Fresenius FCPA Enforcement Action: Part II –  The Bribery Schemes

Thomas Fox

Compliance Evangelist

Last week, the long-awaited Fresenius Medical Care AG & Co. KGaA (FMC) Foreign Corrupt Practices Act (FCPA) enforcement action was announced. It involved massive multi-year and multi bribery schemes by the company in multiple countries. The company agreed to pay a total criminal penalty of $84,715,273 to the Department of Justice (DOJ).  FMC settled a related FCPA matter with the Securities and Exchange Commission (SEC) and paid $147 million in disgorgement and prejudgment interest to the SEC, which the DOJ credited in its resolution, bringing the total amount paid by FMC to over $231 million. In spite of the massive amount of corruption involved, the company was able to garner a Non-Prosecution Agreement(NPA). The DOJ issued a Press Releaseon the matter. The SEC settled its portion of this matter with a Cease and Desist Order(Order), which also issue a SEC Press Releaseon the resolution. Today I want to consider the bribery schemes in some detail.

Every compliance practitioner should study this matter carefully as there were several bribery schemes which were new, different of ones not generally seen previously. The creativity of the Fresenius executives and employees involved speaks to the constant evolution of corrupt employees, always looking for ways to make corrupt payments which will not be detected by a company. But for the compliance professional it means that you must use the full arsenal of tools, controls and techniques available to every corporation to fight this scourge.

The bribery schemes were many but varied. They included such basic bribery techniques as direct payments to foreign officials and claiming they were made under a consulting agreement; without the foreign official providing any service or even having a sham contract in place. There were fraudulent gifts and payments to publicly employed doctors for travel with no business or educational justification gifts. In one scheme over $1.7 million was paid by customers brokers on behalf of FMC. But there were some new and novel schemes that every compliance practitioner needs to learn and become familiar with.

A.     Use of JVs

  1. Angola

Here the company created a Joint Venture (JV) and according to the NPA, the original plan was to “attribute 35% of the share capital of FMC Angola to certain “local partners” as minority shareholders – specifically “15% to [Angolan Military Health Officer who was listed by his military rank], 15% to [Angolan Doctor 1] and 5% to NefroAngola – a local company which owners are all the Angolan nephrologists.” To hide the involvement of the Military Health Officer, his title was changed to “Dr.” Finally, when the JV was presented to FMC management for approval, it was not disclosed that the minority shareholders included an Angolan military health officer and Angolan government-employed doctors.

2.    Turkey

A similar corruption scheme was pursued in Turkey. There, the local business unit entered into a JV with “Turkish Doctor 1, who received 35% of the joint venture shares (worth approximately $74,000 at the time) at the time it was formed”. This Turkish Doctor 1 would contribute to a capital increase in the JV, yet he kept his interest. Indeed, “When the other FMC executive questioned why “they have to be so cooperative to keep [Turkish Doctor 1] when he’s not paying anything,” FMC Turkey Executive 1 responded that Turkish Doctor 1 has strong relations with state hospitals and that they are “not in the position to start a fight with this professor by diluting his shares.” Doctor 1 received $360,000 for his interest in the JV for which he contributed nothing.

A second JV was also set up on Turkey, where another doctor received similar treatment but only to the extent of receiving 20% interest in the JV. Once again Doctor 2 contributed no capital at formation and during the pendency he held his interest. Yet he was paid $110,000 for his interest in this second JV.

B.     Check-Cashing Scheme

In Saudi Arabia, apparently most of the business unit was in on the bribery scheme. We have seen this previously with GlaxoSmithKline PLC (GSK) in China and also Eli Lilly and Company in China. In those situations, the employees were instructed to submit fraudulent expense reimbursement requests to create a pot of money with which to pay bribes. The scheme used by FMC was somewhat different in Saudi Arabia.

Here the company made commission payments to employees. According to the Order, the Saudi business unit generated approximately $1.77 million to fund bribes through a check writing scheme, where checks were written to employees who cashed the checks and handed the cash to the General Manager. There was so much cash laying around that the Order noted “employees sometimes stored bags of cash in a safe without proper documentation.” To hide what they were doing, the transactions were falsely recorded as project marketing expenses and collection commissions in SRS’ books and records, which FMC consolidated.

C.     False Warehousing

Remember the Angolan Military Health Officer noted above? Since he was never paid through the corrupt JV, another scheme was concocted on the Angolan business unit. It was the creation of fraudulent storage payments with a company owned by the sons of the Military Health Officer,

to “provide warehousing space” in a warehouse where no FMC products were. According to the NPA, the company “entered into an oral contract with the Shareholder Company, which was owned by the sons of the Angolan Military Health Officer, to provide warehousing space. In or around December 2011, FMC Angola paid approximately $560,000 to the Shareholder Company for purported “Temporary Storage Services,”. However, no company products were ever stored at the warehouse.

When the company’s internal audit function unearthed this scheme, the local business unit simply put a contract in place, executing a written contract with the Shareholder Company to provide temporary storage services for approximately $77,000 per month from January 2012 to January 2013. Once again, no company products were ever stored at the warehouse.

D.     The Usual Suspects

FMC utilized a large number of traditional bribery schemes to make corrupt payments in all the countries listed in the NPA and Order. While the list of countries is impressive; including not only Angola, Turkey and Saudi Arabia but also Spain, Morocco, China, Bosnia, Mexico, Benin, Burkina Faso, Cameroon, the Ivory Coast, Niger, Gabon, Chad and Senegal. The bribery schemes used in many of these countries were schemes we had previously seen. They included (1) sham consulting contracts for paying bribes to government officials where no services were performed, (2) fake collection commission agreements, (3) fraudulent payments to a charity controlled by a foreign government official ($90,000 to a government charity run by a Saudi doctor), (4) gifts in the form of laptop computers for nurses in Saudi Arabia, (5) payments to publicly employed doctors for travel with no business or educational justification (a six-night stay at the Atlantis Palm Hotel in Dubai to the tune of $7,579.20 for Saudi doctor and his wife), (6) excessive payments to customs officials where the payments were inaccurately recorded ($1.7 million total in Saudi Arabia), (7) payments through third parties and payments through a third-party distributorship, all as a way to funnel bribes to government officials. (West Africa).

In addition to vast corruption conspiracy, it was long standing, going on for over 10 years. Join me tomorrow as I consider how FMC obtained a NPA and a 40% reduction off its criminal fine under the FCPA Corporate Enforcement Policy for this massive corruption.

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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.

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