FCPA Compliance and Ethics Blog

September 6, 2013

The Harvest Moon Will Shine a Light on Compliance

The Harvest Moon is generally considered to be the full moon closest to the Autumn Equinox; the day in the fall when night and day are most equal in length. In folklore, the Harvest Moon was a symbol of fruitfulness allowing farmhands light to work on harvesting through the night or having a long roll in the hay, if one believes in the fertility enhancing properties of such events.

While I cannot speak directly to the latter, I can delineate some compliance related news on the former. As many of you might remember, I was privileged to have been part of the This Week in FCPA podcasts with Howard Sklar. Howard went off to the wide world of corporate compliance. This week I started a new compliance related podcasts series, The FCPA Compliance and Ethics Report, which can be found here. In this podcast series I will bring you the latest compliance, Foreign Corrupt Practices Act (FCPA), Bribery Act or any news related to other laws or topics regarding anti-corruption and anti-bribery. I will also be interviewing many of the leading compliance practitioners, compliance and ethics thought leaders, compliance product and service providers and others who impact the growing field of anti-corruption and anti-compliance. So if you are interested in being interviewed, give me a shout.

My first two podcasts are up. In Episode 1, I review the compliance related news of the summer, beginning with the GlaxoSmithKline PLC (GSK) matter and up through the revelations that JPMorgan Chase is being investigated for possible FCPA violations in regards to its hiring of the sons and daughters of Chinese government officials. In Episode 2, I interview Matt Ellis, founder of FCPAméricas blog. Matt discusses the new Brazilian anti-corruption law and relates how it may play out for US and other western companies in the upcoming rollout to the world’s grandest sporting events in the next three years, the World Cup in 2014 and the Summer Olympics in 2016.

Speaking of Matt Ellis, he has recently begun a site which is long overdue for the Spanish and Portuguese speaking compliance practitioner. Matt has added two well-known compliance practitioners as contributors to this new site. They are Carlos Ayres who specializes in anti-corruption and compliance issues, with a particular focus on Brazil and other regions of Latin America. He is an attorney with the law firm Trench, Rossi e Watanabe Advogados and co-chair of the Anti-Corruption and Compliance Committee of IBRADEMP (The Brazilian Institute of Business Law) in São Paulo. The second is Matthew Fowler, a seasoned FCPA attorney with over 12 years of experience as both outside counsel in leading law firms and internal counsel at a major defense company. He currently covers anti-corruption issues for the Inter-American Development Bank in Washington, D.C.

Beginning this month, the FCPAméricas Blog will regularly offer its new posts in Spanish and Portuguese. Matt’s translation partner for this new fabulous resource is the international translation company Merrill Brink. To get the ball rolling Matt has gone back and translated some of the most popular posts from his archives. So go over and check out the site. If your company has operations in Portuguese or Spanish speaking companies you might have your compliance team in those venues subscribe to this new resource.

If you are interested in how to manage your third parties in the FCPA context, please listen in on a webinar in which I am participating next week, entitled “Engaging With Confidence: Mitigating the Risk of Third-Party Relationships”. It is sponsored by Compliance Week and Datacert. This webinar will explore best practices for mitigating third-party risk, informed by latest government guidance and enforcement actions. Attendees will learn how technology can help prioritize and target due diligence efforts and facilitate ongoing monitoring to support a sustained state of compliance. The webinar is complimentary and will be held next Tuesday, September 10 at 1 PM CDT. Information and registration is available by clicking here.

Lastly, I am extremely pleased to announce that my most recent book, Best Practices Under the FCPA and Bribery Act, is now available on Kindle. The price is only $9.99 and is available at amazon.com. If you have not picked up the hard copy version, this is your chance for the electronic version. You can purchase the book by clicking here.

And last, but not least, pro-football is back…proving once again…there is a God.

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

February 14, 2012

Smith & Nephew DPA: Lessons Learned in Using Distributors

A distributor can be generally defined as a company or individual who purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set the resell price at any amount above what was originally paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside of the US.

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers, who are most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However, many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However, such belief is sorely miss-placed.

As reported by the FCPA Professor and FCPA Blog, on February 1, 2012, the Department of Justice (DOJ) announced that it entered into a Deferred Prosecution Agreement (DPA) with Smith & Nephew, Inc., a medical equipment manufacturer, for violations of the FCPA.  Smith & Nephew paid a monetary penalty of $16.8MM to the DOJ and $5.4MM to the Securities and Exchange Commission (SEC) as a civil penalty, all for a total of $22.2MM in fines and penalties. The violations revolved around a Greek distributor of Smith & Nephew who paid bribes to Greek doctors so that they would purchase and use Smith & Nephew products. According to the FCPA Professor, in a post entitled “Next Up – Smith & Nephew”, Smith and Nephew and its German subsidiary, would sell products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-sell to Greek HCPs and government hospitals at a profit.”

Further, as noted by the Professor, the purpose in setting up these entities “was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employed Greek HCPs.”  According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay the amount of the distributor discount – between 25 and 40 percent of the sales made by [the] Greek Distributor – to an off-shore shell company controlled by [the] Greek Distributor, in order to provide off-the-books funds for [the] Greek Distributor to pay cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of S&N products, while concealing the payments.”  According to the information, S&N “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N and GmbH.”

In honor of the commencement of Spring Training next week, I put together a handy Box Score of the entities which Smith & Nephew set up for this FCPA conspiracy.

