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Rockwell Automation Resolves SEC Action

[Note – because of my involvement in the below Rockwell matter while in private practice, this post is devoid of my customary commentary and analysis as to the enforcement action]

Yesterday, the SEC announced (here) a cease and desist proceeding and imposition of a cease and desist order as to Rockwell Automation, Inc.

As stated in the SEC’s order, the matter involved “violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in January, 2007.”

In summary fashion, the SEC found as follows.

“From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies.”

“Rockwell realized approximately $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies that were associated with payments to the Design Institutes.”

“Rockwell failed to accurately record the payments in its books and records, and failed to implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments.”

Under the heading, “Discovery, Self-Reporting and Remediation” the SEC order states as follows.

“Rockwell discovered the DI Payments and the third-party payment mechanism in 2006 through its normal financial review process. This process was part of Rockwell’s global corporate compliance/internal controls program, which had targeted China for enhanced FCPA training and scrutiny starting in 2004. Upon discovery of the issue, Rockwell hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. As a result of the discovery of this matter, Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a broad, global review of its other operations.”

The SEC order further states as follows.

“In connection with the payments described above, Rockwell failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act.”

“Further, as evidenced by the DI Payments (as described above) and leisure travel payments, Rockwell failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”

As noted in the SEC order, Rockwell, without admitting or denying the SEC’s findings, agreed to “pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000.”

The SEC order concludes by noting that “the Commission is not imposing a civil penalty in excess of $400,000 based upon [Rockwell’s] cooperation” in the investigation.

See here for Rockwell’s press release.

David Simon (Foley & Lardner – here) and Greg Bruch (Willkie Farr & Gallagher – here) represented Rockwell.

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The Rockwell matter represents the second time in the past month (approximately) that the SEC has resolved an FCPA inquiry via the administrative cease and desist route. See here for the prior post regarding Ball Corporation.

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Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include: Lucent Technologies (see here) and UTStarcom Inc. (see here).

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Other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese “Design Institutes” include: ITT Corp. (see here); and Avery Dennison (see here).

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.

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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.

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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.”

Robert Amaee on U.K. Bribery Act Guidance

Yesterday, in a much anticipated development, the United Kingdom Ministry of Justice released (here) its long awaited guidance (here) as to the U.K. Bribery Act – a delayed law now set to go live on July 1, 2011.

The U.K. Serious Fraud Office, the U.K. law enforcement agency tasked with enforcing the Bribery Act, also issued a release (here) and prosecuting guidance (here).

In this guest post, Robert Amaee (the former Head of Anti-Corruption and Proceeds of Crime Unit at the U.K. Serious Fraud Office and current counsel with Covington & Burling LLP in London – see here) provides insight and analysis of the U.K. developments.

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The Bribery Act: Countdown to Implementation

The UK Ministry of Justice yesterday published its long awaited Bribery Act 2010 (the “Bribery Act”) guidance entitled “Guidance about procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing (section 9 of the Bribery Act 2010).” This publication marks the official start of a ninety day countdown to the implementation of the Bribery Act which will now be brought into force on 1 July 2011.

Companies that already have reviewed and updated their anti-bribery and corruption procedures will be ahead of the game but will still need to study the new guidance to see what, if any, further amendments may be required. Those who have yet to complete the process of updating their procedures to ensure compliance no doubt will draw a modicum of comfort from the fact that they have a further ninety days in which to digest and absorb the guidance and implement the necessary policies and procedures.

The comments made by the Minister of Justice, Ken Clarke QC MP, and the guidance itself aim to reassure companies that the Bribery Act will be enforced with common sense and pragmatism.

The Minister of Justice ushered in the guidance by saying that “[t]he ultimate aim of [the Bribery Act] is to make life difficult for the minority of organizations responsible for corruption, not to burden the vast majority of decent and law-abiding businesses.”

