InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Manufacturing Company Agrees to NPA, Will Pay More than $75 Million
On December 29, a Kentucky-based manufacturer and distributor of cable and wire, entered into a non-prosecution agreement with the DOJ regarding improper payments to government officials in Angola, Bangladesh, China, Indonesia, and Thailand. The company agreed to pay the DOJ a $20.5 million criminal penalty. The company simultaneously resolved an investigation by the SEC over the same conduct, and agreed to disgorge approximately $55.3 million, along with a $6.5 million penalty regarding accounting violations at its Brazilian subsidiary.
According to the DOJ, beginning in 2002, the company’s employees became aware that the company’s foreign subsidiaries were using third party agents and distributors to make corrupt payments to foreign officials in various countries to secure business. In 2011, employees from the company’s subsidiary expressed concerns to regional and parent-level executives that commission payments were being used for improper purposes but the company failed to investigate the payments or implement a system of internal controls to detect and prevent the abuse. In total, the subsidiaries paid approximately $13 million to third party agents and distributors from 2002 to 2013, a portion of which was used to make unlawful payments to foreign government officials. According to the DOJ, the payments and resulting contracts netted the company more than $51 million in profits on sales to state-owned enterprises around the world. The SEC separately found that due to weak internal controls, the company failed to detect improper inventory accounting at its Brazilian subsidiary, causing the company to materially misstate its financial statements from 2008 to the second quarter of 2012.
Simultaneous with its resolution with the company, SEC also resolved charges against the company’s then-senior vice president and the individual responsible for sales in Angola. The former senior vice president agreed to pay the SEC a $20,000 penalty without admitting or denying that he knowingly circumvented internal accounting controls and caused FCPA violations when he approved over $340,000 in payments to an agent in Angola. The SEC separately noted that while the company’s former CEO and CFO had now returned millions of dollars in compensation they had received during the period of the violations, the SEC had found no personal misconduct by either former officer.
The company’s $20.5 million criminal penalty represented a 50 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range based on the DOJ’s conclusion that the company “voluntarily and timely disclosed the conduct at issue, fully cooperated in the investigation and fully remediated. The benefits the company received from the DOJ are similar to those companies can receive for participating in the Fraud Section’s FCPA Pilot Program for the self-reporting of FCPA violations. Prior coverage of the Fraud Section’s FCPA Pilot Program can be found here.
Israel-Based Pharmaceutical Company Sets Aside $520 Million for Potential FCPA Settlement
An Israel-based pharmaceutical company, stated in its Form 6-K filed with the SEC on November 15, 2016, that it has set aside approximately $520 million for a potential settlement of FCPA matters being investigated by the SEC and DOJ. The company explained that the reserve relates to conduct that occurred between 2007 and 2013 in Russia, Mexico, and the Ukraine, and that it was discovered in the course of the investigation that began in early 2012 with the issuance of an SEC subpoena to the company, as well as a concurrent internal investigation of its worldwide business practices.
Should the pharmaceutical company enter into a settlement, it will top the growing list of pharmaceutical companies that have been subject to multimillion dollar penalties for conduct in violation of the FCPA, including the following:
- A $5.5 million settlement in 2016 of allegations relating to bribery of Chinese and Russian doctors;
- A $20 million settlement in 2016 of allegations relating to bribery of Chinese health care professionals;
- A $25 million settlement in 2016 of allegations relating to bribery of Chinese doctors;
- A $14 million settlement in 2015 of allegations relating to bribery of healthcare professionals at state-owned hospitals in China;
- A$29 million settlement in 2012 of allegations relating to bribery of government employed physicians in Russia, Brazil, China and Poland; and
- A $70 million settlement in 2011 of allegations relating to conspiracy and bribery of doctors employed by state-controlled health care systems in Greece.
Major Global Financial Company Pays $264 Million to Settle FCPA Investigation of its Referral Hiring Practices in China
A major global financial company (“Company”) and a Hong Kong subsidiary (“Subsidiary”) agreed on November 17, 2016, to pay approximately $264 million to the DOJ, SEC, and the Federal Reserve, putting an end to a nearly three year, multi-agency investigation of the Subsidiary’s “Sons and Daughters” referral program through which the children of influential Chinese officials and executive decisions makers were allegedly given prestigious and lucrative jobs as a quid pro quo to retain and obtain business in Asia. The conduct occurred over a seven year period, included the hiring of approximately 100 interns and full-time employees at the request and referral of Chinese government officials, and resulted in more than $100 million in revenues to the Company and approximately $35 million in profit to the Subsidiary.
The Subsidiary entered into a non-prosecution agreement and agreed to pay a $72 million criminal penalty, as well as to continue cooperating with the ongoing investigation and/or prosecution of individuals involved in the conduct. Additionally, the Subsidiary agreed to enhance its compliance programs and report to DOJ on the implementation of those programs. DOJ asserts in its press release that the Subsidiary admitted that, beginning in 2006, senior Hong Kong-based investment bankers set up the referral program as a means to influence the decisions of Chinese officials to award business to the Subsidiary, going so far as to link and prioritize potential hires to upcoming business opportunities, as well as to create positions for unqualified candidates where no appropriate position existed. The Subsidiary also admitted that its bankers and compliance personnel worked together to paper over these arrangements and hide the true purpose of the hire.
