On September 8, Cisco Systems Inc. disclosed in its annual statement that following an investigation into its operations in Russia and certain of the Commonwealth of Independent States, the DOJ and SEC have both declined to bring enforcement actions under the FCPA. An announcement of possible violations was first disclosed in the December 2013 blog post by Roxane Marenberg, Vice President and Deputy General Counsel in Cisco’s Global Compliance Enablement division. In the post, Marenberg stated that the company was conducting an investigation into alleged FCPA violations at the request of the SEC and DOJ in response to a communication those agencies had received concerning the company’s operations and discounting practices. Cisco’s disclosures did not provide any further detail about the nature of the business activities being investigated.
Former CEO of Chinese Subsidiary Acquired by Harris Corp. Settles FCPA Offenses Following Proactive Investigation and Disclosure of Conduct by Acquiring Company
On September 13, Jun Ping Zhang (Ping), the former Chairman and CEO of a subsidiary of Harris Corporation, a Florida-based provider of information technology services to government and commercial markets, agreed to pay a civil penalty of $46,000 to settle the SEC’s allegations that Ping violated the anti-bribery, books and records, and internal controls provisions of the FCPA. The matter was resolved by an administrative cease and desist order and Ping did not admit or deny the SEC’s findings.
The allegations relate to actions taken in 2011 and 2012 by Ping, a U.S. resident and citizen, and various unnamed sales staff of Harris Corp.’s wholly-owned subsidiary, Hunan CareFx Information Technology, LLC (CareFx China). Ping and the sales staff were alleged to have provided illegal gifts to Chinese government officials to obtain and retain business with various state-owned hospitals and regional Departments of Health. The settlement did not allege personal enrichment and contained no order of disgorgement.
The investigation giving rise to the allegations was spawned in fall 2012 when Harris Corp., notified the SEC and DOJ that it had identified potential violations of the FCPA during a post-acquisition audit of CareFx Corporation, which it had acquired in April 2011. With the assistance of outside counsel, Harris Corp. conducted an internal investigation into the conduct of CareFx China, a Chinese legal entity and wholly-owned subsidiary of CareFx, which began selling electronic medical records software to state-owned hospitals and regional Departments of Health in late 2009. The allegations contained within the administrative order depict an ongoing scheme in which CareFx China sales staff under Ping’s management and with his knowledge submitted bogus expenses for cash reimbursement and then used that cash to pay for improper gifts to government officials for the purposes of influencing their decisions to purchase CareFx China’s products and services.
According to the SEC, from April 2011 to April 2012, Ping “directly authorized or indirectly allowed between $200,000 and $1,000,000 in improper gifts to government officials,” after which CareFx China was awarded over $9,600,000 in contracts with state-owned entities. As CareFx China’s books and records were consolidated into Harris Corp.’s financial statements following the CareFx acquisition in April 2011, Ping, who had responsibility for reviewing CareFx China’s monthly expense report summaries, knew that the improperly recorded expenses and illegal activity would not be properly disclosed to Harris Corp., nor were they disclosed in the pre-acquisition due diligence.
According to a September 4, 2012 Wall Street Journal blog post, Harris Corp., concurrent with its internal investigation and timely self-disclosure in 2012, took remedial actions in relation to CareFx China, including making changes to internal control procedures, ending its gift-giving practice, providing additional compliance training, and terminating certain employees. Shortly thereafter, according to the SEC order, Harris Corp. sold all of CareFx China’s “outward facing operations” and, in mid-2015, Harris Corp. terminated all employees in CareFx China and no longer maintains China-based business operations.
In conjunction with the SEC’s recent settlement AstraZeneca, the U.K.-based pharmaceutical company announced on August 30 that the DOJ has closed its parallel foreign bribery investigation. As detailed here, the SEC settled charges against Astrazeneca for allegedly improper payments made by the company’s wholly owned subsidiaries in China and Russia. Under the SEC settlement, the company agreed to disgorge $4.325 million and pay a $375,000 civil penalty with $822,000 in prejudgment interest. As reported by Reuters, the company issued a public statement stating it was “pleased to have resolution of these matters.”
