Bio-Rad Labs recently agreed to pay a $14.35 million dollar penalty to resolve DOJ allegations that its subsidiaries made improper payments to Russian, Vietnamese, and Thai officials to win contracts in violation of the Foreign Corrupt Practices Act. DOJ alleged that the company falsified its books and records and failed to have adequate internal controls in connection with its sales operations. The settlement also included disgorgement of $40.7 million related to the parallel SEC investigation.
Notably, the DOJ said the criminal sanctions were not more severe because Bio-Rad voluntarily disclosed the misconduct and fully cooperated in its probe, including by making employees available for interviews, producing documents from overseas, and strengthening its compliance program.
Background on the Foreign Corrupt Practices Act
The FCPA prohibits directly or indirectly making, promising, or authorizing the making of a “corrupt payment” to a “public official.” To violate the Act, these corrupt payment must be made in order to “obtain or retain business.” However, the breadth of the law is expansive because payments to third parties (e.g., agents) made with knowledge that funds would be used to make a corrupt payment violate the FCPA.
FCPA also requires public companies (“issuers”) to maintain accurate books and records, and to implement accounting and financial controls. Importantly, there is no materiality requirement under the FCPA--there is strict liability for violations. This means that all transactions must be accurately recorded in the books and records of the subsidiaries, or the parent company can face liability.
Bio-Rad's foreign subsidiaries allegedly implicated the company on violations of both of the above provisions of the FCPA.
The SEC alleges that from 2005 to 2010, foreign subsidiaries of Bio-Rad made unlawful payments in Thailand and Vietnam to obtain or retain business.
The SEC noted that regarding Thailand, Bio-Rad did "very little due diligence" in acquiring Diamed Thailand as part of its acquisition of Diamed AG (Switzerland) in October 2007. "Prior to the October 2007 acquisition, Diamed Thailand had an established bribery scheme, whereby Diamed Thailand used a Thai agent to sell diagnostic products to government customers," the SEC states. "The agent received an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts." This scheme allegedly kept up after the acquisition.
The allegations in Vietnam centered on the fact that sales reps made cash payments to officials at government-owned hospitals and laboratories in exchange for their agreement to buy Bio-Rad’s products. They allegedly made these payments at the direction of the country manager.
During the same period, "Bio-Rad’s subsidiary paid certain Russian third parties, disregarding the high probability that at least some of the money would be used to make unlawful payments to government officials in Russia."
Bio-Rad Russia’s largest contracts with the Russian government were national contracts awarded by the Russian Ministry of Health for the sale of HIV testing equipment and blood bank equipment. The clinical diagnostic products sold to the Russian government were manufactured by Bio-Rad SNC, which in many instances also sold them directly to the Russian government due to certain complexities with Russian regulations and tax laws.
"Bio-Rad SNC, a Bio-Rad subsidiary located in France, retained and paid intermediary companies commissions of 15-30 percent purportedly in exchange for various services in connection with certain governmental sales in Russia," the DOJ states. The intermediary companies, however, did not perform these services. Several high-level managers at Bio-Rad, responsible for overseeing Bio-Rad’s business in Russia, reviewed and approved the commission payments to the intermediary companies despite knowing that the intermediary companies were not performing such services."
In violation of Bio-Rad’s policies, Bio-Rad’s foreign subsidiaries did not record the payments in their own books in a manner that would accurately or fairly reflect the transactions. Instead they booked them as commissions, advertising, and training fees. These subsidiaries’ books were consolidated into the parent company’s books and records. During the relevant period, Bio-Rad also failed to devise and maintain adequate internal accounting controls.
The SEC stated that Bio-Rad "lacked sufficient internal controls to prevent or detect approximately $7.5 million in bribes that were paid during a five-year period and improperly recorded in books and records as legitimate expenses like commissions, advertising, and training fees." Bio-Rad made $35 million in profits through the bribes, the SEC said.
“Public companies that cook their books and hide improper payments foster corruption,” stated DOJ Assistant Attorney General Leslie Caldwell, who heads the criminal division, in a press release. “The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”
Self-Disclosure and Cooperation
The DOJ stated that they 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.” That cooperation included:
- Voluntarily making U.S. and foreign employees available for interviews
- Voluntarily producing “tens of thousands of documents” from overseas
- Summarizing the findings of its internal investigation
DOJ states that in addition, Bio-Rad engaged in significant remedial actions, including:
- Enhancing its anti-corruption policies globally
- Improving its internal controls and compliance functions
- Developing and implementing additional due diligence and contracting procedures for intermediaries
- Conducting extensive anti-corruption training throughout the organization.
There has been a lot of talk recently at conferences about self-disclosure. The US attorney speakers always promote the fact that companies are better off if they disclose issues to the government.
A recent Wall Street Journal article, Why Companies Might Opt to Self-Report Potential Bribery Issues, approaches the topic in a more nuanced way, noting that companies face a tough choice: “Run to the government and hope for a break, or try to fix the problem in-house in hopes of avoiding a costly settlement.”
The article notes:
“A lot of companies are self-reporting. And a lot of companies are not self-reporting,” said F. Joseph Warin, chairman of the Washington litigation department at Gibson Dunn & Crutcher LLP. Companies devote “an enormous effort” analyzing whether to self-report, he said.…
Evaluating whether the government will find out about the potential bribery is one of the biggest factors in whether to self-report, lawyers say. For instance, if there is a whistleblower intent on reporting the issue to the government, it may spur a company to report it on its own to get credit, said Todd Harrison, a partner at McDermott Will & Emery LLP.
Companies also consider the scope of any potential bribery issues. If the potential issues weren’t systemic and were limited to a few lower-level employees, reporting them to the government may not be warranted, Mr. Warin said.
As the pharmaceutical and device industry continue to expand internationally, companies face the daunting task of keeping tight compliance controls on all areas of the globe. It will be interesting to follow both FCPA enforcement and the often related topic of self-disclosure.
View the DOJ statement: http://www.justice.gov/opa/pr/bio-rad-laboratories-resolves-foreign-corrupt-practices-act-investigation-and-agrees-pay-1435
View the SEC order: http://www.sec.gov/litigation/admin/2014/34-73496.pdf