That is a message that prosecutors at the UK Serious Fraud Office (“SFO”) — the organisation tasked with leading enforcement efforts under the Bribery Act — have espoused for some time. What is less clear is whether the guidance provides any tangible assistance on some of the Bribery Act’s thorniest issues such as the UK’s jurisdiction over non-UK registered companies, the extent of liability for the actions of third parties and the boundary between acceptable corporate hospitality and a prosecutable bribe, particularly when foreign officials are concerned.

Government Policy and the Section 7 Corporate Offence

The guidance, as expected, focuses on six high level principles which companies will need to familiarise themselves with and which are supported by 11 case studies. It also sets out the Government policy in relation to the section 7 corporate offence stating that “[t]he objective of the [Bribery] Act is not to bring the full force of the criminal law to bear upon well run commercial organisations that experience an isolated incident of bribery on their behalf” and recognises that “no bribery prevention regime will be capable of preventing bribery at all times.” This part of the guidance already has attracted criticism from some respected quarters. (See here).

The guidance deals with the section 1 offences of bribing another person but the most noteworthy commentary relates to the section 6 offence (Bribery of foreign public officials). This section highlights the fact that bribery of a foreign public official could be prosecuted under the section 1 offence but that evidential difficulties in proving that a bribe was paid to a foreign public official with the intention to induce him or her to perform his or her role “improperly”, something the guidance calls “a mischief”, means that prosecutors would seek to rely on the section 6 offence which needs no such proof. The guidance goes on to make a number of assertions in relation to the interpretation of section 6 which bear closer scrutiny. The guidance says “…it is not the Government’s intention to criminalise behaviour where no such mischief occurs…” In other words it appears that the guidance may be advocating that the concept of “improper performance” be read into section 6. What is clear is that Parliament did not include any such wording in section 6 in clear contrast to section 1.

Corporate Hospitality and other Business Expenditure

In addressing the topic of corporate hospitality and other business expenditures, the guidance adopts what can only be described as a permissive tone. It codifies the comments that the Minister of Justice has made over the last few weeks and states that “[b]ona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour” and goes on to endorse “reasonable” and “proportionate” hospitality and business expenditure.

In determining what is reasonable and proportionate, the guidance proposes taking into account “all of the surrounding circumstances” which include matters such as “the type and level of advantage offered, the manner and form in which the advantage is provide, and the level of influence the particular foreign public official has over awarding business”. It states that “the more lavish the hospitality or the higher the expenditure in relation to travel, accommodation or other similar business expenditure provided to a foreign public official, then, generally, the greater the inference that it is intended to influence the official to grant business or a business advantage in return.”

Much of this is elementary and already part of the mantra of compliance departments but the guidance goes further and appears to give the green light to certain interactions with foreign public officials which would, today, be closely and critically scrutinised by those responsible for compliance. As an example, the guidance envisages that the provision of flights, airport to hotel transfers, hotel accommodation, “fine dining” and tickets to an event for a foreign public official and his or her spouse are “unlikely to raise the necessary inference” to engage section 6 and therefore unlikely to violate the Act so long as there is a business rational for the trip.

A Question of Jurisdiction

The guidance makes it clear that “the courts will be the final arbiter as to whether an organisation ‘carries on a business’ in the UK taking into account of the particular facts in individual cases” and sets out the “Government’s intention” in relation to the phrase “carries on a business, or part of a business in the United Kingdom.” The thrust of the approach appears to be a reliance on a “common sense approach.”

In cases where there may be dispute, the guidance again defers to the courts as the final arbiter but says that “… the Government anticipates that applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught.” That much is uncontroversial but what follows has elicited a great deal of comment. The guidance states that “[t]he Government would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official list and therefore admitted to trading on the London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK and therefore falling within the definition of a ‘relevant commercial organisation’ for the purposes of section 7.” This commentary has been welcomed in some quarters but has been criticised by some as undermining the concept of a level playing field. (See here).

