Welcome to COSO and the World of Internal Controls – Part I

I have intentionally avoided a Top Five or Top Ten prediction list for Foreign Corrupt Practices Act (FCPA) enforcement going forward from 2014 into 2015. However there is one area of FCPA enforcement, which I think underwent a sea change in 2014 and has significant implications for the Chief Compliance Officer (CCO) and compliance practitioner in 2015 and far beyond. That change will be in the enforcement by the Securities and Exchange Commission (SEC) of the internal controls provisions of the FCPA. Last fall we saw three SEC enforcement actions, where there was no corresponding Department of Justice (DOJ) enforcement action yet there was a SEC enforcement action around either the lack or failure of internal controls. Those enforcement actions were Smith & Wesson, Layne Christensen and Bio-Rad.

Coupled with this new found robust enforcement strategy by the SEC, is the implementation of the COSO 2013 Framework, which became effective in December 2014. COSO stands for Committee of Sponsoring Organizations of the Treadway Commission, which originally adopted, in 1992, a framework for basis to design and then test the effectiveness of internal controls. It was deemed necessary to update this more than 20-year old COSO Framework, as modified in 2013, so that it provides a very supportable approach when adversarial third parties challenge whether a company has effective internal controls. While the COSO Framework is designed for financial controls, I believe that the SEC will use the 2013 Framework to review a company’s internal controls around compliance. This means that you need to understand what is required under the 2013 Framework and be able to show adherence to it or justify an exception if you receive a letter from the SEC asking for evidence of your company’s compliance with the internal controls provisions of the FCPA.

Because I believe this single area of FCPA enforcement is so important and will increase so much, I am going to dedicate several posts to an exploration of internal controls, focusing on the COSO 2013 Framework. In Part I, I begin with a review of internal controls under the FCPA.

What are internal controls?

What are internal controls in a FCPA compliance program? The starting point is the law itself. The FCPA itself requires the following:

Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)), commonly called the “internal controls” provision, requires issuers to:

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any

differences ….

The DOJ and SEC, in their jointly released FCPA Guidance, stated, “Internal controls over financial reporting are the processes used by companies to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. They include various components, such as: a control environment that covers the tone set by the organization regarding integrity and ethics; risk assessments; control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties); information and communication; and monitoring.” Moreover, “the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.”

Aaron Murphy, a partner at Foley and Lardner in San Francisco and the author the most excellent resource entitled “Foreign Corrupt Practices Act”, has said, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.”

Well-know internal controls expert Henry Mixon has said that internal controls are systematic measures such as reviews, checks and balances, methods and procedures instituted by an organization that performs several different functions. These functions include allowing a company to conduct its business in an orderly and efficient manner; to safeguard its assets and resources, to detect and deter errors, fraud, and theft; to assist an organization ensuring the accuracy and completeness of its accounting data; to enable a business to produce reliable and timely financial and management information; and to help an entity to ensure there is adherence to its policies and plans by its employees, applicable third parties and others. Mixon adds that internal controls are entity wide; that is, they are not just limited to the accountants and auditors. Mixon also notes that for compliance purposes, controls are those measures specifically to provide reasonable assurance any assets or resources of a company cannot be used to pay a bribe. This definition includes diversion of company assets, such as by unauthorized sales discounts or receivables write-offs as well as the distribution of assets.

The FCPA Guidance goes further to specify that internal controls are a “critical component” of a best practices anti-corruption compliance program. This is because the design of an entity’s “internal controls must take into account the operational realities and risks attendant to the company’s business, such as the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption. A company’s compliance program should be tailored to these differences.” After a company analyzes its own risk, through a risk assessment, it should design its most robust internal controls around its highest risk.

COSO and Internal Controls

Larry Rittenberg, in his book COSO Internal Control-Integrated Framework said that the original COSO framework from 1992 has stood the test of time “because it was built as conceptual framework that could accommodate changes in (a) the environment, (b) globalization, (c) organizational relationship and dependencies, and (d) information processing and analysis.” Moreover, the updated 2013 Framework was based upon four general principles which including the following: (1) the updated Framework should be conceptual which allows for updating as internal controls (and compliance programs) evolve; (2) internal controls are a process which is designed to help businesses achieve their business goals; (3) internal controls applies to more than simply accounting controls, it applies to compliance controls and operational controls; and (4) while it all starts with Tone at the Top, “the responsibility for the implementation of effective internal controls resides with everyone in the organization.” For the compliance practitioner, this final statement is of significant importance because it directly speaks to the need for the compliance practitioner to be involved in the design and implementation of internal controls for compliance and not to simply rely upon a company’s accounting, finance or internal audit function to do so.

