Wednesday, November 05, 2014

Company That Self-Reported FCPA Violations Settles with Authorities for $55M

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

A California-based maker of medical diagnostic and life science equipment will pay $40.7 million in disgorgement to the SEC and $14.35 in penalties to the Department of Justice (DOJ) to settle violations of the Foreign Corrupt Practices Act (FCPA). The SEC said Bio-Rad Laboratories, Inc. lacked sufficient internal controls to prevent or detect approximately $7.5 million in bribes paid to foreign officials during a five-year period and improperly recorded the bribes as legitimate expenses like advertising and training fees. The company allegedly reaped $35 million in illicit profits (In re Bio-Rad Laboratories, Inc., November 3, 2014).

SEC Enforcement Director Andrew Ceresney said Bio-Rad was credited for self-reporting the misconduct and extensive cooperation, but the settlement “reiterates the importance of all companies ensuring they have the proper internal controls to prevent FCPA violations.”

The SEC said that from 2005 to 2010, the company demonstrated “conscious disregard” for the high probability that one of its foreign subsidiaries was paying Russian businesses a commission that was used to pay Russian government officials to gain government contracts. The SEC said the general manager of the company’s emerging markets sales division ignored red flags and permitted the activity to continue for years. The same type of scheme used agents and distributors to funnel money to government officials in Vietnam and Thailand. The payments were not accurately recorded, but rather reflected in the subsidiaries’ books as commissions, advertising, or training fees.

Red flags. Company managers knew that the Russian agents were foreign companies that did not have the resources to perform contracted-for services, the SEC alleged. They knew that “excessive” commissions were paid to banks in Latvia and Lithuania. The company also encouraged secrecy surrounding the Russian agents. One employee of the company’s emerging market division sent an email to another employee instructing her to “talk with codes” when communicating about the Russian invoices.

The manager with the emerging markets division also ignored the fact that the Russian country manager often requested commissions in installments of less than $200,000, which bypassed an additional approval tier by the corporate controller. They also pre-paid commissions in violation of the contracts with the Russian agents, which should have caught the company’s attention, according to the SEC.

Cooperation. The SEC and DOJ credited the company for making an initial voluntary self-disclosure of potential FCPA violations in May 2010. The company’s audit committee thereafter retained independent counsel and conducted a investigation, which was expanded voluntarily to cover other high-risk territories. The SEC said the company produced documents, summarized company findings, translated key documents, produced witnesses from foreign jurisdictions, provided reports on witness interviews, and made employees available to the Commission staff to interview.

The company also undertook extensive remedial efforts, including terminating employees who were involved, re-evaluating and supplementing anticorruption policies across the globe, enhancing its internal controls and compliance functions, developing and implementing FCPA compliance procedures, and conducting extensive anticorruption training.

In exchange for a non-prosecution agreement the company will report periodically to the DOJ about its compliance efforts and progress in implementing enhanced internal controls. “Public companies that cook their books and hide improper payments foster corruption,” said Assistant Attorney General Caldwell. “The department pursues corruption from all angles, including the falsification of records and failure to implement adequate internal controls. The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”