On September 28, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with a Michigan-based manufacturer and distributor of medical devices, over allegations that the company had violated the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”). The SEC’s order instituting proceedings alleged that the company’s internal accounting controls were insufficient to detect the risk of improper payments in sales of its products in India, China and Kuwait, and that the company’s Indian subsidiary failed to maintain complete and accurate books and records. See In the Matter of Stryker Corp., Admin. Proc. No. 3-18853 (September 28, 2018). The company agreed to pay a $7.8 million penalty to settle the SEC’s claims without admitting or denying wrongdoing. This is the second time in five years that the company has settled with the SEC over alleged shortcomings in its books and records and internal accounting controls. See In the Matter of Stryker Corp., Admin. Proc. No. 3-15587 (October 24, 2013).
According to the SEC’s order, the company had policies (applicable to its subsidiaries) that required proper documentation of transactions; written agreements with distributors; and due diligence, approval of, and anti-corruption training for all distributors and sub-distributors. And the company held audit rights to inspect the books and records of nearly 200 dealers through which it sold products in India. However, the SEC noted that the company had exercised those rights only three times in 2012, and despite alleged red flags raised during those three audits and numerous complaints of dealer misconduct, the SEC claimed that the company failed to take appropriate steps to determine the scope of dealer-inflated invoices until 2015. The SEC alleged that, in 2015, the company conducted an internal forensic review targeting its Indian subsidiary’s high-risk and compliance-sensitive accounts from 2010 to 2015 that uncovered a lack of documentation for over 25% of the transactions tested. Similarly, the SEC alleged that the company’s Chinese subsidiary failed to vet, approve or train at least 21 sub-distributors from 2015 to 2017, and that employees of the Chinese subsidiary knew of and worked with unauthorized sub-distributors, even falsifying records to hide the involvement of these unauthorized sub-distributors. And finally, the SEC alleged that from 2015 to 2017, the company failed to maintain internal accounting controls to detect improper payments made by its Kuwaiti distributor.
While this was the company’s second FCPA settlement in five years, the SEC’s approach to the settlement was apparently significantly impacted by the cooperation provided by the company. There is no indication that the company self-disclosed the potentially problematic conduct to the SEC, but after the investigation had commenced the company reportedly retained outside counsel and forensic auditors to conduct an internal investigation and shared its findings on an ongoing basis, including by voluntarily producing reports and other materials (some of which, presumably, may have been difficult for the SEC to otherwise obtain given the multiple jurisdictions involved). In announcing the settlement terms, the SEC also noted that the company undertook several remedial actions, including terminating various senior employees and one distributor, enhancing and updating its policies, creating new compliance measures, increasing trainings, creating a centralized system for dealer documentation, conducting compliance audits, and conducting audits of dealers and distributors’ business.