This previous post went in-depth into the $30.4 million Foreign Corrupt Practices Act enforcement action against Zimmer Biomet announced on January 12th.
This post highlights additional issues to consider.
Biomet is not the first company to be a repeat FCPA criminal offender, just the latest. Other criminal examples include Aibel Group / Vetco entities and Marubeni (and there several other examples involving SEC civil violations such as Orthofix Int’l recently becoming a repeat FCPA offender). To learn more about these examples, see the article “Measuring the Impact of NPAs and DPAs on FCPA Enforcement.”
What is interesting about the previous other two examples of a company becoming a repeat FCPA criminal offender is that the companies the first time were offered a DPA, but were required the second time to plead guilty. (See here and here).
Not so with Zimmer Biomet as the DOJ once again offered the company a deferred prosecution agreement. Moreover, the DOJ agreed to resolve the action for $17.3 million which was in the middle of the sentencing guidelines range of $11.6 to $23.3 million.
In many respects the DOJ is sending the wrong message with the additional DPA and middle range criminal penalty. And this is particularly true given the next topic discussed.
Not Just a Repeat Offender, But in the Same Country and Involving the Same Distributor
Biomet was not merely just an FCPA repeat criminal offender, but a repeat offender in the same country (Brazil) at issue in the 2012 FCPA enforcement action and involving the same distributor. Moreover, the repeat conduct involved the actions of a high-level Biomet attorney.
In the words of the DOJ:
“Specifically, in connection with the 2012 DPA, Biomet knew that Brazilian Distributor [described as the principal owner of Brazilian Distributor Company A and at relevant times controlled Brazilian Distributor Company B] previously had paid bribes to win business for Biomet through Brazilian Distributor Company A, and as a result, Biomet had prohibited its employees from using all companies affiliated with Brazilian Distributor. Despite knowing this, Biomet, through its employees and agents, including Biomet Executive [described as an attorney at Biomet and Biomet International during the relevant period who became a high-level attorney during that period. Biomet Executive’s responsibilities included ensuring that Biomet had effective internal accounting controls, such as third-party due diligence, and implementing Biomet’s internal accounting controls. Biomet Executive was also responsible for addressing the requirements of Biomet’s FCPA monitor with respect to Biomet International], allowed Brazilian Distributor to sell, import, and market its products through Brazilian Distributor Company B and took steps to conceal Brazilian Distributor’s relationship with Brazilian Distributor Company B.”
Stretching Disgorgement to Its Limits
Notwithstanding the above, a noticeable feature of the Brazil conduct is that while the Brazil distributor allegedly paid bribes on behalf Biomet entities in connection with the 2012 FCPA enforcement action, there was no new allegations in the recent enforcement action that the Brazil distributor made any bribe payments on behalf of Zimmer Biomet entities.
Rather, the company was faulted for continuing to do business with the distributor.
The settlement amount included $5.8 million in disgorgement, presumably the sum of the following two figures:
“Biomet obtained over $3,168,000 in profits from the transactions involving the Prohibited Brazilian Distributor.”
“Biomet obtained $2,652,100 in profits from the transactions involved in the Mexico scheme.”
Merely doing business with a distributor that Biomet told the government it had terminated in 2008 obviously looks bad and is reflective of deficient internal controls.
Yet in the absence of any allegations that the distributor made improper payments on behalf of the company, requiring disgorgement for such conduct stretches the disgorgement remedy to its limit and is nothing short of remarkable.
Is It Asking Too Much?
Pardon me for being that guy, yet again. But is it asking too much for the SEC to get the law right in its FCPA resolution documents?
The SEC’s order contains the following findings.
“Biomet … failed to devise and maintain a sufficient system of internal accounting controls.”
“Biomet failed to implement internal accounting controls sufficient to detect or prevent bribery …”.
“Biomet violated [the internal controls provisions] by failing to have internal controls in place to detect and prevent Biomet’s improper recording of transactions with the Prohibited Brazilian Distributor.”
“Biomet further failed to devise and maintain internal accounting controls to prevent and detect 3i Mexico’s payments to Texas Customs Broker and Mexican Customs Broker to get product without valid registrations or proper labeling into Mexico, including improper payments to Mexican customs officials made by Mexican Customs Broker.”
None of these highlighted words or phrases appear in the FCPA.
Rather, the FCPA’s internal controls provisions state that issuers shall “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances“ that the four specified statutory objectives are met.
The FCPA then defines “reasonable assurance” and “reasonable detail” to mean “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
The differences between the language the SEC used and the actual statutory language likely had little practical impact regarding the conduct at issue.
But gosh, it’s just outlandish that the SEC seems incapable (and this is certainly not the first instance I’ve written about this point) of using the correct statutory language in FCPA resolution documents.
It’s sloppy, it’s unprofessional, and it needs to stop if the SEC wants to be viewed as credible.
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