On August 30, the SEC announced a $5.5 million settlement with AstraZeneca, the U.K.-based pharmaceutical company, to settle charges under the FCPA’s books and records and internal control provisions due to allegedly improper payments made by the company’s wholly-owned subsidiaries in China and Russia. In its administrative order, the SEC alleged that the Chinese subsidiaries made improper payments to doctors at state-owned healthcare providers to incentivize purchasing and prescribing AstraZeneca pharmaceuticals. The improper payments were funded by fraudulent tax receipts, inflated travel invoices, and fabricated speaker fees. The Chinese subsidiary also allegedly made improper payments to government officials in exchange for reductions or dismissals of proposed financial sanctions against the subsidiary. Similarly, the SEC alleged that AstraZeneca’s Russian subsidiary made improper payments in connection with pharmaceutical sales. Without admitting or denying the SEC’s findings, AstraZeneca agreed to disgorge $4.325 million and pay a $375,000 civil penalty with $822,000 in prejudgment interest.
The SEC’s administrative order indicates that AstraZeneca waived its statute of limitations defenses. This is notable because AstraZeneca’s misconduct allegedly ended in 2010, and the statute of limitations for FCPA offenses is five years.
This settlement represents another in a series of SEC investigations of the pharmaceutical industry. Examples include the March 2016 Novartis settlement and payment of $25 million, and SciClone Pharmaceuticals’ settlement earlier this year for $12.8 million. Other notable pharmaceutical companies with recent FCPA settlements include Bristol-Myers Squibb in 2015 settling for $14 million; Eli Lily in 2012 settling for $29 million; and Johnson & Johnson settling with the SEC and DOJ in 2011 for $70 million.
In a SEC cease and desist order filed on August 11, Key Energy Services, Inc., a Houston-based provider of rig-based oil well services, agreed to disgorge $5 million to settle charges that the company violated the books and records and internal control provisions of the FCPA. According to the order, from August 2010 through at least April 2013, Key Energy’s Mexican subsidiary paid bribes of at least $229,000 to a contract employee at Petroleos Mexicanos (Pemex), the Mexican state-owned oil and gas company. In exchange, the subsidiary received Pemex non-public information, advice and assistance on contracts with Pemex, and lucrative amplifications or amendments to those contracts. The funds were allegedly funneled through an entity purporting to provide consulting services, but for which there was no evidence of appropriate authorization of the relationship, and no supporting documentation regarding the purported consulting work performed. According to the SEC, the subsidiary improperly recorded the transfers to the consulting firm as legitimate business expenses, which were consolidated into Key Energy’s books and records. Key Energy allegedly failed to implement and maintain sufficient internal controls, including within the subsidiary relating to interactions with Pemex officials, and failed to respond to indications that the subsidiary was improperly using consultants.
It is notable that Key Energy was not required to pay a civil fine in addition to disgorgement. The SEC identified three reasons for accepting Key Energy’s offer of settlement and not imposing a separate civil penalty. First, the SEC praised Key Energy for cooperating with and assisting in its investigation. Key Energy was first contacted by the SEC in January 2014 concerning possible FCPA violations. In April 2014, Key Energy was informed by employees of its subsidiary of possible bribes, at which time the company reported the allegations to the SEC and “undertook a broad internal investigation and risk assessment of [its] international operations.” The SEC specifically noted that, “to the extent the internal investigation identified additional issues of concern, Key Energy provided updates to the Commission staff.”
Second, the SEC considered not only the “cooperation Key Energy afforded to the Commission staff,” but also the “remedial acts undertaken by [the company].” The SEC noted that Key Energy, during its internal review, “promptly and simultaneously undertook significant remedial measures including … a renovation and enhancement of [its] compliance program.” Specific remedial measures included (1) stronger vendor oversight, (2) enhanced financial controls, (3) increased training of all international employees, (4) developing and/or reviewing policies and procedures pertaining to the FCPA, codes of business conduct, and more, and (5) a coordinated wind-down and exit from all markets outside of North America, including a commitment to exit Mexico by the end of 2016.
Finally, “in determining the disgorgement amount and not to impose a penalty,” the SEC “considered Key Energy’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.” This third justification indicates the SEC is not only aware of the current financial strains within the oil and gas services sector, but is uninterested in unnecessarily putting companies out of business. It is also possible that Key Energy’s cooperation and remediation, coupled with its tenuous financial condition, factored into the DOJ’s decision in April to close its investigation of the same conduct without bringing charges.
