[This post is part of a periodic series regarding “old” FCPA enforcement actions]
The 2002 Foreign Corrupt Practices Act enforcement action against Syncor International and its subsidiary Syncor Taiwan broke new ground in two ways.
First, the enforcement action is believed to be the first FCPA enforcement action based on the theory that physicians and others associated with foreign health care systems are “foreign officials” under the FCPA.
Second, the enforcement action against Syncor Taiwan was the first FCPA enforcement action based on the dd-3 prong of the FCPA’s anti-bribery provisions (added to the FCPA in 1998).
As further point of interest is that approximately five years after the corporate action, the SEC filed related charges against a culpable individual.
Summarized below are the 2002 parallel actions brought by the DOJ and SEC as well as the related 2007 individual action.
DOJ
In this criminal information, Syncor Taiwan (described as an indirect, wholly-owned subsidiary of California based Syncor International Corp) was charged with violating the FCPA’s anti-bribery provisions. Syncor Taiwan was a Taiwan corporation engaged in providing radiopharmacy services and outpatient medical imaging services and derived its revenue from two major sources: “(1) sale of radiopharmaceutical products to hospitals; and (2) income from positron emission tomography – a nuclear imaging technique used in the treatment of cancer, and outpatient medical imaging service.
The information alleges that between 1997 through late 2002 Syncor Taiwan “made cash payments to physicians employed by hospitals owned by the legal authorities on Taiwan to obtain and retain certain business involving the sale of radiopharmaceutical products and services.” The information alleges that in order to obtain and retain business, Syncor Taiwan, acting through its officers and agents, “entered into ‘side agreements’ with physicians employed by the hospitals – usually with the department heads of the hospitals’ nuclear medicine departments – whereby these physicians would receive commissions on the” sales.
According to the information, “the practice of entering into such agreements was authorized by the Chairman of the Board” of Syncor Taiwan (Monty Fu – an individual who resided in California) and the General Manager of Syncor Taiwan “periodically hand delivered the commission payments, in cash, in sealed envelopes.” The information alleges that Syncor Taiwan made commission payments totaling approximately $344,110 to physicians at four hospitals in Taiwan.
The information also alleges that between 1998 through late 2002 Syncor Taiwan made cash payments totaling approximately $113,007 to certain physicians to direct business to Syncor Taiwan’s imaging centers.
According to the information, Syncor Taiwan “recorded the commission payments and the referral payments on its books and records as ‘promotional and advertising expenses,” the “General Manager and Deputy General Manager of Syncor Taiwan regularly prepared and submitted to its parent company, Syncor, budgets with a line item for promotional and advertising expenses based primarily on the amount of such expenditures in the prior quarter or year” and that Syncor Taiwan “routinely sent these budgets by electronic mail to Syncor’s principal place of business” in California.
Syncor Taiwan was charged under the dd-3 prong of the FCPA’s anti-bribery provisions which was added to the FCPA in 1998. The jurisdictional element of this prong is that “while in the territory of the United States,” “use of the mails or any means of instrumentality of interstate commerce” is used in furtherance of a bribery scheme.
In this regard, the information alleges that the Chairman of the Board of Syncor Taiwan, while in the U.S., “authorized the practice of paying the commission and referral payments to the employees of the hospitals” as well as “approved and caused to be approved the budgets for promotion and advertising expenses.” According to information, the Chairman also “sent and caused to be sent approval of the proposed budgets by telephone and electronic mail” from California to Taiwan.
Syncor Taiwan pleaded guilty (see here for the plea agreement) and agreed to pay a $2 million criminal fine (see here).
SEC
This civil complaint alleges the same core conduct alleged in the DOJ action.
In addition, the complaint also contains allegations regarding Mexico as well as Belgium, Luxembourg, and France.
As to Mexico, the complaint alleges:
“Syncor has been doing business in Mexico since 1995 through a subsidiary called Syncor de Mexico. In 1998, Syncor de Mexico acquired another Mexican radiopharmaceutical company whose customers were primarily public hospitals, and the two companies formally merged during 2001. During the relevant period, the principal business of Syncor de Mexico was the sale of radiopharmaceutical products and related medical equipment, and its financial results were a component of the consolidated financial statements included in Syncor’s filings with the Commission.