So why will all of the above be a sea change for FCPA enforcement since after all, the requirement for internal controls has been around since 1977. The Smith & Wesson case shows the reason. In its Administrative Order, the SEC stated, “Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy.” Additionally, the company did not “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary to maintain accountability for assets, and that access to assets is permitted only in accordance with management’s general or specific authorization.” All of this was laid out in the face of no evidence of the payment of bribes by Smith & Wesson to obtain or retain business. This means it was as close to strict liability as it can be without using those words. Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit, was quoted in a SEC Press Release on the matter that “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales.” When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In Part II we will begin our exploration of the COSO 2013 Framework and what it requires in the way of internal controls for your FCPA compliance program.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

Atlanta Burns – the Bio-Rad FCPA Enforcement Action – Part III

On this date in 1864, the Union Army phase of the destruction of Atlanta began. While most Southerners credit Union General William T. Sherman with the burning of Atlanta, it was, in reality, Confederate General John Bell Hood who ordered the burning of the armament works that started the destruction. Sherman merely finished it. But whoever started or finished it, the result was horrific for the city. By one estimate, nearly 40 percent of the city was ruined, leaving, as one commentator noted, “little but a smoking shell.” Unfortunately for the Confederacy, this is not the last we will hear about either General Sherman or General Hood.

The Bio-Rad Laboratories Inc. (Bio-Rad) Foreign Corrupt Practices Act (FCPA) enforcement action has provided a wealth of information and lessons to be learned by the compliance practitioner. In Parts I and II I reviewed the facts of the Bio-Rad enforcement action and the specified remedial steps that the company has agreed to take. Today, I want to mine the Deferred Prosecution Agreement (DPA), the company received from the Department of Justice (DOJ) and the Securities and Exchange Commission’s (SEC) Order Instituting Cease-and-Desist Proceedings (Order) and detail the specific internal controls that I think might have helped the company. (I will really try not to get carried away and have a Bio-Rad, Part IV but there is tons of great stuff in this one so there is no telling as I begin to write this post where I might end up.)

For many managers the default mode is to stay within silos and, as noted by Andrew Hill in his article in the Financial Times (FT) entitled “The default mode for managers needs a reset”, that such persons are “suspicious of ideas that are “not invented here.” This may lead them to becoming “detached from the purpose, and even values, of the company.” This can be particularly true of changes required by an anti-corruption compliance program which many business development types fear will change the status quo in a manner, which “puts at risk predictable, comfortable routines.”

Even with the three different bribery schemes used by Bio-Rad in three different countries, some general statements can be made. Obviously the use of a third party representative in Russia was fraudulent. However a robust system of internal controls might not have only detected such conduct but also prevented it if the Emerging Markets Regional Manager and/or any of the team under him knew that they would be checked by a second set of eyes on what they were doing.

I will focus on four areas of internal controls that were sorely missing from the company during its bribery scheme heyday:

• Delegation of Authority (DOA)
• Maintenance of the vendor master file
• Contracts with agents
• Movement of cash / currency.

Delegation of Authority 

Your DOA should reflect the impact of FCPA risk (transactions and geographic locations) to result in higher levels of approval for matters involving agents and for funds transfers and invoice payments to countries outside the US. If properly prepared and enforced, the DOA can be a powerful preventive tool for FCPA compliance, unfortunately this is not often the case as very often the DOA is prepared without much thought given to FCPA risks.

Properly utilized in a FCPA risk based process, the DOA takes into account the increased risk posed by certain types of transactions and by certain geographic locations. The DOA then provides for a higher level of scrutiny for higher risk transactions. This means that the DOA should specify who must give the final approval for engaging agents. Yet the DOA might distinguish between approval of vendor invoices for “routine” third party representatives and those from high-risk third party representatives, such as agents. Finally, the DOA should be integrated into the accounts payable processing system in a manner that ensures all high-risk vendor invoices receive the proper visibility. Identifying high-risk third party representatives can often be done within the vendor master file so payments to them are identified for appropriate approval BEFORE they are paid.

