FCPA Compliance and Ethics Blog

July 23, 2013

Astros Swept Again – Is a China Sweep Coming Next?

What is a sweep? It is certainly a well-known and relevant term in the sporting world. This past weekend, the utterly inept Houston Astros were swept by the Seattle Mariners in a three game series. This came about in the face of Astro pitching, tossing a one-hitter and the team still managing to lose 6-2. One for the records I would say. But what about industry sweeps under the Foreign Corrupt Practices Act (FCPA)? I thought about that question in connection with the ongoing revelations of bribery and corruption by GlaxoSmithKline PLC (GSK) in China.

What is a sweep under the FCPA?

The FCPA Professor, in a blog post entitled “Industry Sweeps”, posted an article from FCPA Dean Homer Moyer, entitled “The Big Broom of FCPA Industry Sweeps”. In his article, Moyer wrote  that an industry sweep is the situation where the Department of Justice (DOJ) and/or Securities and Exchange Commission (SEC) will focus “on particular industries – pharmaceuticals and medical devices come to mind — industry sweeps are investigations that grow out of perceived FCPA violations by one company that enforcement agencies believe may reflect an industry-wide pattern of wrongdoing.” Moyer further wrote, “Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors.”

GSK and Others Used Suspected Third Party Travel Agency

The settlements for FCPA violations by US pharmaceutical companies are well known. Johnson & Johnson (J&J), Pfizer and Eli Lilly immediately spring to mind. But the GSK revelations may bring a new level of scrutiny and may introduce a new term “country sweep”. David Barboza, reporting in the New York Times (NYT) in an article entitled “Files Suggest a Graft Case in China May Expand”, said that “A few weeks ago, when Chinese investigators raided a small travel agency in this fast-growing city, they came upon something startling. The agency appeared to be using fake contracts and travel invoices to help executives at the British pharmaceutical giant GlaxoSmithKline bribe doctors, hospitals, foundations and government officials, Chinese authorities said.” The travel agency was identified as Shanghai Linjiang International Travel Agency. However, perhaps more interesting was the “documents obtained by The New York Times show that in the last three years at least six other global pharmaceutical companies, including Merck, Novartis, Roche and Sanofi, used the same travel agency to make arrangements for events and conferences. The records included invoices for hotel bookings, travel visas and airline tickets to Chinese cities, and to Australia, Italy, Japan, Korea and the United States. One of the drug companies appears to have used the travel agency to make a $2,500 grant to the Cancer Foundation of China.”

Barboza noted that both “Merck and Roche acknowledged using Shanghai Linjiang International Travel Agency.” Barboza wrote that there were several other travel agencies which GSK used but the others have not yet been identified. Barboza said that Chinese official that the travel agency “did very little booking on its own and mostly acted as a “money platform” that allowed Glaxo to create a huge slush fund. According to the government, the travel agency was handling about $16 million worth of Glaxo business a year, but seemed to be doing very little work.”  Barboza quoted Violet Ho, head of China operations for Kroll Advisory Solutions, who said “People don’t realize there’s an active market for fake receipts and that shell companies are used to make bribe payments.”

Just how did the Shanghai Linjiang International Travel Agency garner such work from GSK and others? Barboza said that “How the small agency secured business with many of the world’s biggest drug makers remains a mystery.” Barboza interviewed one of the founders of Shanghai Linjiang International Travel Agency, who said that he sold out to his partners some six years ago. However, this former owner said that his former partner Mr. Weng had come from a restaurant background, not a travel agency background.

In his article, Homer Moyer wrote that “Inevitably, industry sweeps become organic and evolve, with government investigators using information from one company as the basis for additional requests to others.” This may well be the case for pharmaceutical companies which have done business with Shanghai Linjiang International Travel Agency. However, the DOJ and SEC may now take a different tack than simply focusing on one industry. It may well be that there could be a China sweep coming.

Steps for the Compliance Professional

As a compliance professional, one of the key takeaways from the GSK matter should be for you to take a very hard and detailed look at your company’s spend for such organizations. Barboza points out that “using travel agencies, and marketing or consulting firms, to launder money, embezzle or create slush funds to bribe officials is common in China, even at multinational corporations operating in the country.” The first thing is to review the list of such third parties who might provide such services. You should begin by asking such questions as

  • What is the ownership of the third party? Is there a business justification for the relationship?
  • Is there anyone in the company who is responsible for maintaining the relationship? Is there ongoing accountability?
  • How is the relationship being managed?
  • Are you engaging in any transaction monitoring?
  • Are you engaging in any relationship monitoring?
  • What is the estimated or budgeted size of the spend with the third party?
  • What do the actual spends show going forward?