During 2001 and 2002, Syncor de Mexico and its representatives made approximately $23,000 in improper monetary payments to at least four doctors at government-owned hospitals in Mexico, all for the purpose of obtaining or retaining business with those doctors and the hospitals that employed them. These payments took several different forms, including a personal loan to one doctor that was never repaid, and purported reimbursements of personal expenses claimed by several of the doctors.
In at least two cases, moreover, Syncor de Mexico entered into “over-invoicing” arrangements with doctors. Pursuant to these arrangements, Syncor de Mexico would inflate an invoice and bill the doctor’s hospital for a more expensive product than Syncor actually delivered. After the hospital paid the amount reflected on the inflated invoice, Syncor de Mexico would pay to the doctor the difference between the actual price and the inflated price, less Syncor de Mexico’s tax liability on the sale.
All of the foregoing types of payments were known to and approved by the general manager and others at Syncor de Mexico. Many of the payments were hand-delivered to the doctors by Syncor de Mexico sale representatives after the funds were wired to the sales representatives’ bank accounts. Some of the payments were improperly recorded as business expenses in the books and records of Syncor de Mexico.
In addition to the above-described payments, Syncor de Mexico had a general practice of providing “support” – locally referred to as “apoyo” – to doctors with whom it did business, including many employed at government-owned hospitals. These support payments, generally between 1.5% and 3% of sales, mostly came in the form of sponsorships for the doctors’ attendance at educational seminars, including payments for registration fees, travel, lodging, and meals. They also included gifts of computer equipment, software, office furniture, and medical supplies to doctors and their hospitals; sponsorships of social functions and fundraisers at the hospitals; funds provided to cover the cost of temporary employees at the hospitals; and payments made for outside testing when a particular hospital’s laboratory equipment was not functioning properly.
During the years 2000 through 2002, Syncor de Mexico made a total of at least $200,000 in support payments, which were arbitrarily distributed among several of Syncor de Mexico’s business expense accounts in a manner designed to minimize their detection and disallowance by Mexican tax authorities. This improper characterization of the payments caused inaccuracies in the books and records of Syncor de Mexico.”
As to Belgium, Luxembourg and France, the complaint alleges:
“Syncor has been doing business in Belgium, Luxembourg, and France since September 2001 through four subsidiaries collectively operated as the Medcon Group. The primary business of the Medcon Group is the sale and export of radiological film to hospitals, doctors, and distributors, although it also sells a limited quantity of medical equipment. Customers of the Medcon Group include both government-owned and private hospitals. During the relevant period, the financial results of the Medcon Group were a component of the consolidated financial statements included in Syncor’s filings with the Commission.
During 2001 and 2002, the Medcon Group made several different types of illicit payments to doctors employed by hospitals owned by foreign governments for the purpose of retaining business with these doctors and their hospitals. First, the Medcon Group gave some doctors generous gifts worth more than $750 each in the form of money directly transferred to doctors’ bank accounts, computers, digital cameras, expensive wines, wristwatches, and leisure travel. In addition, pursuant to agreements with certain doctors, the Medcon Group occasionally sent inflated or fictitious invoices to medical practices and then rebated to the doctors approximately 80 % of the practices’ payments, with the funds then being used to finance personal travel and other gifts for the doctors.
During 2001 and 2002, such illicit payments and gifts to doctors at government-owned hospitals have totaled at least $45,000, and were known to and approved by the two principal executives of Medcon who manage the affairs of the business for Syncor.
The Medcon Group also improperly recorded many of these payments and gifts in its books and records. It likewise improperly recorded other gifts it gave, and commissions it paid, to various private parties to obtain competitive advantages, including: (i) a gift of a laptop computer given to an employee of one of its major suppliers to induce that supplier to overbid on a Belgian government contract that was consequently awarded to the Medcon Group; (ii) commissions of 5% to 10% paid to distributors of the Medcon Group’s products in France, Germany, and Italy; (iii) a payment of approximately $33,000 to a distributor in Greece to induce him not to compete with the Medcon Group in Belgium and Luxembourg; (iv) commissions paid to employees of the Medcon Group’s suppliers to preserve goodwill and to receive preferential access to products; and (v) commissions of approximately 80% paid to the principal of one distributor of the Medcon Group’s products to induce him to purchase nearly-expired x-ray film that would otherwise have to be written off.
