Yesterday, I began an exploration of the Foreign Corrupt Practices Act (FCPA) enforcement action involving Teva Pharmaceuticals Industries Ltd. (Teva). It was brought jointly by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) with total fines and penalties coming in at $519MM, consisting of a criminal fine of $283 MM and profit disgorgement of $236MM. The company entered into a three-year Deferred Prosecution Agreement (DPA) that requires an independent compliance monitor. The SEC issued a Complaint. The company’s Russian subsidiary, Teva LLC, also agreed to a Criminal Information and agreed to enter into a plea agreement pleading guilty to a one-count criminal information, charging the company with conspiring to violate the anti-bribery provisions of the FCPA.

In my previous post, I considered the underlying facts of the bribery schemes used in three separate countries, namely Russia, Ukraine and Mexico. Today I want to consider the penalty range, the corporate monitor, the actions of Teva to obtain the results it secured and what they all mean for the compliance professional going forward.

As laid out in the DPA, the fine range was between $353,971,685 and $707,943,370. Yet Teva paid $283,177,348 for its criminal violation. (The remaining $236MM was assessed by the SEC.) While the underlying facts demonstrated clear business unit involvement in intentional bribery schemes and conscious indifference at best by the Israeli corporate office by burying its head in the sand with the numerous red flags present; the company was still able to obtain a 20% discount from the minimum range of the US Sentencing Guidelines suggested criminal fine.

Loss of Credit

In none of the resolution documents does it reveal how the information about the company’s bribery and corruption was brought to the attention of the US regulators. The DPA specifically notes the company did not self-disclose to the DOJ and “as a result the Company was not eligible for a more significant discount on the fine amount or the form of resolution.” Equally interesting was the comment, “The Company did not receive full credit because of issues that resulted in delays to the early stages of the investigation, including vastly overbroad assertions of attorney-client privilege and not producing documents on a timely basis in response to certain Fraud Section document requests.” If we assume the company lost 25% of the available discount for its lack of self-disclosure, this final line would mean the company lost 5% of the available discount for basically playing games with the DOJ. At $284MM for the total fines, those games cost Teva approximately $14.2MM. I wonder what the additional cost to Teva was in legal fees for the counsel which advised Teva to play such games.

The bottom line from this portion of the DPA emphasizes, yet again, that the DOJ will provide real credit to a company if it follows the simple prescripts of (1) self-disclosure; (2) extensive cooperation; and (3) significant remediation. Even with the fully pervasive corruption schemes, utilized in three countries; Teva was able to receive a significant discount off what was clearly reprehensible and illegal conduct. But even if a company has such sub-optimal counsel which does not advise self-disclosure and then proactively advises on a course of resistance which is based upon bogus legal arguments; the DOJ will still provide a significant credit if the company moves towards a more cooperative stance in the investigation and remediates significantly during the pendency of the investigation.

Credit for Remediation

Next we turn to the positive conduct which did allow the company to obtain its 20% discount. After having changed its tune around cooperation with the DOJ investigation at some point, the company engaged in significant remediation. As laid out in the DPA, the remediation included:

• removing at least 15 employees who were involved in the conduct at issue from the Company, either through termination, resignation, or they voluntarily departed once the Company’s internal investigation began;
• enhancing the Company’s compliance function by implementing a number of policies and procedures designed to prevent prohibited conduct, including the establishment of a system to monitor transactions with members of the health care community;
• adopting an improved anticorruption training program;
• adopting a standalone third-party due diligence program and terminating business relationships with certain third parties;
• enhancing the independence of the Company’s control functions and establishing an office charged with addressing reports of misconduct; and
• establishing a dedicated Global Compliance Audit group and strengthening the Company’s internal audit and investigations teams.

Teva also demonstrated enhancement and commitment to its compliance program and internal controls to meet the requirements of a best practices compliance program.

It is incumbent to recall that Teva did have an anti-corruption compliance program in place at all times during its bribery and corruption scheme. While one might opine that anti-corruption might not have been taken too seriously prior to the investigation, the SEC did note in its Complaint that Teva had investigated allegations of bribery and corruption back in 2007-08 in its Mexico subsidiary. As a result, the company “found credible evidence of illegal payments by Teva Mexico to government officials in Mexico to influence regulatory and formulary approvals, drug purchase decisions, and prescription decisions, and to develop strategic advantages over competitors. Eleven Teva Mexico employees were terminated in connection with the investigation.”

However, even with the specific findings from the investigation and remediation, the Mexico business unit was determined to continue its bribery scheme. Indeed, it went even further than at the senior executive level at Teva to forestall any serious effort at doing compliance. The Compliance stated, “In April 2011, a Teva employee responsible for overseeing the implementation of the anti-corruption compliance program emailed a senior executive responsible for overseeing compliance in Latin America. The email stated that a senior Teva executive had “specifically instructed not to implement a robust system that will enable us to monitor and assure that the same doctor wasn’t invited to a meal more than three times (for example)””.

The Monitorship and Implications

With this type of senior executive (lack of) commitment to compliance it is probably little wonder that the DOJ required a corporate monitor whose “primary responsibility is to assess and monitor the Company’s compliance with the terms of the Agreement, including the Corporate Compliance Program in Attachment C, so as to specifically address and reduce the risk of any recurrence of the Company’s misconduct.” The Monitor, can, but is not required to, rely not only upon the product of Teva’s compliance resources but also use the company’s internal functions such as legal, compliance and internal audit to assist the Monitor in carrying out the mandate in the DPA; provided, however, “that the Monitor has confidence in the quality of those resources.”

Most interestingly, the Monitor’s mandate requires them to use a risk-based approach in review of the company’s compliance program. The DPA specifies the Monitor should consider “risks presented by: (a) the countries and industries in which the Company operates; (b) current and future business opportunities and transactions; (c) current and potential business partners, including third parties and joint ventures, and the business rationale for such relationships; (d) the Company’s gifts, travel, and entertainment interactions with foreign officials; and (e) the Company’s involvement with foreign officials, including the amount of foreign government regulation and oversight of the Company, such as licensing and permitting, and the Company’s exposure to customs and immigration issues in conducting its business affairs.”

It would seem apparent that the hand of DOJ compliance counsel Hui Chen was involved in setting out these obligations. This action also points out another clear import from the DOJ on the importance of compliance programs and the increasing sophistication of the DOJ (and SEC) in understanding what is a best practices compliance program and requiring the same going forward. This push by the compliance counsel will most certainly continue to keep the bar going up and enhance compliance programs into 2017 and beyond.

Much like the Odebrecht/Braskem FCPA resolutions of the same week, the Teva resolution has quite a bit for the compliance practitioner to digest and use in a compliance program going forward. 2016 has been a FCPA year for the ages and with the information communicated by both the DOJ and SEC, the bar for compliance programs will continue to elevate so that compliance will become a more fully functioning corporate discipline.

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