In the vast majority of cases, it will be clear whether a company is or is not carrying on a business or part of a business in the UK. There will, however, be cases where there is room for debate. If, for example, a non-UK registered company sets up a joint venture with a UK company and the joint venture is not registered in the UK, is the non-UK registered company carrying on a business or part of a business in the UK? What if the non-UK registered company then seconds an employee to work at the UK partner’s offices in London looking after the joint venture – is the non-UK registered company carrying on a business or part of a business in the UK? What if it sends 5 employees? Those are the type of intricacies that need to be worked through by company advisors and in the worst case prosecutors and the courts.

Associated Persons

When considering the potential liability imposed on a company by virtue of its supply chains or its involvement in a joint venture, the guidance introduces the concept of “the level of control”– a concept that does not appear in the Bribery Act — as one of the “relevant circumstances” that would be taken into account when seeking to determine if the person creating liability can be deemed to be an “associated person” i.e. someone who is performing services for or on behalf of a company that falls within the UK’s jurisdiction. The guidance states that “[t]he question of adequacy of bribery prevention procedures will depend in the final analysis on the facts of each case, including matters such as the level of control over the activities of the associated person and the degree of risk that requires mitigation.”

Facilitation Payments

In the run up to the publication of the guidance, there had been some suggestion that there may an attempt to ‘soften’ the approach to facilitation payments. This is not at all the case. While the Government has recognised the problems faced by commercial organisations in some parts of the world and in certain sectors, the guidance reiterates that there are no exemptions in the Act and sets out the OECD position that facilitation payments are corrosive and that exemptions create artificial distinctions that are “difficult to enforce, undermine corporate anti-bribery procedures, confuse anti-bribery communication with employees and other associated person, perpetuate an existing ‘culture’ of bribery and have the potential to be abused.” In circumstances where an individual has no alternative but to make a facilitation payment in order to “protect against loss of life, limb or liberty”, the guidance states that “the common law defence of duress is very likely to be available”. It stresses that it is a matter for prosecutorial discretion whether to prosecute an offence and defers to the Joint Prosecution Guidance when it comes to the “prosecution of facilitation payments.”

Conclusion

Companies will of course be pleased to have more guidance and will look to draw as much comfort as they can from the more ‘permissive’ tone of the MoJ guidance but global companies will not be looking at their UK exposure in isolation and will certainly not be rushing to relax their anti-bribery and corruption policies and procedures. It is not much comfort for a company to avoid prosecution in the UK for interactions with foreign government officials for example but to be in violation of their industry codes of conduct or be called to account in a US court for that same conduct. Global companies will continue to be mindful of their global exposure.

Questions Abound In IBM Enforcement Action

Last week, the SEC announced (here) a settled FCPA enforcement action against International Business Machines Corporation (“IBM”).

This post summarizes the enforcement action and then addresses the many questions raised by the enforcement action.

Summary of Enforcement Action

According to the SEC complaint (here): “During the period from 1998 through 2009, in violation of the Foreign Corrupt Practices Act of 1977, employees of certain of [IBM’s] subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, as well as improper travel and entertainment to government officials in South Korea and China.”

The conduct at issue focused on:

IBM-Korea, Inc. (“IBM-Korea”), a South Korean corporation “wholly-owned indirectly by IBM International Group B.V, which, in turn is wholly-owned by IBM;”

LG IBM PC Co. Ltd. (“LG-IBM”), a South Korean joint venture formed in 1996 by IBM-Korea (51% owner of the JV) and LG Electronics (“LG”) (49% owners of the JV); and

IBM (China) Investment Company Limited and IBM Global Services (China) Co. Ltd. (collectively “IBM-China”) – entities “owned by IBM China/Hong Kong Limited, a Hong Kong company that is ultimately owned by IBM.”

In summary fashion, the SEC alleged as follows.

