Top Ten Enforcement Actions for 2012

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As we welcome in 2013, it is appropriate to reflect back on some of the things which have occurred over 2012 and in the Foreign Corrupt Practices Act (FCPA) enforcement world, it was quite a significant year. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) both have used enforcement actions to educate compliance professionals on several different aspects of the FCPA and FCPA compliance. This is my list of what I believe to be the most significant enforcement actions over the past year and the lessons which can be drawn from them.

1. Morgan Stanley - without a doubt the most significant enforcement action of 2012 was the Declination given to Morgan Stanley, when one of its Managing Directors, Garth Peterson, pled guilty to a FCPA violation. The DOJ Press release set out the detailed compliance program which Morgan Stanley had and the specific trainings, certifications and acknowledgements from Peterson all avowing he was in compliance with the FCPA.

Key Takeaway - if anyone ever doubted that the DOJ provides credit for a robust compliance program, this Declination made clear that the DOJ does so. The Press Release gives information on what steps you can take immediately to improve the quality of your FCPA compliance program.

2. Smith and Nephew - the first in several enforcement actions from 2012 that answered once and for all the issue of whether distributors in the sales chain are covered by the FCPA. Smith and Nephew used Isle of Mann domiciled distributors, receiving up to 40% discounts on the list price of the products, to sell medical devices into Greece.

Key Takeaway - once and for all time distributors are treated the same as agents, resellers, sales representatives and any other third parties in the sales chain.

Double Key Takeaway - do not use any foreign sales representatives, who are domiciled in the Isle of Mann, for work outside that country.

3. BizJet - a company which literally sent ‘bags of money’ across the border to pay bribes received a penalty ⅓ below the Sentencing Guidelines suggested minimum fine. The potential fine ranged between a low of $17.1MM to a high of $34.2MM. The final agreed upon monetary penalty was $11.8MM. BizJet’s reduction was 30% off the bottom of the fine range and a whopping 65% off the top of the fine range.

Key Takeaway - no matter how bad the facts appear to be if a company engages in ‘extraordinary cooperation’, after self-disclosure to the DOJ, it will obtain much credibility in the settlement negotiations and can potentially lead to a significant fine reduction.

4. Biomet - for reported bribes paid somewhere over $1.5MM, the company had documented fines, penalties and losses of over $29MM, which did not include any of the investigative costs. The company’s internal auditors had completely failed to follow up on obvious red flags. These included the fact that Internal Audit was aware of the bribery and even discussed the payments in a memorandum to Biomet’s home office. Biomet’s Internal Audit took no steps to determine the reason for royalty payments to doctors or why they were 15-20% of sales. Internal Audit did not obtain any evidence of services which the doctors might have performed entitling them to the payments.

Key Takeaway - the Deferred Prosecution Agreement (DPA) outlined some of the DOJ’s most current thinking of the role of Internal Audit in a FCPA compliance program.

5. Eli Lilly - the company engaged in multi-year, multi-country FCPA violations, those countries being Russia, Poland, Brazil and China. There were multi-bribery schemes used with all forms of the sale chain model; employees as sales representatives, distributors and commissioned agents. However the company only paid fines and penalties of $29MM to the SEC based upon a civil Complaint. There was no DPA nor any criminal allegations of FCPA violations made by the DOJ.

Key Takeaway – this enforcement action has one of the best discussions of the different types of bribery schemes and the compliance tools available to prevent, detect and ultimately remedy such systematic failure.

6. Orthofix - when Mexico passed a law that hospital administrators could no longer approve contracts, in a bid to end corruption in the health care system, Orthofix simply began to bribe the regional government official charged with taking over the contract letting process.

Key Takeaway - if your foreign employees to do not speak English, you really need to translate your Code of Conduct and FCPA compliance policy into their native tongue. For extra credit - do not call your bribe payments ‘giving chocolates’. It insults Forest Gump and gives chocolates a bad name.

7. Pfizer - a massive and multi-year internal investigation turned up a plethora of FCPA violations, yet the company received only a $15MM fine. But it did join the Top Ten list of profit disgorgements for its $45.2MM in disgorgement and pre-judgment interest to the SEC. The Company’s “Enhanced Compliance Obligations” provided an excellent discussion of how to structure a compliance group within a company, the role of a Chief Compliance Officer (CCO), what disciplines should be a part of a FCPA audit team and what their roles should be, how to perform risk assessments and proactive reviews and post-acquisition FCPA obligations.

Key Takeaway - today’s ‘Enhanced Compliance Obligation’ will become tomorrow’s best practices.

8. Tyco - a company which was under a prior DPA for past FCPA violations discovered a wide-ranging and systemic bribery program in at least twelve different post-injunction illicit payment schemes occurring at Tyco subsidiaries across the globe. However, due to extraordinary cooperation of Tyco, it only received a Non-Prosecution Agreement (NPA) from the DOJ and a fine of $26MM.

Key Takeaway - the Tyco SEC Compliant is chocked full of information regarding what an internal auditor needs to look for in reviewing expenses charged by employees; commissions paid to employees; invoices by agents and other third party representatives and over-inflated sales contracts; all used to disguise corrupt payments..

9. Oracle - the company got into hot FCPA water because its Indian subsidiary directed its distributor to set up a separate slush fund of monies which could be, and were used, to pay monies to persons unknown.

Key Takeaway - if your company uses distributors to handle or supplement its sales channels, you should immediately review the entire process, from business purpose, to due diligence, to contract terms and post-contract management, to make sure that your company is following minimum best practices with regards to this sales mechanism.

10. Allianz – the German company had shares and bonds registered with the SEC. It invested in an Indonesian joint venture, which made, without the company’s apparent knowledge or approval, improper payments to employees of state-owned entities in Indonesia between seven to eleven years ago.

Key Takeaway - a company does not have to be listed on a US stock exchange to be an ‘issuer’ for FCPA purposes. Jurisdiction can also lie if shares and/or bonds are registered with the SEC.

Topics:  Allianz, Audits, Compliance, Deferred Prosecution Agreements, DOJ, Eli Lilly, Enforcement Actions, FCPA, Internal Investigations, Morgan Stanley, SEC

Published In: Administrative Agency Updates, General Business Updates, Criminal Law Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox | Attorney Advertising

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