As you see from today's picture I am enthusiastically
wearing a New England Patriots (classic) shirt. You may ask yourself why am I
wearing this shirt? The reason is because of a rather rash wager I made with
Jay Rosen, Vice President of Merrill Brink, earlier this month on the
Patriots/Texans football game. (I also made the same wager with Matt Kelly,
Editor of Compliance Week, who says he will use the photo for marketing
Compliance Week 2013, good luck with that!) I can't quite seem to remember the
final score but I do recall that it was what we in Texas might call a full 'butt-whoopin'.
Up until that game, the Patriots were 19-1 at home in the month of December
over the past ten years, after beating the Texans, they became 20-1. The key
lesson I learned from this experience is to evaluate your risk and then manage
that risk accordingly.
Earlier this month, the Securities and Exchange
Commission (SEC) announced the settlement of the Eli Lilly and Company's
(Lilly) violations of the Foreign Corrupt Practices Act (FCPA). The enforcement
action details a number of bribery schemes that Lilly had engaged in for many
years in multiple countries. Indeed Lilly used four different styles of bribery
schemes in four separate countries; all of which violated the FCPA. In China,
corrupt payments were falsely called reimbursement of expenses; in Brazil,
money that was characterized as a discount for distributor was used to pay a
bribe; in Poland, charitable donations were falsely labeled and used to induce
a Polish government official to approve the purchase of Lilly products; and,
finally, Lilly's subsidiary in Russia, paid bribes to Offshore Agents who were
domiciled outside Russia and who performed no services for which they were
compensated.
I think the most noteworthy information found in this
enforcement action is that it provides significant guidance to the compliance
practitioner on not only the different types of bribery schemes used, but more
importantly, by reading into the types of conduct the DOJ and SEC finds
violates the FCPA, it is valuable as a lesson on how to structure tools to
manage FCPA risks going forward. In this post I will detail the bribery schemes
that Lilly engaged in and in Part II, I will discuss how the Lilly enforcement
action should inform your FCPA compliance program.
I.
China - Use of False Expense Reports to Cover Improper Gifts and Cash Payments
In China, Lilly employees used the classic system of
submitting inflated expense reports and using the excess reimbursements to pay
bribes. More ominously, not only did the sales representatives engage in this
tactic but their supervisors did and also instructed subordinates to do so as
well. The list of gifts that were provided to Chinese government officials was
as wide ranging as it was creative. There were gifts consisting of specialty
foods, wines and a jade bracelet. There were paid trips to bath houses, karaoke
bars and spas. There was money paid to purchase "door prizes and publication
fees to government employed physicians." It was even noted that bribes were
paid consisting of cigarettes. In the SEC complaint it stated that "Although
the dollar amount of each gift was generally small, the improper payments were
wide-spread across the [China] subsidiary."
II.
Brazil - Use of Distributor Discounts to Fund Bribes
In Brazil, Lilly sold drugs to distributors who then
resold the products to both public and private entities. It was the classic
distributor model where Lilly sold the drugs to the distributors at a discount
and then the distributors would resell the products "at a higher price and then
took their discount as compensation." There was a fairly standard discount
given to the distributors which generally ranged "between 6.5% and 15%, with
the majority of distributors in Brazil receiving a 10% discount."
However in early 2007, at the request of a Lilly sales
manager, the company awarded an unusually high discount of between 17% and 19%
to a distributor for the sale of a Lilly drug to the government of one of the
states of Brazil. The distributor used approximately 6% of this additional
discount to create a fund to pay Brazilian government representatives to
purchase the Lilly drugs from him. Further, the Lilly sales manager who
requested this unusual discount was aware of the bribery scheme. Moreover, this
increase in the discount was approved by the company with no further inquiry as
to the reason for the request or to substantiate the basis for such an
unusually high discount. If there were any internal controls they were not
followed.
III.