On August 8, 2016, medical device manufacturer Biomet announced in an SEC filing that it is “probable” that the company will incur additional liabilities in connection with the company’s 2012 deferred prosecution agreement (DPA) related to FCPA violations in Mexico and Brazil. The company stated that it had set aside funds for this purpose, but did not specify the amount. Biomet’s SEC filing stated that the company “expects to continue discussions with the SEC and DOJ but the terms of a potential resolution were not certain.”
Two months ago, DOJ stated in a court filing that Biomet had breached the DPA by failing to implement and maintain a compliance program. See previous FCPA Scorecard coverage of that filing here.
According to an August 9, 2016 news report, six former and current executives of Novartis Korea have been indicted by prosecutors in Seoul for alleged corruption involving payments to physicians intended to boost sales. The news report stated that the officials are alleged to have made payments to the physicians totaling $2.3 million from 2011 to present. Several doctors and publishers of medical journals involved in the payments were also indicted according to the news report.
In March 2016, a different division of the Switzerland-based pharmaceutical company entered into a settlement with the SEC to resolve alleged violations of the FCPA’s book and records and internal controls provisions related to activities in China. Prior FCPA Scorecard coverage of the Novartis AG settlement can be found here. In the past few years, several other pharmaceutical companies have also faced corruption allegations regarding allegedly corrupt payments to employees of Chinese state-owned hospitals. Prior FCPA Scorecard coverage of those investigations can be found here.
On August 8, 2016, the UK Serious Fraud Office (SFO) announced that it is conducting an investigation of aircraft manufacturer Airbus. The SFO stated that the investigation centers on the use of third party consultants. In April 2016, the Wall Street Journal reported that the U.K. Export Finance Industry had cut off export credit financing to the company while it conducted a fraud investigation also related to the use of third party overseas agents and referred the matter to the SFO. The SFO’s brief announcement asked for individuals with information to contact the agency through its confidential reporting system.
On July 29, the DOJ announced that Brayan Jiménez, former president of the Guatemala soccer federation, pleaded guilty to racketeering conspiracy and wire fraud conspiracy charges. Jiménez was the president of the Guatemala soccer federation from 2009 to 2015. His guilty plea came in response to allegations that Jiménez received bribes in exchange for awarding media and marketing rights to a Florida company for the Guatemalan national soccer team’s World Cup qualifying games. The bribes, totaling hundreds of thousands of dollars, were transmitted from U.S. bank accounts. As part of the plea, Jiménez agreed to forfeit $350,000 and could be sentenced to a maximum of 20 years for each count.
The guilty plea came as part of the U.S. government’s investigation into corruption in international soccer. 42 individuals and entities have been charged thus far in the investigation, which has been ongoing since May 2015, and Jiménez is the sixteenth person to plead guilty.
Previous FCPA Scorecard coverage of the FIFA investigation can be found here.
Second quarter SEC filings revealed substantial financial reserves set aside by two companies, each under investigation for alleged FCPA violations for over half a decade. If they end up reflecting the size of the ultimate settlements reached, the reserves, totaling hundreds of millions of dollars, would represent some of the largest FCPA enforcement settlements ever reached by the Justice Department.
According to its July 29 Form 6-K/A filing with the SEC, Embraer S.A., a Brazilian aircraft manufacturer, has recognized a $200 million loss contingency in connection with its discussions to settle the DOJ’s investigation into allegations that Embraer sales executives bribed various Dominican individuals who, in exchange, influenced legislators in the Dominican Republic to approve a $92 million contract and financing agreement for aircraft. Embraer also disclosed that a final settlement is likely to include a deferred prosecution agreement and the imposition of an independent monitor to oversee the company’s compliance with the terms of an agreement. The related criminal case by the Brazilian government against eight Embraer S.A. sales executives is still ongoing. Additional FCPA Scorecard coverage of the Embraer investigation can be found here.
On August 2, Och-Ziff Capital Management Group LLC, a publicly-traded hedge fund, revealed in its Form 10-Q filing with the SEC that it has raised its FCPA investigation reserve to over $414 million from the $200 million accrued in the prior quarter. Och-Ziff disclosed that it was raising the reserve based on ongoing discussions to resolve the matter with the SEC and DOJ. According to the Wall Street Journal, the settlement discussions relate to allegations that the company knowingly paid bribes to Libyan government officials in order to obtain investments from Libya’s sovereign-wealth fund and in natural-resources deals in other African countries. The Journal also reported that the Justice Department is pushing for the company to plead guilty, which would be a rare occurrence for a major financial company accused of FCPA violations.