BK Medical, a subsidiary of the Denmark company, Analogic settled an FCPA enforcement action last week with the Justice Department and the SEC for approximately $14 million. Analogic agreed to pay $3.4 million to the Justice Department as part of a non-prosecution agreement (NPA), and paid the SEC approximately $11.4 million in disgorgement and interest. Lars Frost, a former CFO at BK Medical, settled an individual enforcement action with the SEC for $20,000.
In its settlement with the Justice Department, Analogic received only a 30 percent discount from the bottom of the federal sentencing guideline range. DOJ explained Analogic’s failure to secure a larger discount because Analogic, after its initial voluntary disclosure, failed to disclose all relevant facts it learned during its internal investigation. In particular the Justice Department cited Analogic’ failure to disclose information about the identities of a number of state-owned entities that were end us.ers of Analogic’s products and certain statements made by employees in the course of the internal investigation.
While we do not know the exact nature of Analogic’s failure to disclose important aspects of its internal investigation and the specific end users, the Justice Department’s action reinforces its policy enunciated in the Yates Memorandum requiring full disclosure of internal investigation facts and statements. In the FCPA context, identifying the number and identity of state-owned enterprises that were end users is a key part of any FCPA internal investigation. Similarly, Analogic’s failure to identify and disclose all employee statements made during the internal investigation raises additional questions as to Analogic’s commitment to cooperate and provide a full accounting of its conduct. I suspect that Analogic was lucky to get away with a 30 percent reduction in the fine as opposed to a smaller discount.
Analogic’s conduct itself focused on bribery in Russia, although it extended to other countries. The statement of facts for the NPA, and the SEC’s settlement, however, focus on Analogic’s relationship with a Russian distributor.
According to the settlement documents, Analogic authorized at least 180 payments to its Russian distributor totaling over $16 million in suspicious payments. The Russian distributor directed Analogic to make payments to otherwise unknown third parties. The payees ranged from apparent shell companies located in places such as Belize, the British Virgin Islands, Cyprus, and Seychelles, to specific individuals in Russia, including Russian medical officials and physicians.
Analogic also funneled approximately 80 suspicious payments totaling approximately $4 million in suspicious payments through distributors in Ghana, Israel, Kazakhstan, Ukraine and Vietnam. These suspicious payments followed the same pattern as those involving the Russian distributor where payments were eventually made at the direction of the distributors to otherwise unknown third parties.
Lars Frost, BK Medical’s former CFO, authorized approximately 150 payments to unknown third parties in violation of Analogic’s internal controls. Additionally, he executed numerous quarterly Sarbanes-Oxley sub-certifications that were false.
The Analogic enforcement action underscores the importance of due diligence, monitoring and auditing of third-party distributors. More significantly, the enforcement action targets Analogic’s internal financial controls, invoice processing and accounts payable procedures. In particular, companies have to design and implement controls around invoice review and accounts payable to ensure that vendors are adequately screened, monitored and reviewed on an ongoing and periodic basis.