Entity Designation Domicile of Entity Commission Rate Services Provided Actual Services
Shell Company A UK 40% of sales of Greek distributor Marketing Did not perform any services
Shell Company B UK 26% of sales of Greek distributor Marketing None listed
Shell Company C UK 35% of sales of Greek distributor Marketing Did not perform any true services

Indicia of Bribery and Corruption

What are some of the factors that demonstrate the distributors used by Smith & Nephew were fraudulent and did not have a legitimate business purpose? Initially I would note that the distributor was domiciled in a location separate, the UK, and apart from the sole location it was designed to deliver products or services into, Greece. This clearly demonstrated that the entities were used for a purpose that the company wished to hide from Greek authorities. While it is true that a distributor might sell products into a country different than its domicile, if the products are going into a single country, this should raise a Red Flag.

However, the biggest indicium of corruption was the amount of the commission paid. The traditional sales model for a distributor has been to purchase a product, take the title, and therefore the risk, and then resell it to an end user. Based upon this sales model, there has been a commission structure more generous than those usually accorded a reseller or sales agent, who is usually only a negotiator between the OEM and the end user. This difference in taking title, and risk of loss, have led to a cost structure which has provided a deeper discount of pricing for distributors than commission rates paid to resellers or sales agents. The sales structure used by Smith & Nephew had pricing discounts of between 26-40% off the list price. Further, this money was used precisely to pay bribes to Greek doctors to use Smith & Nephew products. If your company uses a distributor model, I would suggest that you review and reassess your pricing structure in light of this enforcement action.

Monitorship

A very interesting feature of the Smith & Nephew DPA is that the company agreed to an external Monitor. This is not something we saw in most DPAs from 2011. The Monitor’s primary purpose is to “assess and monitor Smith & Nephews compliance with the terms of this Agreement so as to specifically address and reduce the risk of any recurrence of Smith & Nephew’s conduct.” The Monitor is to be retained by Smith & Nephew “for a period of not less than eighteen (18) months.” The DPA specifies that the Monitor is to perform at a minimum two reviews and corresponding reports. The Monitor shall provide to Smith & Nephew a written work plan no less than 60 days before commencing either review. The Monitor is to formulate conclusions based upon “among other things (a) inspection of relevant documents, including Smith & Nephew’s current anti-corruption policies and procedures; (b) onsite observation of selected systems and procedures of Smith & Nephew at sample sites, including internal controls and record-keeping and internal audit procedures; (c) meetings with, and interviews of, relevant employees officers, directors and other persons at mutually convenient times and places; and (d) analyses, studies and testing of Smith & Nephew’s compliance program with respect to the anticorruption laws.”

The Smith & Nephew DPA provides the compliance practitioner with specific guidance regarding how not to use a distributor. While this post did not focus on the conduct of Smith & Nephew during the pendency of the investigation, suffice to say that its conduct after self-disclosure led to a fine which was 20% below the minimum suggested by the Sentencing Guidelines. This fact clearly points to the value of self-disclosure and cooperation with the DOJ, as a key, if not THE key component during any enforcement action.

Lessons Learned on Compliance and Ethics is available for purchase on amazon.com by clicking here.

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.

February 13, 2012

Lessons Learned on Compliance and Ethics

Lessons Learned on Compliance and Ethics: The Best from the FCPA Compliance and Ethics BlogWhen my daughter was 7 she wrote and published her first book. When I asked her how she did it, she replied “Dad, it’s easy to write a book, you just sit down and do it.” I thought about that sage wisdom for many years before I sat down and started writing this blog. While I did not set out to write a book about compliance when I began blogging, I did hope  to bring some of the things I have learned about the nuts and bolts of compliance to other practitioners. After several years of writing this blog, one of my mentors in this field, Dick Cassin, who writes the FCPA Blog, suggested I collate some of my pieces and publish a book. So there are now two published authors in the Fox family.

In this volume I have collected some of my posts which I think will help guide you in your own journey through the world of anti-corruption and anti-bribery compliance. I have broken the book down into the following chapters:

Some Thoughts on Best Practices – This chapter charts some of the evolving standards of a best practices compliance program, with articles on the thoughts of Department of Justice (DOJ) representatives; guidelines from the US Sentencing Commission; standards from the OECD; and comments on the UK Bribery Act.

The Nuts and Bolts of Compliance – This chapter includes articles regarding the ‘How To’ of compliance inside a corporation. As any in-house practitioner knows, the practice of law inside of a corporation is very different from private practice. I try to bring an in-house perspective and provide guidance on how to perform the day-to-day work of implementing, assessing and enhancing a compliance program, inside a corporation.

Investigations, Enforcement Actions and Legal Issues – In this chapter I discuss ongoing investigations, enforcement actions which resulted in Deferred or Non-Prosecution Agreements and legal issues. From this discussion you, the reader, should be able to understand the Department of Justice’s most current thinking on compliance issues.

Summing It All Up – This chapter highlights some of the top enforcement actions and compliance issues which companies have faced. These articles provide more than just ‘tea leaf’ readings of where enforcement is going across the globe and will provide to you solid guidance in your compliance program going forward.

I have included the full text of the Foreign Corrupt Practices Act (FCPA) as well as the Department of Justice’s “Lay Person’s Guide to the FCPA“.

I know that you will find this book useful in your compliance practice and I hope that you will purchase it. It is available for the very reasonable price of $19.99 and you can order it on Amazon.com by clicking here.

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