The task force investigating the situation has reported that it intends to question a number of international medical equipment manufacturers allegedly involved in the scheme.
A massive scheme involving medical products sales to Brazilian public entities has led to recent high-profile arrests. The events highlight the importance to a well-functioning compliance program of keeping up with new schemes and pressure-testing existing compliance programs to assess whether your program would have detected them.
On April 11, 2017, the federal police in Brazil arrested the former health secretary of the Rio de Janeiro state, Sérgio Côrtes, charging him with bribery and corruption. In a new phase of “Operation Car Wash,” known as “Fatura Exposta” (“Exposed Invoice”), Brazilian authorities allege that Côrtes ran a scheme where private companies paid bribes to win contracts to supply the state health care system, including the State Secretariat (SES) and the National Institute of Traumatology and Orthopedics (INTO), with medical equipment, such as electric stretchers, transcutaneous monitors, surgical appliances and mobile health units.
The scheme took advantage of the laws regulating the importation of medical goods, with SES and INTO approving payment of invoices, including line charges for taxes, even though these public institutions were exempt from paying taxes. Money generated was then returned to the public officials, including alleged payment to Sérgio Cabral, a former state governor already in jail on other corruption charges, and payments to the “machine.” Côrtes and others allegedly took 10 percent of the value of contracts by siphoning off more than 300 million reals ($95 million) from a state health care system that last year declared a state of financial emergency, with not enough funds to pay civil servants.
Miguel Iskin, president of Oscar Iskin, the largest medical goods distributor in Brazil, also was arrested for allegedly leading a cartel of distributors that preselected the winners of the equipment tenders and coordinated a “tip box” allegedly used to make improper payments.
The task force investigating the situation has reported that it intends to question several international medical equipment manufacturers allegedly involved in the scheme. One named company, Orthofix International, earlier this year settled Foreign Corrupt Practices Act (FCPA) allegations with the Securities and Exchange Commission (SEC) over its business unit in Brazil and paid disgorgement and interest of $3.2 million and a civil penalty of $2.9 million.
The Growing Strength of Brazilian Enforcement Authorities
The recent arrests are the latest chapter in a massive corruption scandal in Brazil that has touched a former president and resulted in charges against dozens of politicians, several of the country’s richest executives and its most well-known companies, including state-run oil company Petrobras. Of note is the record being established by Brazilian authorities, which led the investigation resulting in a 2016 $3.5 billion settlement with the Brazilian construction company Odebrecht S.A. and its petrochemical unit, Braskem S.A., in a global agreement with authorities in the United States, Brazil and Switzerland. The Brazilian authorities also have played major roles in FCPA settlements involving Embraer, including a disgorgement agreement with the Brazilian Federal Prosecution Office and the CVM (the Brazilian equivalent to the SEC), as well as the FCPA settlement involving the British manufacturer Rolls-Royce PLC, which a U.S. Department of Justice (DOJ) official called “yet another example of the strong relationship between the United States and U.K. Serious Fraud Office and Brazilian Federal Prosecution Office, and the collective efforts to ensure that ethical companies can compete on an even playing field anywhere in the world.”
The Brazilian investigative work is spurring other enforcement authorities in Latin America to pursue leads, including recent charges in the “Panama Papers” case and new allegations arising from Odebrecht’s alleged bribery in Peru, Ecuador, Argentina and Guatemala.
Role of Continuous Improvement in an Effective Compliance Program
The guidance from the DOJ and the SEC on operating an effective compliance program advises that it should constantly evolve to reflect changes to the company’s business as well as the environments in which it operates, the nature of its customers, the laws that govern its actions, and the standards of its industry. Revisions to corporate compliance programs in light of “lessons learned” are an important factor in determining a compliance program’s effectiveness. Indeed, leaders of a strong compliance program think critically about emerging risks and act before a problem strikes.
In the case of the recent arrests in Brazil, companies should review whether the risks identified in the allegations may have taken place in their own programs. Does your business interact with health ministries or any of the alleged schemers in Brazil? How would your internal controls deal with an alleged “tax” charge included on an invoice to a government agency? Does your business participate in tenders where bidders are colluding to impact the results? The answers to these questions will determine what next step might be reasonable, which might include:
Adding to the scope of an internal audit work plan
Conducting internal control testing
Engaging in a review by in-house compliance and legal staff
Conducting distributor audits
Reviewing existing policies and procedures
Educating board members and other senior leaders
Incorporating the cases into training
Engaging external counsel.