Recent FCPA developments

Orthofix charged with accounting fraud and FCPA violations

On January 18, 2017, the Securities and Exchange Commission (SEC) announced that Orthofix International (Orthofix), a Texas-based medical device company, agreed to admit wrongdoing and pay more than US$14 million to settle charges that it improperly booked revenue in certain instances and made improper payments to doctors at government-owned hospitals in Brazil in order to increase sales. The SEC found that Orthofix violated the Foreign Corrupt Practices Act (FCPA) when its subsidiary in Brazil schemed to use excessive discounts and make improper payments through third-party commercial representatives and distributors to induce doctors under government employment to use Orthofix’s products.  Fake invoices were used for purported services.  Four then-executives at Orthofix also agreed to pay penalties to settle cases related to the accounting failures, which according to the SEC’s order involved Orthofix improperly recording certain revenue as soon as a product was shipped despite contingencies requiring certain events to occur in order to receive payment in the transaction.

Orthofix agreed to pay an US$8.25 million penalty to resolve the accounting violations and more than US$6 million in disgorgement and penalties to settle the FCPA charges.  The company agreed to retain an independent compliance consultant for one year to review and test its FCPA compliance program.  The SEC’s order noted Orthofix’s cooperation and remedial acts.

Biomet fined for repeating FCPA violations  

On January 12, 2016, the SEC and Department of Justice (DOJ) announced that Biomet, Inc. (Biomet, later acquired by Zimmer Holdings, Inc. and renamed Zimmer Biomet Holdings, Inc.), a medical device manufacturer, has agreed to pay more than US$30 million to resolve a second violation of the FCPA.

Biomet settled its first FCPA violation in March 2012 relating to alleged bribery of government officials in Argentina, Brazil and China by entering into a deferred prosecution agreement (DPA).  As part of the settlement, Biomet agreed to retain an independent compliance monitor. 

As Biomet was implementing recommendations from the independent monitor in 2013, the company learned about potential anti-bribery violations in Brazil and Mexico and notified the monitor and the SEC.  The SEC’s order finds that Biomet continued to interact and improperly record transactions with a known prohibited distributor in Brazil, and used a third-party customs broker to pay bribes to Mexican customs officials to facilitate the importation and smuggling of unregistered and mislabeled dental products.  Biomet also failed to implement an adequate system of internal accounting controls at the company’s subsidiary in Mexico, despite employees and executives having been made aware of red flags suggesting that bribes were being paid.

To resolve the current case, Biomet entered into a three-year DPA and agreed to pay a US$17.4 million criminal penalty and retain an independent corporate compliance monitor for three years.  The company also agreed to pay to the SEC disgorgement of US$ 6.5 million including pre-judgment interest and US$ 6.5 million as a civil penalty.

DOJ charges relatives of former UN Secretary-General for FCPA violations

On January 10, 2017, the DOJ announced  indictments, among others, charging the nephew and brother of a former UN Secretary-General with FCPA violations, money laundering, wire fraud, and aggravated identity theft. The charges relate to an alleged corrupt scheme to pay US$ 2.5 million in bribes to a foreign official of a country in the Middle East in order to facilitate the sale by South Korean construction company Keangnam Enterprises Co., Ltd.of a 72-story commercial building known in Hanoi, Vietnam, to the Middle East country's sovereign wealth fund for US$ 800 million.  It does not appear the former UN Secretary-General was implicated.

Teva Pharmaceutical pays settles FCPA charges

On December 22, 2016, the DOJ and the SEC announced that  Teva Pharmaceutical Industries Limited (Teva Pharmaceutical) agreed to pay more than US$519 million to settle parallel civil and criminal charges that it violated the FCPA by paying bribes to foreign government officials in Russia, Ukraine, and Mexico.

According to the settlement documents, Teva executives and Teva Russia employees paid bribes to a high-ranking Russian government official intending to influence the official to use his authority to increase sales of Teva’s multiple sclerosis drug, Copaxone, in annual drug purchase auctions held by the Russian Ministry of Health.  Teva also admitted to paying bribes to a senior government official within the Ukrainian Ministry of Health to influence the Ukrainian government’s approval of Teva drug registrations, which were necessary for the company to market and sell its products in the country.  Between 2001 and 2011, Teva engaged the official as the company’s “registration consultant,” paid him a monthly fee and provided him with travel and other things of value.  In addition, Teva admitted that it failed to implement an adequate system of internal accounting controls and failed to enforce the controls it had in place at its Mexican subsidiary, which allowed bribes to be paid by the subsidiary to doctors employed by the Mexican government. 

