The end of September is traditionally an active period for Foreign Corrupt Practices Act enforcement as the SEC’s fiscal year comes to a close.
On the heels of yesterday’s Petrobras enforcement action (see here and here for prior posts), the SEC announced a $7.8 million enforcement action against medical device company Stryker for not having internal accounting controls “sufficient to detect the risk of improper payments in sales of Stryker products in India, China, and Kuwait” and because “Stryker’s India subsidiary failed to maintain complete and accurate books and records.”
In doing so, Stryker joins the list of FCPA repeat offenders (see here). As highlighted in this prior post, in 2013 Stryker resolved a $13.2 million enforcement action based on alleged conduct in Mexico, Poland, Romania, Argentina, and Greece.
In summary fashion, this administrative order finds:
“This matter concerns violations of the books and records and internal accounting controls provisions of the Exchange Act by Stryker, a global leader in the medical technology industry, related to its operations in India, China, and Kuwait.
Stryker’s policies, which applied to its global operations, prohibit bribery and other improper payments. As part of its internal accounting controls, the company had policies, which applied to its subsidiaries, requiring, among other things, proper documentation of transactions; written agreements with distributors and sub-distributors that included anticorruption provisions and review rights to determine compliance; and due diligence and approval of, and anti-corruption training for, all distributors and sub-distributors.
India
From at least 2010 through 2015, Stryker’s wholly-owned subsidiary in India (“Stryker India”) failed to keep and maintain any documentation with respect to 27% of the transactions tested in an internal forensic review that targeted Stryker India’s high-risk and compliance-sensitive accounts and payments during the relevant period. Additionally, the forensic review found missing or inaccurate documentation for numerous other transactions flagged as high-risk, including expenses related to consulting fees, travel, and other benefits to health-care professionals (“HCPs”) in India.
The sales transactions here involved Stryker India’s sales of orthopedic products to dealers, which subsequently sold the products to certain private hospitals. Stryker India authorized these dealer transactions only after Stryker India’s management negotiated and approved the price that the hospitals would pay to the dealers. Thus, in determining the price charged to dealers, Stryker India’s management and the dealers specifically negotiated the profit margin such dealers would stand to earn based on the difference between what hospitals paid the dealers and what the dealers paid Stryker India. Furthermore, all such transactions were governed by Stryker India’s policy of prohibiting dealers from making, requesting, or accepting any “improper payments to government or non-government officials, employees, or entities.”
During the relevant period, certain of Stryker India’s dealers regularly issued “inflated invoices” upon the request of certain private hospitals. The private hospitals that requested inflated invoices from dealers profited from their purchase of Stryker orthopedic products by passing on the higher (invoiced) prices to their patients or their patients’ insurers, even as the hospitals paid the lower prices previously negotiated with Stryker India to Stryker India’s dealers. Stryker received internal complaints of this practice and uncovered evidence of such overbilling by one dealer when it conducted audits of three dealers in 2012. Yet Stryker failed to devise and maintain a system of internal accounting controls sufficient to detect, address, and prevent this widespread practice at the dealer level, which violated Stryker’s own policies governing the activities of Stryker India’s dealers.
China
In China, Stryker operates through a wholly-owned subsidiary (“Stryker China”) that sells its Sonopet ultrasonic aspirator, as well as other products, through distributors. From 2015 through 2017, at least 21 sub-distributors of Stryker’s Sonopet product in China were not vetted, approved, or trained, as required by Stryker’s policies. At times, Stryker China employees worked directly with these unauthorized sub-distributors, and at other times installation records were falsified to hide the involvement of the unauthorized sub-distributors in the sale of Sonopet products. Stryker had in place certain internal accounting controls relating to third parties that limited transactions to those that complied with their contractual undertakings to adhere to Stryker’s anti-corruption policies and procedures. The use of these unauthorized sub-distributors increased the risk of improper payments in connection with the sale of Stryker products. Stryker failed to sufficiently implement its policies to detect and prevent the use of these unauthorized sub-distributors in China.
Kuwait
EMEA Supply Chain Services B.V. is a wholly-owned subsidiary of Stryker based in the Netherlands. From an office located in Dubai, employees of this subsidiary oversee sales by Stryker’s distributors in Kuwait. Until 2018, Stryker had one primary distributor in Kuwait (the “Kuwait Distributor”) that sold Stryker orthopedic products to the Kuwait Ministry of Health. From 2015 through 2017, the Kuwait Distributor made over $32,000 in improper “per diem” payments to Kuwaiti HCPs to attend Stryker events, when Stryker had directly paid the costs for lodging, meals, and local transportation for these individuals. Stryker had in place certain internal accounting controls relating to third parties that limited transactions to those that complied with their contractual undertakings to adhere to Stryker’s anti-corruption policies and procedures. Stryker failed to sufficiently implement policies to test or otherwise assess whether the Kuwait Distributor would allow the company to exercise its audit right to review records, and whether it was complying with the company’s policies prohibiting bribes and other improper payments by its distributors.
