Enforcement actions by criminal and supervisory authorities are settled regularly. In light of these developments, companies are advised to take appropriate measures. This month we highlight some notable settlements that were reached in the United States in March 2016. The U.S. Department of Justice settled with Olympus Corporation of the Americas in a case involving, among other things, the alleged bribery of Latin American government officials to stimulate product sales. Furthermore, the Securities and Exchange Commission settled with Qualcomm Inc., for allegedly trying to influence foreign government officials by hiring the relatives of these officials. These settlements emphasise the importance of taking preventive action to minimise the risk of irregularities. Both settlements also highlight the broad scope of the Foreign Corrupt Practices Act which makes it possible for US authorities to fight bribery abroad. The settlement with Qualcomm shows that US authorities have a broad interpretation of bribery: it can include the hiring of relatives of government officials.
The importance of an effective compliance program: the Olympus settlement
The U.S. Department of Justice (DOJ) in March entered into several deferred prosecution agreements with Olympus Corporation of the Americas (Olympus), a medical equipment company, for alleged misconduct relating to kickbacks in the US and the bribery of foreign government officials in Latin America. The alleged kickback practices first came to light by revelations made by Olympus’ former chief compliance officer. He received almost USD 51 million for his whistleblowing.
Olympus agreed to pay USD 310.8 million for alleged violations of federal law, and USD 312.4 million under the False Claims Act. As part of the deferred prosecution agreement, Olympus also agreed to implement multiple compliance measures, including creating a confidential hotline and website for reporting misconduct, enhancing compliance training for employees, and ensuring that the compliance programme is executed effectively. Another measure entails the adoption of an executive financial recoupment programme which requires executives involved in the misconduct or who did not sufficiently promote compliance, to give up their performance pay (up to a maximum of three years). Moreover, Olympus agreed to the selection of former federal prosecutor Larry Mackey as an independent compliance monitor for the next three years.
In a separate deferred prosecution agreement, Olympus’ subsidiary Olympus Latin America Inc. (OLA) agreed to pay USD 22.8 million for alleged violations of the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits individuals and businesses from bribing foreign government officials in order to obtain or retain business. An important factor in deciding on the penalty amount was the fact that OLA had not voluntarily disclosed the misconduct to the DOJ. Nevertheless, OLA received a 20% discount for its cooperation with the DOJ. The cooperation consisted of an “extensive internal investigation, translation of numerous foreign language documents and collecting, analysing and organizing voluminous evidence.” The appointment of Mackey as a compliance monitor for Olympus and OLA was also a condition of the agreement.
According to the DOJ, OLA allegedly paid employees of state-owned health care facilities in Latin America to boost the sales of its products and obtain new business. Similar to the conduct within the US, the payments were said to have included cash, travel and free equipment. A special practice of OLA, however, was to deliver the payments under the cover of “training centres,” which were allegedly used to provide benefits to the employees of the health care facilities, instead of educating and training them.
This settlement highlights the importance for companies to have not only a compliance programme in place, but also to make sure that the programme is effective. Compliance programmes cannot be mere “paper policies” but must constitute an important safeguard against bribery and corruption within the daily practice of a company. U.S. Attorney Fishman explicitly mentioned that Olympus’ failure to pay due attention to the issue of compliance provided sufficient reason to sanction the company. The DOJ is not alone in its fight against foreign bribery, as witnessed by the recent USD 25 million settlement that Novartis AG agreed to with the SEC of USD 25 million in connection with the alleged bribery of Chinese doctors and other health care officials.
Qualcomm penalised under the FCPA for hiring family members of Chinese officials
In March, the SEC settled with chipmaker Qualcomm Inc. for USD 7.5 million for allegedly bribing Chinese government officials by hiring their relatives as permanent employees or interns. Qualcomm furthermore agreed to regularly report to the SEC by submitting annual reports and proof of FCPA compliance certification. Qualcomm neither denied nor confirmed the findings of the official investigation.
According to the SEC, Qualcomm lacked internal controls to prevent its hiring practices from violating the FCPA. Allegedly, Qualcomm hired relatives of Chinese government officials in order to gain advantage over its competitors in the telecommunications market. For instance, the SEC alleged that the son of a foreign official received an internship and later a fulltime job, despite the fact that he did not have the right qualifications. According to the press release, Qualcomm also lent the son of the official USD 70,000 to buy a home and made a donation in his name to a university in the US.
Apart from providing internships and employment to the relatives of Chinese officials, Qualcomm was also said to have bribed them in other ways, such as by providing them with meals, event tickets and travels, all without a legitimate business purpose. The books and records of Qualcomm allegedly falsely stated that these payments constituted legitimate business expenses.
This settlement indicates that the FCPA is not limited to situations where the advantage offered not only directly benefits the foreign official, but it also extends to advantages that benefit relatives. Again, the settlement shows that compliance programmes must exist in practice and not only on paper. It is thus important for companies to ensure that their anti-corruption and bribery policies cover this aspect of the FCPA and to approach the hiring of relatives of governmental officials with caution.
The importance of exercising due care when hiring relatives of government officials is also highlighted by the fact that the SEC seems to especially scrutinise these practices. For instance, HSBC announced in its Annual Results 2015 that – together with other financial institutions – it was the subject of an investigation “in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific.” Furthermore, media have reported that JP Morgan Chase is allegedly also being investigated by the SEC after hiring two children of Chinese government officials. The FCPA is of course also enforced outside of Asia, as can be witnessed from the settlement of BNY Mellon in August 2015, for providing internships to relatives of “foreign government officials affiliated with a Middle Eastern sovereign wealth fund.”