Vendor Master File

The vendor master file can be one of the most powerful PREVENTIVE control tools. This file should be structured so that each vendor can be identified not only by risk level but also by the date on which the vetting was completed and the vendor received final approval. Electronic controls should be in place to block payments to any vendor for which vetting has not been approved. Manual controls are needed over the submission, approval, and input of changes to the vendor master file. These controls include verification that all third party representatives have been approved before their information (and the vendor approval date) are input into the vendor master. Manual controls are also needed when “one time” third party representatives are submitted, when vendor name and/or vendor payment information changes are submitted.

Contracts with Third Party Representatives 

As demonstrated with the Bio-Rad enforcement action, contracts with agents are typically not integrated into an internal control system. They are left to operate on their own. Indeed in the case of Bio-Rad it is not clear if the compliance function had visibility into this process at all. However, to provide effective control, relevant terms of those contracts should be extracted and be made available to those who process and approve vendor invoices. This would also include a review of the commission rate for sales agents and the discount rate for distributors. To accomplish this, once the third party representatives are flagged as high-risk, and before any payments are made, the invoices are pulled for review and approval in accordance with the DOA. Such review would require that nonconforming service descriptions, commission rates, etc., must be approved not only by the original approver but also by the person so delegated in the DOA. This provides the necessary PREVENTIVE control to intercept questionable amounts before they are paid.

Disbursements of funds

All situations in which funds can be sent outside the US (accounts payable computer checks, manual checks, wire transfers, replenishment of petty cash, loans, advances, etc.,) should be reviewed from a FCPA risk standpoint. The goal is to identify the ways in which a country manager could cause funds to be transferred to their control and to conceal the true nature of the use of the funds within the accounting system. Controls need to be in place to prevent such activities. This would require that wire transfers outside the US have defined approvals in the DOA, and the persons who execute the wire transfers should be required to evidence agreement of the approvals to the DOA. Moreover, wire transfer requests going out of the US should always require dual approvals. Finally, wire transfer requests going outside the US should be required to include a description of proper business purpose and over certain level, there should be an additional review (yet another ‘second set of eyes’).

What about Hill and his default mode for managers to stay in their silos and never come out or allow change in their regions, such as was the case with the Bio-Rad Emerging Markets leadership team? This can occur in the compliance arena when the compliance function receives push back and is told the controls are too burdensome and also make operations less efficient. One of the areas available to a compliance professional is benchmarking from other company’s compliance experiences. However this can be expanded into solid presentations about why it is important to assess and mitigate FCPA risks using your corporate peers that have been the subject of a FCPA enforcement action. This is some of the best sources of information a compliance practitioner can avail his or herself of to provide good insight into why it was never expected that the company would be subject to FCPA enforcement and insight into the extreme disruption, cost, and anxiety which accompanied the enforcement actions.

Another key factor, as with all FCPA compliance initiatives, is ‘Tone at the Top’. This means that you should meet with and present the case for FCPA-focused internal controls to your company’s Executive Leadership Team (ELT), Audit Committee of the Board or other appropriate group of senior executives. The presentation should include, with examples, the importance of identifying and mitigating the FCPA and fraud risks. Some of these might include the following:

• Illustrating the examples of how the controls can prevent bribery as well as many other types of occupational fraud;
• Illustrating that the controls needed are all sound business controls, nothing exotic or out of the ordinary;
• With proper control design, it may be possible to eliminate some existing detect controls in favor of more useful preventive controls or even prescriptive controls;
• As a result of your business changes and resulting changes in assessed risks, it may be that some procedures now being performed are no longer needed and the resources can be shifted to more necessary controls; and
• It may be possible to build in more electronic controls, which can replace existing manual controls.