“From 1998 to 2003, employees of [IBM-Korea] and [LG-IBM] made payments to various government officials in South Korea. The purpose of these payments was to secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners. During the relevant period, these managers paid approximately KRW 216,832,500 (South Korean Won), or $207,000, in cash bribes to South Korean government officials, including providing improper·gifts and payments of travel and entertainment expenses.”

“From at least 2004 to early 2009, employees of [IBM-China] engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-China employees and more than 100 IBM China employees overall.”

As to IBM, the parent-company issuer, the SEC alleged as follows.

“Despite its extensive international operations, IBM lacked sufficient internal
controls designed to prevent or detect these violations of the FCPA. During the period 1998 to 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA; however, deficient internal controls allowed employees of IBM’s subsidiaries and joint venture to use local business partners and travel agencies as conduits for bribes or other improper payments to South Korean and Chinese government officials over long periods of time.”

“During the period 1998 to 2009, IBM failed to make and keep books and records that accurately reflected the improper payments made in South Korea and China. Instead, these payments were recorded as legitimate business expenses.”

The body of the SEC’s complaint alleges various “things of value” provided to alleged South Korean “foreign officials” including shopping bags filled with thousands of dollars, cash-filled envelopes exchanged in parking lots and free personal computers, and travel and entertainment expenses.

According to the SEC, such “things of value” were: “in exchange for designating IBM-Korea a preferred supplier of mainframe computers to [an alleged government entity] and for placing orders with IBM-Korea at higher prices;” “in exchange for (1) maintaining IBM-Korea as the supplier of mainframe computers to [an alleged government entity]; and (2) for helping an IBM-Korea business partner win bids to supply mainframe computers and storage equipment to [an alleged government entity] worth more than [$21 million]; “in exchange for [an alleged “foreign official’s] assistance to IBM-Korea in obtaining a contract with [an alleged government entity] worth approximately [$13 million] for the installation of a mainframe computer in 2002;” “to entice [foreign official’s] to purchase IBM products:” “to win a contract to supply 657 (later increased to 825) personal computers valued at [approximately $1.4 million]; “in exchange for providing LG-IBM with certain confidential information regarding the product specifications on [an alleged government entity’s] request for procurement;” “to persuade employees of [an alleged government entity] to purchase IBM products;” and to entice alleged foreign officials “to purchase IBM products or to provide information to assist LG-IBM in the bidding process.”

The body of the SEC’s complaint as to China conduct alleges as follows.

“From at least 2004 to early 2009, IBM-China employees created slush funds at local travel agencies in China that were then used to pay for overseas and other travel expenses incurred by Chinese government officials. In addition, IBM-China employees created slush funds at its business partners to provide a cash payment and improper gifts, such as cameras and laptop computers, to Chinese government officials. IBM failed to record accurately these payments in its books and records.”

Specifically, the SEC alleged as follows:

“Between 2004 and 2009, IBM’s internal controls failed to detect at least 114
instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved [Delegation Trip Requests] DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; and (6) trips where per diem payments and gifts were provided to Chinese government officials.”

Based on the above allegations, the SEC charged IBM with violating the FCPA’s books and records and internal control provisions. As noted in the SEC release, IBM, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment permanently enjoining the company from future FCPA violations. IBM agreed to pay $10 million (disgorgement of $5.3 million, $2.7 million in prejudgment interest, and a $2 million civil penalty).

Peter Barbur and Evan Chessler (Cravath, Swaine & Moore – here and here) represented IBM.

Questions Abound

For starters, this is not the first time IBM has been the focus of an FCPA enforcement action.

In December 2000 (see here), the SEC found, in a cease and desist proceeding, that IBM violated the FCPA books and records provisions in connection with a $250 million contract to integrate and modernize computer systems in Argentina. As part of the settlement, “IBM consented to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA’s books and records provisions].

Given that IBM was charged last week with FCPA books and records violations, IBM has clearly violated this 2000 court order.

In my recent “Facade of FCPA Enforcement” article (here), I highlight various pillars that contribute to the facade of FCPA enforcement.