DOJ acknowledged that while the Subsidiary did not voluntarily or timely disclose its conduct, in determining an appropriate resolution DOJ considered a number of actions taken by the Company, including the commencement of a thorough internal investigation, the navigation of foreign data privacy law to produce documents from foreign countries, and the provision of access to foreign-based employees for interviews in the US. Additionally, DOJ considered the employment actions taken by the Subsidiary, which resulted in the departure of 6 employees and the discipline of 23 employees.
In connection with the same conduct, the Company also settled allegations with the SEC and the Federal Reserve. In a cease and desist order filed today, the SEC found that the Company violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act of 1934. The SEC considered the Company’s remedial actions and cooperation with the ongoing investigation, ordering the Company to pay over $105 million in disgorgement and $25 million in interest. Finally, in a consent cease and desist order filed today, the Federal Reserve Board imposed an approximately $62 million civil monetary penalty on the Company for operating an improper referral hiring program and failing to maintain adequate enterprise-wide controls to ensure candidates were vetted and hired appropriately and in accordance with anti-bribery laws and company policies. This order, among other things, requires the Company to enhance its oversight and controls of referral hiring practices and anti-bribery policies, as well as to continue cooperating with the ongoing investigation.
DOJ Issues Two Declination Letters Requiring Disgorgement
On September 29, the DOJ issued two declination letters concerning suspected FCPA violations, closing their investigations of two Texas-based corporations. The DOJ claims that its investigation of one of the corporations found that the company’s employees paid approximately $500,000 in bribes to Venezuela and China government officials in order to influence those officials’ purchasing decisions and thereby secure approximately $2.7 million in profits. With respect to its investigation of the second corporation, DOJ claims that the company’s China subsidiary provided approximately $45,000 worth of benefits to China government officials to obtain sales which generated profits of approximately $335,000. In connection with the issuance of the declination letters, the companies agreed to the disgorgement of their profits from the sales associated with their purportedly illegal conduct.
The declinations were made pursuant to the FCPA Pilot Program, a one-year program launched in April 2016 to encourage companies to voluntarily self-disclose FCPA-related misconduct, cooperate with DOJ, and make appropriate remediation efforts. The DOJ’s decision to close the investigations was based on a number of factors including the companies’ (i) voluntary disclosures; (ii) thorough internal investigations; (iii) full cooperation in providing DOJ with information about the individuals responsible for the purported misconduct; (iv) agreement to disgorge all profits made from the purported misconduct; (v) enhancement of compliance programs and internal accounting controls; and (vi) remediation in the form of terminating or sanctioning employees responsible for the purported misconduct. These are the fourth and fifth declination letters issued under the Pilot Program.
The disgorgement of profits in connection with the declination letters to the two corporations raises the question of whether such disgorgement may be a prerequisite to obtaining a declination letter under the Pilot Program. Companies that previously received declination letters under the Pilot Program were required to disgorge profits as part of settling related SEC enforcement actions. Past FCPA Scorecard coverage of the Pilot Program and associated declination letters may be found here.
Personal Care and Dietary Supplement Company Settles FCPA Charges Arising from Charitable Donation
On September 21, 2016, the SEC reached a $766,000 settlement with a personal care and dietary supplement company over charges that it violated the internal controls and books and records provisions of the FCPA. The SEC alleged that the company’s China subsidiary made a $150,000 payment to a charity chosen by a Chinese Communist party official in order to obtain that official’s assistance in terminating an on-going provisional agency investigation into the company’s compliance with local rules for direct selling.
The settlement reveals important lessons for U.S. companies regarding oversight of charitable contributions made by their foreign-based subsidiaries. According to the Order, the company’s China subsidiary had informed its U.S. counterpart of the donation but omitted the relationship between the donation, foreign official, and provisional agency investigation. While the U.S. company flagged the FCPA risks a large donation in China may raise, and advised its China subsidiary to consult with outside U.S. legal counsel to assure compliance, the counsel’s advice was ultimately ignored by the subsidiary. The SEC concluded that the company failed to maintain necessary internal controls, specifically with respect to due diligence conducted by its China subsidiary regarding charitable contributions and accounting for such donations.
Notably, this is the second time that the government has charged a company with violating the FCPA based only on a charitable donation to purportedly buy the influence of a foreign official. The settlement illustrates the SEC’s increasing focus on charitable donations in high risk markets.
British Pharmaceutical Company Ordered to Pay $20 Million for Alleged Bribery in China
On September 30, 2016, the SEC reached a $20 million settlement with a British pharmaceutical company arising from the company’s business in China. The SEC alleged that between 2010 and 2013, sales and marketing managers of the company’s China subsidiary made corrupt payments to medical professionals to encourage more prescriptions for the company’s products. The purported corrupt payments included gifts, travel, entertainment, shopping, and cash but were recorded in the company’s books and records as legitimate marketing expenses, speaker fees, medical association payments, and travel and entertainment expenses. Because the medical professionals worked in government-owned hospitals, the SEC considered them to be foreign government officials under the FCPA, and charged the company with violations of the internal controls and recordkeeping provisions of the FCPA.