As we end today’s post with Atlanta burning, Andrew Hill tearing down silos so that a company like Bio-Rad can put appropriate FPCA internal controls in place and arm the compliance practitioner with a wealth of information and lessons which can be applied to your own compliance program, all courtesy of Bio-Rad, I find that there is one more significant lesson to be taking away from this enforcement action, however I will save that for another day.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

John Doar and the Bio-Rad FCPA Enforcement Action – Part II

John Doar died yesterday. He was perhaps most famously known for his role as the House Judiciary Committee Chief Counsel during the investigation of and impeachment proceedings against then President Nixon. However, it was his role in the civil rights movement in the South that in large part inspired me to become a lawyer. He rode with the Freedom Riders in Alabama; walked with James Meredith so that he could register to attend the University of Mississippi, then stayed in the same dorm room with Meredith while the campus rioted; prosecuted the KKK in Mississippi after the murder of three civil rights workers in 1964; and marched for voting rights with Dr. King in Selma. My favorite John Doar story was retold in his obituary in the New York Times (NYT), where he stopped a riot in its tracks with the following ““My name is John Doar — D-O-A-R,” he shouted to the crowd. “I’m from the Justice Department, and anybody here knows what I stand for is right.” That qualified as a full-length speech from the laconic Mr. Doar. At his continued urging, the crowd slowly melted away.”” In my book, he is right up there with Atticus Finch.

In an earlier post, I reviewed the Bio-Rad Laboratories, Inc. (Bio-Rad) Foreign Corrupt Practices Act (FCPA) enforcement action from the perspective of the Non-Prosecution Agreement (NPA) the company was able to secure with the Department of Justice (DOJ). Today I want to review the bribery schemes that the company used to either internally fund the bribes or attempt to evade internal detection. Both the NPA and the Securities and Exchange Commission’s (SEC) Order Instituting Cease-and-Desist Proceedings (Order). The compliance practitioner can use these bribery schemes not only for FCPA training but also to see if any such schemes or their indicia may be present in your company.

Initially I need to discuss the corporate structure. It was apparently quite decentralized. According to the Order, “Bio-Rad’s international sales organization (“ISO”) oversees the company’s international sales operations; this includes all locations outside the United States and Canada. In 2009, the ISO consisted of four sub-divisions: (1) Western Europe; (2) Asia Pacific; (3) Japan; and (4) Emerging Markets. Each sub-division had a general manager, reporting to the vice-president of ISO. The Asia Pacific sub-division included Vietnam and Thailand. The Emerging Markets sub-division included Russia and other eastern European countries. Some countries within the sub-divisions had a country manager who reported to the ISO sub-division general manager.” Emerging markets is clearly a high-risk area for pharmaceutical companies. If your business development or sales organization has such a designation, I would suggest that you check and see if there are sufficient protections in place to at least raise any red flags, which might need further investigation.

However, it was more than the management structure of the business operations that was decentralized, the compliance function was similarly structured. The NPA stated, “BIO-RAD also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct.” This decentralization so defanged the company’s compliance program that it could not perform even the most basic functions of a compliance organization; no due diligence on third parties, indeed no management of third parties at all from the compliance perspective; no risk assessments were performed and, finally, the most damning was that the compliance function could not even ensure compliance with the company’s own business ethics policy.

The Russia Scheme

However the company used third party representatives to facilitate the bribery scheme. In addition to the lack of due diligence or usual steps that a compliance practitioner might put in place to manage third parties under the FCPA there were several other items of note which constitute lessons learned by the compliance practitioner. First and foremost was the commission rate paid to these third parties, that being between 15%-30%. This alone may well have been enough to demonstrate “a conscious disregard for the high probability that the Russian Agents were passing along at least a portion of their commissions to Russian government officials to obtain profitable public contracts for the sale of medical diagnostic equipment.” Further, the payments made to these agents were sent to countries outside Russia, where neither the alleged services were delivered nor where the agents were legally domiciled. Moreover, not only did these agents have no offices in Russia, they had no employees in Russia either.

Apparently there were contracts in place with these agents. The services these agents were specified to deliver included, “acquiring new business, creating and disseminating promotional materials to prospective customers, distributing and installing products and related equipment, and training customers.” But it really is hard to deliver services if you have no employees. Apparently there were times these agents did deliver something identified as “distribution services” for the commission rates between 15%-30%. However the estimated value of these services for the company was between 2%-2.5% of the total sales.

Another area of obvious concern should have been the pre-payment of commissions to these agents. Any time you pre-pay before a service is delivered (other than a retainer into a lawyer’s trust account) you can potentially run into trouble. But Bio-Rad took it a step further by making pre-payments before contracts with the ultimate buyer were negotiated. Any ideas where those pre-paid commissions might have gone? Another area was the amount of the commissions. They were just less than $200,000, which happened to be the authority level of the head of Bio-Rad’s Emerging Markets business unit. So there was no oversight or second set of eyes on these pre-payments because it was within the manager’s authority level. Finally, these pre-payments were actually forbidden under the contracts but they were made anyway.

