Battle of the Somme IIToday, I want to focus on the planning phase of the Battle of the Somme, which led to the disastrous casualties sustained by the British. Although rarely mentioned, I think the accidental drowning death of Lord Kitchener, less than 30 days before the battle began, had an important effect by removing one of Britain’s most seasoned professionals when he was needed the most. However, even without Kitchener, the battle plan of Sir Douglas Haig was most probably doomed to fail from the start. It had too many moving parts and depended on the synchronous artillery shelling to destroy German forward positions that had never been accomplished. It was not accomplished in the 30 days leading up the initial attacks of July 1 and the consequence was horrific.

Today, I want to conclude my exploration of the resolution of the Foreign Corrupt Practices Act (FCPA) action involving the company Analogic Corporation (Analogic) and Lars Frost (Frost), a former Chief Financial Officer (CFO) of its wholly owned Danish subsidiary BK Medical ApS (BK Medical). These resolutions included an Agreed Order with the Securities and Exchange Commission (SEC) and a Non-Prosecution Agreement (NPA) with the Department Of Justice (DOJ), BK Medical, Analogic and Frost also paid fines. Today I want to explore how these companies achieved their results and demonstrate that the DOJ Pilot Program can pay tangible benefits to any company that follows its requirements, even with a full-scale bribery program as egregious as BK Medical.

As laid out yesterday, it was a complete bribery program, facilitated at the highest levels of the Danish subsidiary. The Danish subsidiary had numerous mechanisms to fund the bribes paid across multiple countries. However the parent company Analogic did not or had not put sufficient internal controls in place to detect or prevent this conduct. In addition to the violation of the internal controls provisions of the FCPA, both BK Medical and its parent did not accurately book these payments so there was also a violation of the accounting provisions.

Ann Klibaner Sultan and Marc Alain Bohn, writing in a FCPA Blog post entitled “The Analogic Settlement: What’s behind the issue of cooperation credit?”, laid out four key areas of inquiry which they raised. The four were: (1) High level accounting failures, as it does not get much higher than the CFO. Sultan and Bohn said, “Among other things, Frost submitted numerous false quarterly sub-certifications to Analogic and knew and failed to disclose the fake contracts requested by the distributor, despite his responsibility of completing quarterly checklists designed to identify unusual transactions for Analogic’s controller. (2) Unknown third parties and here they wrote, “Significantly, BK Medical did not know or have a business relationship with the third parties to whom it was making payments.” (3) Novel Distributor Overpayment Scheme to Generate Funds. Yesterday I detailed out the bribery program that BK Medical engaged in. (4) Conduct Flagged Twice over Ten Year Period without Being Stopped. Sultan and Bohn noted that in addition to the two separate red flags raised by senior officials of the company in 2004 and 2008, Analogic never followed through for thorough remediation. Indeed one almost wonders what the company uncovered in 2011 which led to Analogic “flagging the distributor scheme,” and then proceeding to discontinue the distributor payments, conducting an internal investigation, and self-disclosing the misconduct to US enforcement authorities. I would have opined that any one or perhaps two of these factors would have been enough to slap a serious criminal penalty on Analogic yet the company only sustained a civil side FCPA enforcement action, while BK Medical only received a NPA.

There is one anomaly that bears some discussion. In a somewhat odd rejoinder to Point 2 above, the NPA stated, “the Company did not receive full cooperation credit because… the Company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the Company did not disclose information that was known to the Company and Analogic about the identities of a number of the state-owned entity end-users of the Company’s products, and about certain statements given by employees in the course of the internal investigation.” Put another way, it is difficult to understand how Analogic could be faulted by the SEC for its subsidiary not knowing whom it was doing business with, when the DOJ turns around and says the subsidiary knew but did not disclose the information to the DOJ.

Whatever the answer might be, BK Medical did not receive the fully available discount of 50% of the minimum of the low end of the Sentencing Guidelines for its DOJ imposed fine. BK Medical did receive a 30% discount, presumably for its remediation going forward.

The bottom line for the Chief Compliance Officer (CCO) or compliance practitioner is that even with senior management involvement, you can make a comeback towards a very reasonable fine and penalty. Clearly the DOJ is committed to giving companies significant credit if they will follow the strictures of the new Pilot Program. I cannot imagine a much more egregious bribery program than the one engaged in by Analogic’s Danish subsidiary yet both Analogic and BK Medical appear to have done quite well in their respectively low penalties.


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© Thomas R. Fox, 2016