was the General Director of the government-owned distributor, and he ultimately received the payments from the BVI entity.”
As to these various arrangements, the SEC alleges as follows. “Lilly did not direct Lilly-Vostok to cease entering into these third-party agreements until 2004. However, Lilly permitted the subsidiary to continue making payments under already existing third-party contracts as late as 2005.”
As to the above Russian conduct, the complaint charges violations of the FCPA’s anti-bribery provisions. Of note, the complaints specifically pleads as follows regarding knowledge. “When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstances, unless the person actually believes that the circumstance does not exist.”
The SEC complaint also contains the following allegation.
“From 2005 through 2008, Lilly-Vostok made various proposals to government officials in Russia regarding how Lilly-Vostok could donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials. Examples included their personal participation or the participation of people from their institutions in clinical trials and international and regional conferences and the support of charities and educational events associated with the institutes. At times, these proposals to government officials were made in a communication that also included a request for assistance in getting a product reimbursed or purchased by the government. Generally, Lilly-Vostok personnel believed these proposals were proper because of their relevance to public health issues and many of the proposals were reviewed by counsel. Nonetheless, Lilly-Vostok did not have in place internal controls through which such proposals were vetted to ascertain whether Lilly-Vostok was offering something of value to a government official for a purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”
As to Lilly’s books and records, the SEC alleges as follows.
“[S]ubsidiaries of Eli Lilly made numerous payments that were incorrectly described in the company’s books and records. In China, payments were falsely described as reimbursement of expenses when, in fact, the money was used to provide gifts to government-employed physicians. In Brazil, money that was described in company records as a “discount” for a pharmaceutical distributor was, in actuality, a bribe for government officials. In Poland, payments classified as charitable donations were not intended for a genuine charitable purpose but rather to induce a government official to assent to the purchase of a Lilly product. Finally, in Russia, millions of dollars in payments, described in the company’s books and records as for various services, were actually payments to assure that Lilly was able to conduct business with certain pharmaceutical distributors.”
As to Lilly’s internal controls, the SEC alleges as follows.
“During the relevant period, Lilly and its subsidiaries failed to devise and maintain an adequate system of internal accounting sufficient to provide reasonable assurance that the company maintained accountability for its assets and transactions were executed in accordance with management’s authorization. Particularly, Lilly did not adequately verify that intermediaries with which the company was doing government-related business would not provide a benefit to a government official on Lilly’s behalf in order to obtain or retain business. Lilly and its subsidiaries primarily relied on assurances and information provided in the paperwork by these intermediaries or by Lilly personnel rather than engaging in adequate verification and analyzing the surrounding circumstances of the transaction. Lilly and its subsidiaries’ employees considered and offered benefits to government officials at the same time they were asking those government officials to assist with the reimbursement or purchase of Lilly’s products with inadequate safeguards to assure that its employees were not offering items of values to a government official with a purpose to assist Lilly in retaining or obtaining business.
Moreover, despite an understanding that certain emerging markets were most vulnerable to FCPA violations, Lilly’s audit department, based out of Indianapolis, had no procedures specifically designed to assess the FCPA or bribery risks of sales and purchases. Accordingly, transactions with off-shore entities or with government-affiliated entities did not receive specialized or closer review for possible FCPA violations. In assessing these transactions, the auditors relied upon the standard accounting controls which primarily assured the soundness of the paperwork. There was little done to assess whether, despite the existence of facially acceptable paperwork, the surrounding circumstances or terms of a transaction suggested the possibility of an FCPA violation or bribery.
As to Lilly’s remedial efforts, the SEC complaint states as follows.
“Since the time of the conduct noted in this Complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anticorruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”
As noted in this SEC release, Lilly, without admitting or denying the allegations, agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8.7 million for a total payment of $29,398,734. The release also notes that “Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures.”
In Lilly’s release (below) the retention period of the consultant is identified as 60 days and in the SEC’s proposed final judgement, the consultant is identified as FTI Consulting which has been assisting Lilly in connection with a previous Corporate Integrity Agreement.
The case has been assigned to Judge Beryl A. Howell (U.S. District Court, District of Columbia).
William Baker III (Latham & Watkins) represented Lilly.
In the SEC’s release, Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit) stated as follows. “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.” In the same release, Antonia Chion (Associate Director in the SEC Enforcement Division) stated as follows. “When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated. We strongly caution company officials from averting their eyes from what they do not wish to see.”
This Lilly release quotes Anne Nobles (Lilly’s Chief Ethics and Compliance Officer and Senior VP of Enterprise Risk Management) as follows. “Lilly requires our employees to act with integrity with all external parties and in accordance with all applicable laws and regulations. Since ours is a business based on trust, we strive to conduct ourselves in an ethical way that is beyond reproach. We have cooperated with the U.S. government throughout this investigation and have strengthened our internal controls and compliance program globally, including significant investment in our global anti-corruption program.” The Lilly release further states as follows. “The SEC noted that since the time of the conduct alleged in its complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anti-corruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.” The release further notes that “Lilly was first notified of the investigation in August 2003” and describes the independent compliance consultant as conducting a “60-day review of the company’s internal controls and compliance program related to the FCPA.”