Pillars include, unsupported legal conclusions serving as the foundation for an enforcement action, including as to “foreign official” and disgorgement issues; the tendency of factually similar cases being resolved materially different ways; and bribery, yet no bribery.

These pillars are present in the IBM enforcement action.

For starters, who were the “government officials in South Korea and China.” Were they traditional bona-fide government officials or employees of alleged state-owned or state-controlled enterprises and thus “foreign officials” under the enforcement agencies’ interpretation – an interpretation currently the subject of judicial challenges?

As to the South Korean officials, the complaint merely alleges that the “foreign government officials involved worked for sixteen South Korean government entities.” These officials included the “Chief of Operations for the Electronic Operations Division” of an entity; an employee of the same entity; a “manager of the government-controlled entity”; the “Director of Planning” of another entity; employees of an entity; an employee of a “state-owned agency of the South Korean government;” a “Director of Information Technology” at another entity; employees of another entity; and “key decision makers at ten other” entities.

As to the Chinese officials, the complaint merely alleges that the individuals were associated with “government-owned or controlled customers in China for hardware, software, and other services.”

Based on the descriptions in the complaint, it seems as if the “foreign officials” were all employees of SOE entities. If so, two out of three corporate FCPA enforcement actions in 2011 (IBM and Maxwell Technologies – see here) involve SOE employees.

Why no FCPA anti-bribery charges against IBM or the relevant subsidiaries (accepting of course the SEC’s “foreign official” interpretation)?

According to the SEC, the conduct at issue took place between 1998 and 2009. Further, according to the SEC, “in connection with the conduct described herein, IBM, directly or indirectly, made use of the mails or the means or instrumentalities of interstate commerce in connection with the acts, transactions, practices and courses of business alleged in this Complaint.”

Why no DOJ involvement?

It is very common for the DOJ and SEC to announce FCPA enforcement actions on the same day. Thus, one can assume (perhaps future events will prove otherwise) that the DOJ elected to sit this one out.

Why?

The SEC’s complaint alleges vivid instances of bribery (not always seen in FCPA enforcement actions) in connection with multi-million dollar contracts.

Yet, no bribery – not even civil FCPA anti-bribery charges.

Is this another instance where the U.S. enforcement agencies look first at the corporate offender, its customers, and its products, and then craft a resolution that will hurt the least?

After all, one of IBM’s largest customer segments is the government (federal, state, etc.) see here.

Did this play any role in how the enforcement action was resolved?

The SEC charged IBM only with FCPA books and records and internal controls violations. Yet, as in several other cases, the SEC pursued a disgorgement remedy. As noted in my Facade article (pages 981-984) non-FCPA disgorgement case law clearly holds that disgorgement may not be used punitively. It is difficult to see how mis-recording of a payment (a payment the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy. See also here from Philip Urofsky and Danforth Newcomb on this issue.

In a transparent legal system, similar facts are supposed to be resolved with similar charges. However, it is questionable whether this fundamental principle (one that inspires trust and confidence in a legal system) is followed in many FCPA enforcement actions.

The China-related charges against IBM regarding excessive travel and entertainment expenses are nearly identical to two previous FCPA enforcement actions – the December 2007 enforcement action against Lucent Technologies and the December 2009 enforcement action against UTStarcom, Inc.

Lucent was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging only FCPA books and records violations (here).

UTStarcom was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging FCPA anti-bribery as well as books and records and internal controls violations (here).

IBM, as detailed above, is presumably being resolved without any DOJ involvement and an SEC enforcement action charging only FCPA books and records violations.

Three cases – all involving in whole or in part allegations of providing excessive travel and entertainment expenses to Chinese “foreign officials” – resolved in three different ways.

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And now, as one reader put it, the question all FCPA Professor blog readers (at least this particular reader) are dying to know.

Butler or Wisconsin?

I am a born and raised cheesehead and graduate of the University of Wisconsin Law School.