Just as the Wal-Mart FCPA investigation has reverberated throughout the US, I think that the GSK matter will be with us for some time. As bad as it seems about now, and it certainly appears bad, there are many lessons which the compliance practitioner can not only draw from but use for teaching moments within your company. So please do not be like the Astros, who pathetically wasted a one-hit pitching performance in the course of being swept this past weekend, use the GSK saga for your benefit going forward. For it may not be “if you are subjected to a FCPA sweep” but only “when”.

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A big congratulations to Will and Kate for the birth of their baby boy, the Prince of Cambridge.

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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, 2013

November 5, 2012

Gun Sting with No Powder

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today look’s at the Gun Sting matter. We also would note that Mary is a LSU alum and uber fan, so we pass our condolences along (and to all LSU fans who are reader of this blog)  for the Tigers last minute loss to Alabama on Saturday night in Baton Rogue. For you Alabama fans who are readers of this blog, Roll Tide.

On November 5, 1920, Two Oklahoma law enforcement personnel helped uncover the details of a liquor raid. In the process, one gallon of corn juice, one quart of gasoline, and one live prisoner were taken into custody.   Seems paltry compared to the twenty-one citizens taken into custody in Las Vegas, Nevada where they were preparing to attend the 2010 Shooting, Hunting & Outdoor Trade (“SHOT”) Show.  But alas, it appears that in the end, the 1920 raid may have captured more loot than the 2010 raid.

On January 19, 2010, the Department of Justice issued a Press Release entitled “Twenty-Two Executives and Employees of Military and Law Enforcement Products Companies Charged in Foreign Bribery Scheme”. The Release stated that “This ongoing investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations and the largest action ever undertaken by the Justice Department against individuals for FCPA violations”.  The press release also contained a warning from Assistant Attorney General Lanny A.  Breuer to would be FCPA violators, “The fight to erase foreign bribery from the corporate playbook will not be won overnight, but these actions are a turning point. From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent.”

The indictments allege that the defendants engaged in a scheme to pay bribes to the minister of defense of a small African country. However, the indictments are slightly misleading due to the fact that a foreign official was never involved in the scheme, because the defense minister’s existence was fabricated as part of an elaborate undercover operation crafted by the FBI in attempt to catch would be FCPA violators.  During the undercover operation, the defendants allegedly agreed to pay a 20 percent “commission” to a sales agent whom the defendants believed represented the minister of defense, in order to win a portion of a $15 million deal to outfit the country’s presidential guard.  In reality, the “sales agent” was an undercover FBI agent. The defendants were informed that half of the “commission” would be paid directly to the minister of defense. The defendants allegedly agreed to create two price quotations in connection with the deals, with one quote representing the true cost of the goods and the second quote representing the true cost, plus the 20 percent “commission.” The defendants also allegedly agreed to engage in a small “test” deal to show the minister of defense that he would personally receive the 10 percent bribe.

The practical pointer for today’s blog is this –there is a trend within the DOJ and SEC to perform industry wide investigations. If you are in an industry that is related to one that has already been investigated or is in the process of being investigated- don’t stick you head in the sand. Be proactive and examine where you are and where you have been in your compliance program.  Initially, the government began its industry wide investigations with an investigation into the customs clearance and permitting practices of the oil and gas services sector, which investigation encompassed global logistics firm Panalpina World Transport and eleven of its oil and gas services customers. In 2007, the DOJ and SEC would turn their attention to the orthopedic medical device industry and corrupt payments made to government-employed health care providers in Greece. The medical device industry sweep was followed closely by the Iraq “Oil for Food” cases.  Consequently, It should be no big surprise that  FCPA investigations are continuing to be structured to leverage leads learned in one investigation to catch multiple companies’ throughout an industry.

Ultimately, the Gun Sting ended with a dud instead of a bang; however, it would be foolish to consider this the end of the industry sweeps. The industry sweep has simply proven too successful and profitable to let this FCPA enforcement plan go by the way side.

Tomorrow is another historical day for our country- Election Day.  For those of you who are as tired of ugly ads as I am- we will celebrate not only the election of our President, but the end to fliers, phone calls at night and TV ads that are more annoying than normal.  Therefore, tonight when you sit and wonder who will be the next president of the United States, ask yourself another question:  Who exactly is a “Government Official”, and tune in tomorrow to find out.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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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.

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