The Medcon Group inaccurately recorded many of the above-described gifts and payments as capital or business expenses, apparently for the purpose of minimizing the risk of detection and disallowance by tax authorities. Moreover, the Medcon Group improperly recorded many of these payments and gifts in the books and records of Syncor’s Luxembourg subsidiary rather than those of its Belgium subsidiary, where they properly belonged, apparently to take advantage of more favorable tax treatment and more relaxed oversight in Luxembourg.”
Based on the above allegation, Syncor was charged with violating the FCPA’s anti-bribery, books and records and internal controls provisions. To resolve the matter, Syncor paid a $500,000 civil penalty – at the time – the largest penalty ever obtained by the SEC in an FCPA case. As a condition of settlement, Syncor agreed to retain an “independent consultant to review and make recommendations concerning the company’s FCPA compliance policies and procedures.”
The SEC’s release states:
“In determining to accept Syncor’s settlement offer, the Commission considered the full cooperation that Syncor provided to the Commission staff during its investigation. The Commission also considered the fact that Syncor – after being alerted to the relevant conduct by another company [Cardinal Health] that was conducting due diligence relating to a previously announced merger with Syncor – promptly brought this matter to the attention of the Commission’s staff and the U.S. Department of Justice.”
Individual Action
In 2007, the SEC brought this related enforcement action against Monty Fu based on the same Taiwan conduct alleged in the 2002 enforcement action. Fu is described as the founder of Syncor who held a variety of positions including as Chief Executive Officer and Chairman of the Board.
Under the heading “Syncor Taiwan’s Lack of Sufficient Internal Controls and Misrecordation of the Payments,” the complaint alleges:
“Under the FCPA, Syncor was required to design and implement a system of internal controls to ensure that its wholly-owned subsidiary complied with the FCPA’s books and records and internal controls provisions. It failed to do this with respect to Syncor Taiwan, which circumvented existing internal controls and failed to implement other controls designed to detect and prevent non-compliance at the company.
Syncor’s internal accounting policy manual in use from at least 1993, a copy of which was provided to Syncor Taiwan, specified that the “Advertising and Promotions” account on its books and records was to include local and national advertising, convention displays, convention expenses and convention space rental. The manual designated selling-related expenses for other accounts.
An employee handbook issued by Syncor in 2001 under Fu’s signature specified that “[nlo false or misleading entries shall be made in the books and records of the Company for any reason, . .. [and] [n]o payment on behalf of the Company shall be approved without adequate supporting document or made with the intention or understanding that any part of such payment is to be used for any purpose other than that described by the document supporting the payment.”
At various times during the relevant period, Syncor Taiwan improperly recorded the commissions and referral payments paid to the doctors at public and private hospitals as “Advertising and Promotions” expenses. These entries were rolled up into Syncor’s consolidated books and records.”
Under the heading “Fu’s Violative Conduct,” the complaint alleges:
“Throughout the relevant time period, Fu had the authority to implement a system of internal controls in the subsidiary sufficient to ensure that transactions were executed in accordance with management’s general or specific authorization and that transactions were recorded in a manner that fairly reflected the transactions. His authority derived from the various positions he held throughout the relevant time period. Fu directed the creation of Syncor Taiwan in 1985. Fu’s brother was country manager for Taiwan. Fu’s brother, who was promoted to various positions in the Asia region during the relevant period, consulted and, at times, reported to Fu about Syncor Taiwan’s operations throughout the relevant period, including the making of payments to doctors.
At all relevant times, Fu was aware that Syncor Taiwan was paying commissions and, commencing in 1997, referral fees to doctors at private and public hospitals in Taiwan.
In 1994, in connection with the outside auditor’s audit of Syncor’s 1993 financial statements, Syncor’s then chief executive officer and president inquired about the nature of certain payments by Syncor Taiwan and cautioned Fu that Syncor could not make payments for the purpose of influencing doctors’ decisions to purchase or use Syncor’s products and services. As a result, Fu knew or was reckless in not knowing that the commissions and referral fees were improperly recorded on the books and records of Syncor Taiwan and, thus, of Syncor.
Nonetheless, Fu failed to maintain compliance with existing internal controls and also failed to implement additional internal controls to determine whether payments by Syncor Taiwan complied with Syncor’s management’s specific directive and more generally with the FCPA.”
Based on the above allegations, the SEC charged Fu with knowingly failure to implement a system of internal accounting controls and aiding and abetting Syncor’s books and records and internal controls violations. Without admitting or denying the SEC’s allegations, Fu agreed to pay a $75,000 civil penalty.