However, my allegiance is to my employer – Butler University. Let’s face it, Butler is an awesome, feel-good story. Student-athletes in every sense of the word, home games at historic Hinkle Fieldhouse, a coach who, a few years ago, left his job selling pharmaceuticals to become a volunteer coach (since promoted), and a small, cozy campus to top it off.

BU-TLE- R U a Bulldog – hell ya!

Save The Date …. and … The Friday Roundup

Save The Date

Deferred prosecution agreements, affirmative defenses, companies x, y, and z.

On a daily basis this site and – those who follow it – are, to use the analogy, generally focused on the trees. However, the trees are part of a vast forest.

Against the backdrop of aggressive enforcement of bribery and corruption laws worldwide, several basic questions remain unanswered, or at least subject to dispute.

It is these big-picture questions that will be the focus of an upcoming roundtable discussion (“Bribery – What is It, What Can Be Done, What Should Be Done, and How to Comply?”) at International Law Weekend, an event presented by the American Branch of the International Law Association and the International Law Students Association. The roundtable will take place on Saturday, October 23 at 10:45 at Fordham University School of Law.

I am pleased to co-chair the panel along with Corinne Lammers (Paul, Hastings – see here). Other participants include: Bruce Bean (Michigan State College of Law – here), Daniel Chow (The Ohio State University College of Law – here), Elizabeth Spahn (New England College of Law – Boston – here), and Andy Spalding (Chicago-Kent College of Law – here).

See here for the full event schedule.

Friday Roundup

An FCPA investigation in the midst of a merger, a voluntary disclosure involving “minor” entertainment and gifts relating to a few “discrete transactions involving immaterial revenue,” World Bank debarment, and the blogging life … it’s all here in the Friday roundup.

FCPA Investigation in the Midst of a Merger

In June, Spain-based Grifols, S.A. (a global healthcare company and leading producer of plasma protein therapies) and Talecris (a U.S.-based biotherapeutics products company) announced that they signed a definitive agreement by which Grifols will acquire Talecris. See here and here.

In the meantime, Talecris is conducting a mammoth FCPA internal investigation. Here is the lastest from the recent Form F-4 Registration Statement of Grifols.

“Talecris is conducting an internal investigation into potential violations of the FCPA that it became aware of during the conduct of an unrelated review. The FCPA investigation is being conducted by outside counsel under the direction of a special committee of the Talecris Board of Directors. The investigation into certain possibly improper payments to individuals and entities made after Talecris’ formation initially focused on payments made in connection with sales in certain Eastern European and Middle Eastern countries, primarily Belarus, Russia and Iran, but Talecris is also reviewing sales practices in Brazil, China, Georgia, Turkey and other countries as deemed appropriate.”

“In July 2009, Talecris voluntarily contacted the U.S. Department of Justice, which is referred to as the DOJ, to advise them of the investigation and to offer its cooperation in any investigation that they want to conduct or they want Talecris to conduct. The DOJ has not indicated what action it may take, if any, against Talecris or any individual, or the extent to which it may conduct its own investigation. The DOJ or other federal agencies may seek to impose sanctions on Talecris that may include, among other things, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which Talecris does business may initiate their own investigations and impose similar penalties. As a result of this investigation, Talecris suspended shipments to some countries while it put additional safeguards in place. In some cases, safeguards involved terminating consultants and suspending relations with or terminating distributors in countries under investigation as circumstances warranted. These actions unfavorably affected revenue from these countries in 2009 and have an ongoing unfavorable impact on revenue in 2010. Talecris has resumed sales in countries where it has appropriate safeguards in place and is reallocating product to other countries as necessary. To the extent that Talecris concludes, or the DOJ concludes, that Talecris cannot implement adequate safeguards or otherwise need to change its business practices, distributors, or consultants in affected countries or other countries, this may result in a permanent loss of business from those countries. These sanctions or the loss of business, if any, could have a material adverse effect on Talecris or its results of operations.”