The $20 million dollar settlement with the SEC follows an almost $490 million sanction ordered in 2014 by a Chinese Court against the company’s Chinese subsidiary based on the same alleged bribery scheme. Five of the company’s managers were also convicted in that action in China and its former country manager was deported. FCPA Scorecard coverage of the Chinese Court order can be found here.
DOJ Teams Up With OFAC to Bring Enforcement against Chinese Front Company
On September 26, the DOJ announced charges against a Chinese trading company and its executives for conspiracy to violate the International Emergency Economic Powers Act (IEEPA), and to defraud the United States; as well as for conspiracy to launder monetary instruments through U.S. financial institutions. The criminal complaint alleges that the company served as a third-party payer, using an illicit network of front companies, financial facilitators, and trade representatives to purchase sugar and fertilizer for a banking entity based in North Korea that OFAC had designated as a Specially Designated National (SDN) in 2009. The civil forfeiture complaint seeks forfeiture of funds spread out across 25 different bank accounts located in China and connected to the affairs of the company. In addition, OFAC imposed sanctions on the company, which is located near the North Korean border and openly worked with the SDN banking entity after 2009.
DOJ Declines FCPA Charges Against UK-Based Pharmaceutical Company Following SEC Settlement
In conjunction with the SEC’s recent settlement with a U.K.-based pharmaceutical company, the company announced on August 30 that the DOJ has closed its parallel foreign bribery investigation. As detailed here, the SEC settled charges against the company for allegedly improper payments made by its wholly owned subsidiaries in China and Russia. Under the SEC settlement, the company agreed to disgorge $4.325 million and pay a $375,000 civil penalty with $822,000 in prejudgment interest.
UK-Based Pharmaceutical Company Agrees to Pay $5.5 Million to Settle FCPA Charges with SEC
On August 30, the SEC announced a $5.5 million settlement with a U.K.-based pharmaceutical company to settle charges under the FCPA’s books and records and internal control provisions due to allegedly improper payments made by the company’s wholly-owned subsidiaries in China and Russia. In its administrative order, the SEC alleged that the Chinese subsidiaries made improper payments to doctors at state-owned healthcare providers to incentivize purchasing and prescribing the company’s pharmaceuticals. The improper payments were funded by fraudulent tax receipts, inflated travel invoices, and fabricated speaker fees. The Chinese subsidiary also allegedly made improper payments to government officials in exchange for reductions or dismissals of proposed financial sanctions against the subsidiary. Similarly, the SEC alleged that the company’s Russian subsidiary made improper payments in connection with pharmaceutical sales. Without admitting or denying the SEC’s findings, the company agreed to disgorge $4.325 million and pay a $375,000 civil penalty with $822,000 in prejudgment interest.
The SEC’s administrative order indicates that the company waived its statute of limitations defenses. This is notable because the company’s misconduct allegedly ended in 2010, and the statute of limitations for FCPA offenses is five years.
This settlement represents another in a series of SEC investigations of the pharmaceutical industry.
Global Technology Company Settles FCPA Charges with SEC; DOJ Issues Third Declination Letter
On July 11, a Wisconsin-based global technology company agreed, pursuant to an administrative cease and desist order and without admitting or denying the SEC’s findings, to pay $14.3 million to settle the SEC’s allegations that it violated the books and records and internal controls provisions of the FCPA. The charges related to actions taken by managers and employees of the company’s wholly-owned Chinese subsidiary, between 2007 and 2013, to make payments to sham vendors to effect bribes and improper payments to employees of Chinese government owned shipyards, ship-owners, and others, as well as to obtain and retain business and personally enrich the subsidiary’s employees. The company’s settlement includes a disgorgement of $11,800,000, prejudgment interest of $1,382,561, as well as a civil penalty of $1,180,000. The company also agreed to a one-year period of self-reporting to the SEC on the status of its FCPA and anti-corruption related remediation and compliance enhancements.
On the same day, the DOJ Fraud Section released a declination letter sent on June 21, 2016, to the company, in which DOJ declined prosecution of possible FCPA violations “despite the bribery by employees of [the company’s] subsidiary in China.” The DOJ letter stated that its decision is consistent with the FCPA Pilot Program , a one-year program launched in April 2016, to encourage companies “to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs.” DOJ determined that the company had voluntarily self-reported potential FCPA violations, conducted a thorough internal investigation, and continues to cooperate fully and remediate its internal controls.
No individuals have been charged in this matter, but DOJ noted in its declination letter that the company removed from the company all 16 employees determined to have been involved in the misconduct. The company also agreed to continue to cooperate in any ongoing investigation of individuals.
This is the third declination letter issued by the DOJ since its FCPA Pilot Program was announced it April 2016. Prior FCPA Scorecard coverage on the FCPA Pilot Program can be found here.