The Vietnam Scheme 

The Vietnam Country Manager had contracting authority up to $100,000 and sales commissions up to $20,000. From 2005-2009 Bio-Rad apparently paid bribes directly to health care workers so they would purchase the company’s products. When it was pointed out to the Country Manager this was illegal, he simply moved to a distributor “at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes…Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore.” 

The Thailand Scheme

In Thailand, it was an almost mundane bribery scheme involved compared to Russia and Vietnam. Bio-Rad acquired an interest in a Thai Joint Venture (JV) through an acquisition where it performed “very little due diligence” on the JV. Bio-Rad acquired a minority interest in the JV and it did not communicate directly with the JV’s distributors but only through the majority owners of the JV. The bribery scheme was funded through “an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.” The due diligence was so poor that Bio-Rad did not know that the prime third party sales representative for the JV were the same majority owners of the JV.

Tomorrow, I will discuss some of the internal controls that a company might employ to help prevent such a compliance failure as occurred at Bio-Rad.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

Gordon Lightfoot, the Edmund Fitzgerald and the Bio-Rad FCPA Settlement, Part I

This month there are two dates that are forever tied together in the annuals of maritime tragedies and great songwriters. November 10 is the 39^th anniversary of the sinking of the Great Lakes freighter the SS Edmund Fitzgerald, who sank 17 miles from the entrance to Whitefish Bay on Lake Superior taking all 29 crewmembers to the bottom with her. Next Monday, November 17, is the 76^th birthday of the Canadian singer-songwriter Gordon Lightfoot, who memorialized the tragedy in the song The Wreck of the Edmund Fitzgerald, which he released on the album Summertime Dream in 1976. The song went all the way to Number 2 on the charts. I can still hear Lightfoot’s haunting tale in my head to this day and for me, it was his greatest single.

Earlier this month, Bio-Rad Laboratories Inc. (Bio-Rad) concluded a multi-year Foreign Corrupt Practices Act (FCPA) investigation and enforcement action. It was notable for many reasons. First and foremost was the stunning bribery and corruption scheme that the company engaged in; multiple bribery schemes in multiple countries. Also notable were the results that the company achieved. While we do not yet know if there will be any individual prosecutions of this matter, the company received a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) and a relatively small fine of $14.35MM for what clearly would appear to be criminal violations of the FCPA. Perhaps equally stunning is the amount of profit disgorgement that the company agreed to with the Securities and Exchange Commission (SEC), that amount being $40.7MM.

As with the Layne Christensen FCPA enforcement action from October, both settlement documents provide a wealth of very useful information for the compliance practitioner to use to not only help create a best practices compliance program, but also review your company’s compliance program to see if there might be areas of risk which need to be assessed or have greater compliance scrutiny. Over the next couple of blog posts I want to explore the Bio-Rad FCPA settlement, discuss some of the lessons learned for the compliance practitioner and explore what this settlement may unveil for future FCPA enforcement actions.

With his usual thoroughness, the FCPA Professor went into deep dive mode to lay out the underlying facts involved in this matter, in a post entitled “Bio-Rad Laboratories Agrees To Pay $55 Million To Resolve FCPA Enforcement Action”. According to the NPA, Bio-Rad had bribery schemes running in the following countries: Russia, Vietnam and Thailand. In Russia, persons identified as ‘Manager-1’ who was a high-level manager of the company’s Emerging Markets sales region and ‘Manager-2’ who worked for Manager-1 and was described as a high-level accounting manager of the company’s Emerging Markets sales region, engaged with ‘Agent-1’ paying him “a commission of 15-30% purportedly in exchange for various services outlined in the agency contracts, including acquiring new business by creating and disseminating promotional materials to prospective customers, installing Bio-Rad products and related equipment, training customers on the installation and the use of Bio-Rad products, and delivering Bio-Rad products.”

The commission rates were approved by Manager 1 and 2 even though they were both aware that Agent 1 did not and indeed could not perform the contracted services. Payments were made to a level of $200,000 or less because that was the spending authority of the managers, which did not require a higher level of company review. Both managers communicated with Agent 1 through multiple fraudulent email addresses to avoid detection by the company. Finally, Agent 1 had a 100% success rate in obtaining sales into Russia.