What has the internal investigation cost thus far?

According to the same filing, approximately $12.9 million (see pg. 303).

The above was not the only FCPA disclosure news this week.

The Voluntary Disclosure Involving “Minor” Entertainment and Gifts Relating to a Few “Discrete Transactions Involving Immaterial Revenues”

Real estate is not generally thought of as an FCPA high-risk industry.

Yet, earlier this week CB Richard Ellis, a “global leader in real estate services” (see here), disclosed as follows in its 8-K:

“As a result of an internal investigation that began in the first quarter of 2010, the Company determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non−business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. Nonetheless, the Company believes that the payments may have been in violation of the U.S. Foreign Corrupt Practices Act or other applicable laws. Consequently, the Company voluntarily disclosed these events to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) on February 27, 2010 and has continued to cooperate with both the DOJ and the SEC in connection with this
investigation. The Company engaged outside counsel to investigate these events and has implemented thorough remedial measures.

In addition, in the third quarter of 2010, the Company began another internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business. This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information.”

One can perhaps understand a voluntary disclosure when the payments at issue involve suitcases full of cash to government officials to obtain or retain government contracts.

But a voluntary disclosure based on “minor” entertainment and gifts involving a “few discrete transactions involving immaterial revenues?”

Has it truly come to this rather than the company internally handling such “minor” “discrete transactions involving immaterial revenue” in an effective manner?

Did FCPA counsel advise the company that voluntary disclosure was necessary in this instance? Perhaps not necessary, but preferable? How would you handle this issue if you were the company’s in-house counsel or on the company’s board?

Interesting questions indeed.

For more on voluntary disclosure and the role of FCPA counsel see this prior post.

World Bank Debarment

The EU and US debarment directives and regulations may be “toothless,” but the World Bank is in charge of its own debarment decisions when it comes to World Bank financed or executed projects.

A prior post (here) discussed the World Bank’s debarment of Macmillan Limited and recently the World Bank announced (see here) that its Sanctions Board debarred “four companies and two individuals for fraudulent practices in projects in India and Afghanistan” following “inquiries by the World Bank’s Integrity Vice Presidency (INT), which is responsible for investigating fraud and corruption in World Bank-financed projects.”

According to the release:

“In India, the World Bank Group debarred Ambalal Sarabhai Enterprises Limited (ASE) and Chemito Technologies Pvt. Ltd. (Chemito) for having engaged in fraudulent practices relating to the Food and Drugs Capacity Building project. Both ASE and Chemito are ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for three years. The debarment may be reduced to two years if the companies put in place and implement effective corporate compliance programs.”

“The third decision relates to fraudulent practices by Global Spin Weave Limited (GSW) and its Director Sudhir Agrawal. The company’s misconduct was substantiated in relation to three Bank-financed projects in India; namely: First Reproductive and Child Health Project, Second National HIV/AIDS Control Project and the Malaria Control Project. According to the Sanctions Board decision, GSW is ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for five years. The debarment may be reduced to four years if GSW puts in place and implements an effective corporate compliance program. Mr. Agrawal’s period of ineligibility is three years.”

“In relation to the Urban Water Supply and Sanitation Project in Afghanistan, the Sanctions Board debarred Ronberg Gruppe LLC, AG (Ronberg) and its Director Nikolay V. Vakorin for having engaged in fraudulent practices. Ronberg and Mr. Vakorin are ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for three years.”

The World Bank release notes that the above “cases are eligible for cross debarment under the April 2010 Agreement for Mutual Enforcement of Debarment Decisions entered into by the African Development Bank Group, Asian Development Bank, the European Bank for Reconstruction and Development, the World Bank Group and the Inter-American Development Bank Group.” For more on that Agreement see here.

The Blogging Life

Interested in blogging?

See here for my recent interview with Jerod Morris of Corporate Compliance Insights. We also talk a bit about the FCPA!

A good weekend to all.

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