Teva entered into a DPA under which it will pay a total criminal penalty of approximatelyt US$283 million.  Teva also agreed to pay more than US$ 236 million in disgorgement and interest to the SEC.  Teva also agreed to continue to cooperate with the DOJ investigation, enhance its compliance program, implement rigorous internal controls and retain an independent corporate compliance monitor for a term of three years.

SEC resolves FCPA and accounting fraud violation with General Cable

On December 29, 2016, the DOJ and the SEC announced that General Cable Corporation (General Cable), a fiber and cable manufacturer based in Kentucky, agreed to pay more than US$75 million to resolve investigations related to its violations of the FCPA. The company agreed to pay an additional US$ 6.5 million penalty to the SEC to settle separate accounting-related violations.

According to General Cable’s admissions, some parent-level and subsidiary-level employees, including executives, knew that some of its foreign subsidiaries used third-party agents and distributors to make corrupt payments to foreign officials in Angola, Bangladesh, China, Egypt, Indonesia, and Thailand. In one case the foreign subsidiary made corrupt payments directly to foreign officials.  The corrupt conduct began in 2002.  In 2011, when employees from a General Cable subsidiary expressed concerns to regional and parent-level executives that commission payments were being used for improper purposes, including potentially bribery, General Cable nevertheless failed to implement and maintain a system of internal accounting controls designed to detect and prevent such corruption and otherwise illegal payments. 

According to the SEC, General Cable’s weak internal controls also 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.

General Cable entered into a non-prosecution agreement with the DOJ and agreed to pay a US$ 20 million penalty, reflecting a 50 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range, in addition to more than $55 million in disgorgement and interest to the SEC.  General Cable agrees to self-report its FCPA compliance efforts for the next three years. General Cable also agreed to pay a US$ 6.5 million penalty to the SEC settle the accounting violations.  DOJ and SEC both stated that they considered General Cable’s self-reporting, cooperation, and remedial acts when determining the settlements.

The SEC also charged General Cable’s then-senior vice president responsible for sales in Angola, who agreed to pay a US$ 20,000 penalty.  The SEC stated that its investigation found no personal misconduct by General Cable’s former CEO and former CFO, who returned compensation received from the company during the period when the accounting violations occurred. Therefore, it wasn’t necessary for the SEC to pursue a clawback action under Section 304(a) of the Sarbanes-Oxley Act.

Businessmen and former Mexican officials plead guilty in connection with bribery schemes for aviation business

On December 27, 2016, the DOJ announced that four businessmen pleaded guilty earlier to conspiracy to violate the FCPA.  These defendants who used to run aircraft service companies in the US, allegedly paid bribes in order to secure parts and servicing contracts with Mexican government-owned customers.  Two of the four businessmen also pleaded guilty to conspiracy to commit wire fraud.

Two Mexican officials admitted that while employed by Mexican state-owned entities, they accepted bribes in exchange for taking certain actions to assist the other persons convicted to obtain or retain business.  They also admitted that he conspired with the other defendants to launder the proceeds of the bribery scheme.

Former Guinean officials charged with money laundering for receiving bribes from Chinese companies

On December 13, 2016, the DOJ announced that the former Minister of Mines and Geology of the Republic of Guinea was arrested and charged with laundering proceeds from bribes that he allegedly received from two Chinese companies that are part of a Chinese conglomerate in exchange for official actions he took to secure valuable mining rights for the conglomerate.  In order to conceal the bribes, the defendant allegedly opened a bank account in Hong Kong and misreported his occupation to conceal his status as a government official.  The defendant later transferred millions of dollars in bribe proceeds into the United States, where he allegedly lied to two US banks to conceal both his position as a foreign government official and the source of the funds. 

Argentine sports marketing company fined for international bribery conspiracy in FIFA case

On December 13, 2016, the DOJ announced that Torneos y Competencias S.A. (Torneos), a South American sports marketing company, entered into a DPA with the government in which the company admitted to its role in a long-running  scheme to corrupt international soccer, including its role in paying tens of millions of dollars in bribes and kickbacks to a high-ranking FIFA official to secure his support for, among other things, the acquisition of rights to broadcast the 2018, 2022, 2026, and 2030 editions of the FIFA World Cup.  Torneos admitted that it systematically bribed high-ranking officials of FIFA, two of FIFA’s confederations, CONCACAF and CONMEBOL, and several national member associations, including the Argentine national soccer federation (AFA).  Torneos and its co-conspirators employed a variety of means to prevent the detection of their illegal activities and to conceal the location and ownership of proceeds of those activities, including the use of sham contracts and invoices, reliance on corrupt intermediaries and bankers, the creation and use of shell companies, and the use of cash.  Torneos and its co-conspirators also relied on the US financial system and its banking institutions and wire facilities to facilitate their scheme.

