Tuesday, July 10, 2012

“Chocolates” Not Sweet in FCPA Action

The SEC reached a settlement agreement on recordkeeping and internal control violations of the Foreign Corrupt Practices Act with a Texas-based medical device company. As alleged, a subsidiary of Orthofix International N.V. paid routine bribes referred to as “chocolates” to Mexican officials in order to obtain lucrative sales contracts with government hospitals.
According to the complaint, Orthofix’s Mexican subsidiary Promeca S.A. de C.V., bribed officials at Mexico’s government-owned health care and social services institution Instituto Mexicano del Seguro Social (IMSS). As alleged, the “chocolates” came in the form of cash, laptop computers, televisions, and appliances that were provided directly to Mexican government officials or indirectly through front companies that the officials owned. The bribery scheme yielded nearly $5 million in illegal profits for the Orthofix subsidiary, alleged the SEC. Orthofix agreed to pay $5.2 million to settle the SEC's charges.
“Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business,” said Kara Novaco Brockmeyer, chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit. “Orthofix’s lax oversight allowed its subsidiary to illicitly spend more than $300,000 to `sweeten’ the deals with Mexican officials.”
According to the SEC complaint, the bribes began in 2003 and continued until 2010. Initially, stated the charges, Promeca falsely recorded the bribes as cash advances and falsified its invoices to support the expenditures. Later, when the bribes got much larger, Promeca allegedly falsely recorded them as promotional and training costs.
Orthofix did launch an inquiry into these expenses, but according to the SEC, the parent company did very little to investigate or diminish the excessive spending. The complaint also stated that prior to the discovery of the bribery schemes, Orthofix did not have an effective FCPA compliance policy or FCPA-related training. Although Orthofix disseminated some code of ethics and anti-bribery training to Promeca, the materials were only in English, and the SEC stated that it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English. Later, upon discovery of the bribe payments through a Promeca executive, Orthofix immediately self-reported the matter to the SEC and implemented significant remedial measures. The company terminated the Promeca executives who orchestrated the bribery scheme.
The proposed settlement is subject to court approval. Orthofix consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest. The final judgment would permanently enjoined the company from violating the books and records and internal controls provisions of the FCPA. Orthofix also agreed to certain undertakings, including monitoring its FCPA compliance program and reporting back to the SEC for a two-year period. Orthofix also disclosed in a Form 8-K filing that it has reached an agreement with the U.S. Department of Justice to pay a $2.22 million penalty in a related action.