In Vietnam, the system was much simpler and even more directly corrupt. The Bio-Rad country manager was authorized to approve contracts up the amount of $100,000 and to pay sales commissions up to $20,000 without further review. This un-named country manager simply authorized cash payments to officials at state-owned hospitals to obtain or retain business for the company. When the country manager was finally challenged on this direct bribery scheme, he simply “proposed a solution that entailed employing a middleman to pay the bribes to the Vietnamese government officials as a means of insulating Bio-Rad from liability.” The bribery funds were created by giving these middlemen, named distributors, deep discounts “which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes.” These bribes were recorded on the company’s books and records as “commissions”, “advertising fees” and “training fees”.

In Thailand, the company acquired a 49% interest in a joint venture (JV) through acquisition. Initially I would note that there is no record that Bio-Rad either performed pre-acquisition due diligence or engaged in any post acquisition integration or remediation so that an ongoing bribery scheme which began under a previous company’s ownership continued after Bio-Rad took control of the Thailand JV. The bribery scheme involved paying an agent “an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.” Just to top it all off, the agent involved in the bribery scheme was Bio-Rad’s JV partner.

I would say that all of the above is very bad conduct. Yet, Bio-Rad was able to garner a NPA from the DOJ and a civil Cease and Desist Order from the SEC. How did they accomplish this? In the DOJ Press Release, it stated, “The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation…In addition, Bio-Rad has engaged in significant remedial actions, including enhancing its anti-corruption compliance programs globally, improving internal controls and compliance functions, developing and implementing additional due diligence and contracting procedures for intermediaries, and conducting extensive anti-corruption training throughout the organization.”

For the compliance practitioner, yet once again the DOJ and SEC are sounding a LOUD and CLEAR message that even with very bad conduct, the systemic failure of internal controls and having a culture that turned a very blind eye at best to what was going on; you can make a comeback. Moreover, you can make such a spectacular comeback that does not even sustain a Deferred Prosecution Agreement (DPA) let alone have to accept a guilty plea. It all starts with putting a best practices compliance program in place and the DPA lists the steps that any company should consider in its compliance regime.

1. High level commitment by providing visible support by senior management.
2. An appropriate corporate policy around anti-corruption.
3. Specific policies and procedures in the following areas: (a) gifts, (b) hospitality, entertainment and travel, (c) customer travel, (d) political contributions, (e) charitable donations and sponsorship, (f) facilitation payments and (g) solicitation and extortion.
4. Appropriate internal controls to ensure transactions are authorized and properly recorded.
5. A periodic risk-based review. In other words, a risk assessment. Policies and procedures need to be reviewed no less than annually and updated as appropriate.
6. The compliance function should have proper Board oversight, independence to act and support within the organization.
7. Compliance shall provide training on and guidance to the business units on its anti-corruption compliance program.
8. There should be mechanisms for employees to report internally compliance issues of concern with no fear of retaliation.
9. A company must maintain and provide “effective and reliable” processes and resources to responding to any raised issues.
10. A company must use both incentives to encourage behavior and discipline of those employees who violate its compliance program.
11. Third parties must be subjected to an appropriate due diligence based vetting process, have an appropriate contract and thereafter be managed going forward after the contract is signed.
12. There should be a protocol for evaluation of any potential acquisitions or merger candidates and then appropriate review and remediation after any acquisition is complete.
13. There should be ongoing monitoring and testing of the compliance program going forward.

At the conclusion of its NPA, Bio-Rad agreed to ongoing compliance reporting, at annual anniversaries of the date of the NPA by reporting to the DOJ the results of its remediation efforts over the past year. This is one of the most significantly overlooked positive aspects of any FCPA resolution. This allows the DOJ to have a continued view into the company’s compliance function. It is not an ongoing monitor but it does give the DOJ a transparent view into the company’s work towards the overall goal of putting a best practices compliance program in place and not simply stopping work when the settlement is signed. It keeps the company on its toes and allows the DOJ to continue to assess the company’s actions around anti-corruption compliance.

In the next blog post on Bio-Rad, I will review some of the specific bribery schemes that the company used and discuss how a compliance practitioner might use them for some lessons learned.

For a YouTube version of Gordon Lightfoot signing The Wreck of the Edmund Fitzgerald, click here.

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© Thomas R. Fox, 2014