As part of the DPA, Torneos agreed to over US$ 112.8 million in forfeiture and criminal penalties, and further agreed to implement enhanced internal controls and a rigorous corporate compliance program and to cooperate fully with the government’s ongoing investigation.

Brazilian companies settle FCPA charges in connection with "Operation Carwash"

On December 21, 2016, the DOJ and the SEC announced that Odebrecht, a global construction conglomerate based in Brazil, and Baskem, a Brazilian petrochemical company, pleaded guilty and agreed to pay a combined total penalty of at least US$3.5 billion to resolve charges with authorities in the United States, Brazil and Switzerland arising out of their schemes to pay hundreds of millions of dollars in bribes to government officials around the world. This is the largest-ever global foreign bribery resolution. 

According to its admissions, Odebrecht engaged in a massive and unparalleled bribery and bid-rigging scheme for more than a decade, beginning as early as 2001.  During that time, the company paid approximately US$ 788 million in bribes to government officials, their representatives and political parties in a number of countries in order to win business in those countries.  The criminal conduct was directed by the highest levels of the company, with the bribes paid through a complex network of shell companies, off-book transactions and off-shore bank accounts.

Odebrecht is Braskem's largest shareholder.  Braskem also admitted to engaging in a wide-ranging bribery scheme and acknowledged the pervasiveness of its conduct.  Between 2006 and 2014, it paid approximately US$250 million into Odebrecht's secret, off-book bribe payment system.  Using Odebrecht's system, Braskem authorized the payment of bribes to politicians and political parties in Brazil, as well as to an official at Petróleo Brasileiro S.A. – Petrobras (Petrobras), the state-controlled oil company of Brazil.  In exchange, Braskem received various benefits, including: preferential rates from Petrobras for the purchase of raw materials used by the company; contracts with Petrobras; and favorable legislation and government programs that reduced the company’s tax liabilities in Brazil.  This conduct resulted in corrupt payments and/or profits totaling approximately US$ 465 million. 

Petrobras is subject to the high-profile corruption investigation named "Operation Carwash" in Brazil.

Redflex enters into non-prosecution agreement with the DOJ

On December 27, 2016, the DOJ announced that Redflex Traffic Systems Inc. (Redflex) has entered into a non-prosecution agreement in relation to alleged bribery to elected officials to procure or expand Redflex’s contracts with Chicago and Columbus.  Redflex cooperated with the government for the successful prosecutions of several individuals, including a high-ranking city of Chicago official and Redflex’s prior Chief Executive Officer.

Under the two-year non-prosecution agreement, Redflex will pay restitution and compensatory damages to the City of Chicago and the City of Columbus, Ohio.  Further, Redflex agreed to cooperate fully with DOJ and any other law enforcement agency designated by DOJ.  As part of that obligation, Redflex must, among other things, provide DOJ, the Australian Federal Police, and other Australian law enforcement authorities, upon request, all non-privileged information, documents, records, or other tangible evidence.  Notwithstanding the two-year time period of the agreement, Redflex agreed to cooperate with DOJ, the Australian Federal Police, and other Australian law enforcement authorities until all of their investigations or prosecutions are concluded.  During the term of the agreement, Redflex must prepare at least four follow-up reports and periodically submit them to DOJ. 

Other corporate criminal and enforcement actions

Volkswagen pleads guilty in connection with cheating emissions tests, executives indicted

On January 11, 2017, the DOJ announced that Volkswagen AG (Volkswagen) has agreed to plead guilty to, among other things, participating in a conspiracy to defraud the United States and its US customers and to violate the Clean Air Act by using cheating software to circumvent the U.S. testing process and concealing material facts about its cheating from US regulators and pay a US$2.8 billion criminal penalty.  Volkswagen will be on probation for three years, will be under an independent corporate compliance monitor who will oversee the company for at least three years, and agrees to fully cooperate in the Justice Department’s ongoing investigation and prosecution of individuals responsible for these crimes.  In separate civil resolutions of environmental, customs and financial claims, VW has agreed to pay US$1.5 billion.

In addition, six Volkswagen executives and employees were indicted for their participation in the scheme.  One of the indicted executives has been arrested, and the others remain in Germany.

DOJ settles with McKesson for failure to report suspicious orders of drugs On January 17, 2017, the DOJ announced that McKesson Corporation (McKesson), one of the nation’s largest distributors of pharmaceutical drugs, agreed to pay a record US$150 million civil penalty for alleged violations of the Controlled Substances Act (CSA).