Poland - Use of Charitable Donations to Obtain Sales of Drugs
In Poland we see our old friend the Chudow Castle
Foundation (Foundation). You may remember this charity as it was the subject of
a prior SEC enforcement action involving Schering-Plough Corporation. The thing
that got both Lilly and Schering-Plough into trouble was that the Foundation
was controlled by the Director of the Silesian Health Fund (Director) and with
this position he was able to exercise "considerable influence over the
pharmaceutical products local hospitals and other health care providers in the
region purchased."
Just how did this bribery scheme camouflaged as a
charitable donation work? Initially it started while Lilly was in negotiations
with the Director for the purchase of one of Lilly's cancer drugs for public
hospitals and other health care providers in the region. The Director actually
made a request for a donation directly to representatives of Lilly. Thereafter,
the Foundation itself made "subsequent requests" for donations.
In addition to this obvious red flag, Lilly did no due
diligence on the Foundation and falsely described the nature of the payments
not once but three separate times with three separate descriptions. Lilly
turned some of the monies over not to the Foundation, but to the Director for
use at his "discretion". Interestingly, the donations were not only made at or
near the time of a contract execution, with one donation being made two days
after the Director authorized the purchase of the drugs from Lilly.
Internally Lilly even discussed the size of a donation, calling it a
"rebate" and said "it will depend on the purchases of medicines."
IV.
Russia - Use of Offshore Agents Who Performed No Services
As with Brazil, Lilly used a distributor sales model in
Russia. However, there was a further twist which got Lilly into FCPA hot water.
Lilly would enter into an agreement with a third party other than the
distributor who was selected by the government official making decisions on the
purchase of Lilly products. The other third parties were usually not domiciled
in Russia, nor did they have bank accounts in Russia. In other words, they were
Offshore Agents who were paid a flat fee or percentage of the total sales with
no discernible work or services performed.
There was little to no due diligence performed on these
Offshore Agents. In one instance, detailed in the SEC Complaint, Lilly ran a
Dun and Bradstreet report on a third party agent, coupled with an internet
search on a third party domiciled in Cyprus. There was no determination of the
beneficial ownership of this Offshore Agent nor was there any determination of
the business services which this Offshore Agent would provide, subsequently
this . This Offshore Agent was paid approximately $3.8MM. An additional
Offshore Agent, again in Cyprus, which Lilly conducted little to no due
diligence on, received a $5.2MM commission. Under another such agreement, yet
another Cypriot Offshore Agent received a commission rate of 30% of the total
sale.
What about the services that these Offshore Agents
provided to Lilly? First and foremost, they all had their own special
"Marketing Agreement" which was actually a template contract prepared by Lilly.
The services allegedly provided by these Offshore Agents included "immediate
customs clearance" or "immediate delivery" of the product. There were other
equally broad and vague descriptions such as "promotion of the products" and
"marketing research". But not only was there little if no actual evidence that
these Offshore Agents provided such services; Lilly, or its regular in-country
distributors, actually performed these services.
Unlike their experience in Poland, officials from Lilly
simply inquired directly from government officials with whom it was negotiating
if it could "donate or otherwise support various initiatives that were
affiliated with public or private institutions headed by the government officials
or otherwise important to the government officials." As noted in the SEC
Complaint, Lilly had neither the internal controls in place nor performed any
vetting to determine whether it "was offering something of value to a
government official for the purpose of influencing or inducing him or her to
assist Lilly-Vostok in obtaining or retaining business."
In my next post I will discuss how the compliance
practitioner can use the information and facts presented in the Lilly
enforcement action as teaching points to evaluate and enhance a company's
compliance program.
Although I rarely agree with Peggy Noone, I always read
her Saturday column in the Wall Street Journal (WSJ) and would like to end my
blogging year with the closing paragraph, which I quote in full, from her
article entitled "About
Those 2012 Political Predictions":
Lesson? For writers it's always the same. Do
your best, call it as you see it, keep the past in mind but keep your eyes open
for the new things of the future. And say what you're saying with as much verve
as you can. Life shouldn't be tepid and dull. It's interesting-try to reflect
the aliveness in your work. If you're right about something, good. If you're
wrong, try to see what you misjudged and figure out why. And, always, "Wait
'til next year."
A safe and Happy New Year to all.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
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, 2012
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