Based on all of the above, Stryker violated Section 13(b)(2)(B) of the Exchange Act because it failed to devise and maintain, in its India, China, and Kuwait operations, a system of internal accounting controls sufficient to provide reasonable assurances that transactions were executed in accordance with management’s general or specific authorization, and that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets. In addition, the failure to have internal accounting controls that ensured proper documentation of transactions involving Stryker India, described above, caused Stryker to violate Section 13(b)(2)(A) of the Exchange Act because its books and records did not, in reasonable detail, accurately or fairly reflect the transactions and dispositions of the assets of Stryker.”
Under the heading, “Internal Accounting Controls Violations,” the order states:
“Stryker failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. For example, Stryker recorded transactions of Stryker India for which Stryker could not verify the business purpose or otherwise account for the legitimacy of those expenses.
Further, Stryker failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were executed in accordance with management’s general or specific authorizations. In India, even after the 2012 audits revealed evidence of dealers not complying with Stryker policies — as required by their contracts with Stryker India — and of hospitals requesting invoices with prices higher than the prices that Stryker India had specifically negotiated with such hospitals, Stryker failed to devise and maintain a system of internal accounting controls designed to detect and prevent dealers from engaging in the practice of inflating invoices to certain private hospitals for the sale of Stryker orthopedic products. In China, Stryker failed to vet, approve, train, and monitor subdistributors of its Sonopet product in accordance with the company’s policies, thereby increasing the risk of bribery and other improper payments in connection with the sale of Sonopet products. And in Kuwait, Stryker failed to implement its policies to test or otherwise assess whether the Kuwait Distributor was complying with Stryker’s anti-corruption policies.”
Under the heading, “Books and Records Violations,” the order states:
“Stryker India, during the period of 2010 through 2015, Stryker was unable to provide any documentation for 27% of sampled high-risk transactions on Stryker India’s general ledger. For other compliance-sensitive transactions, the available documentation was insufficient for purposes of determining accurately the recipient, amount, or purpose of the payments at issue.”
Under the heading “Stryker’s Remedial Efforts,” the order states:
“In response to the Commission’s investigation, Stryker retained outside counsel and forensic auditors to conduct an internal investigation into the company’s compliance with the Foreign Corrupt Practices Act (“FCPA”) concerning Stryker’s activities in India, China, and Kuwait. As the internal investigation progressed, Stryker shared its findings on an ongoing basis, voluntarily produced reports and other materials, and cooperated with the Commission staff’s investigation.
Since the time of the conduct detailed above, Stryker undertook a number of remedial efforts, which include: (1) enhanced and updated policies, procedures, and best practices for Stryker India; (2) new compliance measures with additional controls around (i) the monitoring of Stryker’s relationship with HCPs and indirect channels, including dealers and distributors, (ii) reducing the risk of unauthorized business practices in India, and (iii) due diligence of third parties; (3) increased training of all Stryker India employees and local management, including an FCPA compliance workshop for Stryker India’s leadership team; (4) a new centralized system for dealer documentation, and a modified dealer commission model designed to increase transparency around the payment of commissions to dealers in India; (5) compliance audits related to marketing events, event documentation, and employee reimbursements in India; and (6) audits of dealers’ and distributors’ business practices in India. Further, Stryker terminated certain senior employees at Stryker India, appointed new leadership to head Stryker India, and sent a notice of termination to the Kuwait Distributor.
Also in response to the Commission’s investigation, Stryker fortified its existing compliance program, which is designed to prevent, detect, and remediate potential misconduct. This program develops, maintains, and implements corporate policies and standard operating procedures setting forth specific due diligence and documentation requirements for relationships with foreign officials, HCPs, consultants, and distributors.
In determining to accept Stryker’s Offer, the Commission considered Stryker’s cooperation and remedial acts undertaken.”
As noted in the SEC’s release:
“Without admitting or denying the SEC’s findings, Stryker consented to the entry of an order requiring the company to cease and desist from committing violations of the books and records and internal accounting controls provisions of the FCPA and pay a $7.8 million penalty. […] Stryker also must now retain an independent compliance consultant to review and evaluate its internal controls, record-keeping, and anti-corruption policies and procedures relating to use of dealers, agents, distributors, sub-distributors, and other such third parties that sell on behalf of Stryker.”
In the release, Marc Berger (Director of the SEC’s New York Regional Office) states:
“Stryker’s failures to implement sufficient internal accounting controls and keep accurate books and records are unacceptable, especially as this is not the first time the company has been charged for these types of violations. The penalty ordered along with the imposition of a compliance consultant are appropriate and necessary.”
Matthew Kipp (Skadden) represented Stryker.
On the day the enforcement action was announced, Stryker’s stock closed up 1.45%.
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