In 2008, McKesson agreed to a US$13.25 million civil penalty and administrative agreement for similar violations. In this case, the government alleged again that McKesson failed to design and implement an effective system to detect and report “suspicious orders” for controlled substances distributed to its independent and small chain pharmacy customers – i.e., orders that are unusual in their frequency, size, or other patterns. From 2008 until 2013, McKesson supplied various US pharmacies an increasing amount of oxycodone and hydrocodone pills, frequently misused products that are part of the current opioid epidemic.

The nationwide settlement requires McKesson to suspend sales of controlled substances from distribution centers in Colorado, Ohio, Michigan and Florida for multiple years. The settlement also imposes new and enhanced compliance obligations on McKesson’s distribution system.

Forest Laboratories and Forest Pharmaceuticals settle kickback allegations

On December 15, 2016, the DOJ announced that Forest Laboratories LLC (Forest Laboratories) and its subsidiary, Forest Pharmaceuticals Inc. (Forest Pharmaceuticals), agreed to pay US$38 million to resolve allegations that they violated the False Claims Act by paying kickbacks to induce physicians to prescribe certain drugs.

The Anti-Kickback Statute prohibits the payment of remuneration to induce referrals of items or services covered by federal health care programs.  The entities charged allegedly provided payments and meals to certain physicians in connection with speaker programs about their drugs between Jan. 1, 2008 and Dec. 31, 2011.  The United States contends that the payments and meals were intended as improper inducements because Forest entities provided these benefits even when the programs were cancelled (and Forest entities provided no evidence of a bona fide reason for the cancellation), when no licensed health care professionals attended the programs, when the same attendees had attended multiple programs over a short period of time, or when the meals associated with the programs exceeded Forest entities' internal cost limitations.

The settlement resolves allegations filed in a lawsuit by a former Forest employee.  The lawsuit was filed under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery.  Mr. Kroening will receive approximately US$ 7.8 million out of the US$ 38 million settlement.

Sanctions update

OFAC provides clarification regarding Iran sanctions "snapback"

On December 15, 2016, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) updated the Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions under the Joint Comprehensive Plan of Action (“JCPOA FAQs”), providing guidance regarding how sanctions would be re-imposed in case of a "snapback" of Iranian sanctions.  The updated JCPOA FAQs states that, in line with past practice, OFAC would allow third country persons a 180-day period to wind down operations involving Iran that were consistent with the JCPOA and undertaken under a written contract entered into prior to snapback. In addition, after snapback, OFAC will allow third country persons to be made whole for debts and obligations owned to them by Iranian parties, including payment for goods or services fully provided or delivered prior to snapback and repayment of loans or credits extended to an Iranian party prior to snapback.  Details of the guidance can be found here.

OFAC issues guidance on sanctions compliance services

On January 12, 2017, OFAC published its "Guidance on the Provision of Certain Services Relating To the Requirements of U.S. Sanctions Laws" as well as updating its website to address five Frequently Asked Questions.  The new guidance clarifies that US attorneys, compliance personnel, and others are not prohibited from providing services related to compliance with US sanctions laws, even where sanctions would otherwise prohibit U.S. persons from direct or indirect involvement in the underlying business activities.  Details of the guidance can be found here.

Money laundering

NYDFS penalizes Agricultural Bank of China for anti-money laundering violation

The New York Department of Financial Service (NYDFS) announced a fine of US$ 215 million against Agricultural Bank of China for violating New York’s anti-money laundering laws. The bank also agrees to engage an independent monitor. The monitor will report directly to DFS to address serious deficiencies within the bank’s compliance program and implement effective anti-money laundering controls.

According to NYDFS, its investigation discovered actions by bank officials to obfuscate US$ transactions conducted through the New York Branch that might reveal violations of sanctions or anti-money laundering laws.  The bank's former Chief Compliance Officer reportedly tried to raise concerns to the branch management, but was forced to resign and later launched a discrimination case against the bank. 


Cybersecurity sanctions targeting Russia implemented

On December 29, 2016, President Obama signed an Executive Order in response to the Russian government's aggressive harassment of US officials and cyber operations aimed at the U.S. Election.  The Executive Order amends the previously adopted sanctions regime against foreign individuals and entities engaged in malicious cyber-enabled activities, expanding its scope to include cyber activity targeting U.S. election processes and institutions and adding nine Russian entities and individuals to the Specially Designated Nationals and Blocked Persons (the "SDN List").  President Obama sanctioned several Russian entities and individuals under the amended Executive Order.  Details of the Executive Order and the sanctions imposed under it can be found here.