Show Notes for Episode 5, Year End Review, Part II

We turn to the 2016 year in review, in this Part II of a two-part series.

Jonathan Armstrong leads a discussion on Privacy Shield, information and data privacy issues the past year. Mike Volkov relates what he saw as the top enforcement highlights from 2016, the block-buster year for FCPA fines and penalties and the growing trend of globalization of enforcement. Matt Kelly discusses the arrival of front pay, and general escalation of retaliation risk for company’s vis-a-vis whistleblowers, ideas on auditing corporate culture and what types of data and information should go on a compliance dashboard.

For Matt Kelly’s posts on these topics see the following:

  1. Another Front in Retaliation Risk: Front Pay
  2. Ideas on Auditing Organizational Culture
  3. What Goes on a Compliance Dashboard?

Rants will return next week.

The members of the Everything Compliance panel include:

  • Jay Rosen (Mr. Translations) – Jay is Vice President of Legal & Corporate Language Solutions at United Language Group. Rosen can be reached at rosen@ulgroup.com.
  • Mike Volkov – One of the top FCPA commentators and practitioners around and is the Chief Executive Officer (CEO) and owner of The Volkov Law Group, LLC. Volkov can be reached at mvolkov@volkovlawgroup.com.
  • Matt Kelly – Founder and CEO of Radical Compliance, is the former Editor of the noted Compliance Week Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong – Rounding out is our UK colleague, who is an experienced lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com.

 

In this episode Matt Kelly and I take a deep dive into a couple of recent SEC enforcement actions. The first involved L-3 Technologies and accounting irregularities. The second involves BlackRock and the continued issues around pre-taliation. We connect these enforcement actions to broader issues involving the COSO 2013 Framework, the DOJ mandated expertise in compliance, a speak-up culture and remedial actions. For additional information, check out Matt’s blog posts on these topics:

  1. Lessons Galore in New SEC Internal Controls Case; and
  2. SEC Dings BlackRock for Pre-Taliation Clauses.

Last week Zimmer Biomet Holdings, Inc. paid a high price for its and its predecessors failure to comply with the terms and conditions of 2012 Deferred Prosecution Agreement (the “2012 DPA”). Biomet, having originally paid $23 million to resolve violations of the Foreign Corrupt Practices Act (FCPA), was subsequently acquired by Zimmer, which  is now hit with an additional $30 million and new DPA. Under the new DPA, Zimmer will pay a criminal fine of $17.46 million and retain an independent compliance monitor for three years. The company also agreed to pay the Securities and Exchange Commission (SEC) $13 million, consisting of $6.5 million in disgorgement and interest and a $6.5 million penalty and resolved the SEC matter with an Administrative Order (Order). Finally, as part of the Department of Justice (DOJ) action JERDS Luxembourg Holding S.ár.l. (Jerds), a Zimmer Biomet subsidiary, agreed to plead guilty to a Criminal Information for causing Biomet to violate the books and records provisions of the FCPA.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division said in the DOJ Press Release, “Zimmer Biomet had the opportunity to avoid criminal charges but its misconduct allowed the bribes to continue,” said Assistant Attorney General Caldwell. “Zimmer Biomet is now paying the price for disregarding its obligations under the earlier deferred prosecution agreement. In appropriate circumstances the department will resolve serious criminal conduct through alternative means, but there will be consequences for those companies that refuse to take these agreements seriously.”

The matter paints a very negative picture of a company which not only claimed it had eliminated FCPA violations in the original DPA but allowed more illegal conduct to continue during the pendency of its first monitorship. The original monitorship was schedule to last 18 months but was later extended to three years. According to the new DPA, even with that extension, “At the end of the additional year, the independent compliance monitor again could not certify that Biomet’s compliance program met the standards set forth in the 2012 DPA, and the Fraud Section concurred in that assessment”.

The new DPA noted two areas of recidivism, “During the DPA, Biomet continued to engage in criminal conduct, specifically Biomet informed the Fraud Section of: (1) internal controls failures related to Mexico between 2010 and 2013, which resulted in Biomet’s earning approximately $2,652,100 in profits; and (2) the continued use, between 2009 and 2013, by Biomet of a Brazilian distributor who had been engaged in the underlying criminal conduct that led to the 2012 DPA, which resulted in Biomet’s earning approximately $3,168,000 in profits; Biomet executives were aware of the continued use of the prohibited distributor and red flags related to corruption in Mexico that Biomet did not address; Biomet executives ignored recommendations by Biomet’s internal auditors and a company-wide requirement to cease all business with the Brazilian distributor”.

It is difficult to say in which country the violative conduct was more recalcitrant. In Brazil the company had discovered back in 2008 one of its distributors paid bribes on behalf of Biomet and was terminated. Somehow the Biomet Brazil “continued to use Brazilian Distributor A and one of his affiliated companies, Brazilian Distributor Company B, and knowingly and willfully failed to implement additional controls to ensure” the distributor did not continue his relationship with Biomet. Rather amazingly this distributor relationship continued until 2013.

In Mexico, Biomet continued its bribery scheme unabated after the 2012 DPA through its subsidiary JERDS. According to the Criminal Information, JERDS knew it could not import certain products into Mexico through its standard importation channel of flying products into Mexico City and clearing customs at that location. Instead JERDS retained a corrupt Texas shipping company which paid bribes to Mexican customs officials on the Texas-Mexico border to get the products through customs. The Information should be studied by every Chief Compliance Officer (CCO) and compliance professional to view a prime example of how business unit personal may hide illegal payments and the schemes that exporters can use to export products illegally into a foreign country using bribery and corruption.

According to the calculations in the new DPA, the fine range was between $11,640,200 and $23,280,400. Zimmer was assessed a criminal fine by the DOJ of $17,460,300. Zimmer did not receive any credit under the FCPA Pilot Program because as a recidivist they “breached its obligations under the 2012 DPA”, though they were clearly the beneficiary of some amount of credit by the DOJ. Zimmer did not receive any credit for self-disclosure, the new DPA stated, “although Biomet disclosed the conduct described in the Statement of Facts to the Fraud Section during the term of the 2012 DPA, Zimmer Biomet did not receive voluntary disclosure credit because the 2012 DPA obligated Biomet to disclose the conduct described in the Statement of Facts, and some of the conduct described in the Statement of Facts predated the 2012 DPA”. Zimmer did receive full credit for its cooperation.

Finally, the company did engage in significant remedial measures, including:

  • terminating or causing the resignation of five employees who participated in the misconduct described in the Statement of Facts;
  • terminating one employee who failed to identify issues with the use of a prohibited distributor in Brazil and failed to take appropriate steps to mitigate risks;
  • disciplining two employees who failed to detect the misconduct, failed to supervise effectively those who were engaged in the misconduct, and failed to take appropriate steps to mitigate corruption and compliance risks, including by placing an official letter of reprimand in their employment files, reducing their bonuses, and requiring them to take additional anticorruption training;
  • conducting individualized training for certain remaining employees;
  • adopting heightened controls related to their third-party intermediary policies;
  • increasing their resources devoted to compliance, particularly in Latin America; and
  • requiring improved FCPA training.

The Zimmer FCPA enforcement action serves as a cautionary tale for any company subject to a DPA. If you violate it, the second round of penalties will be more severe than the initial sanctions. Yet the DOJ did not bring down the full weight of its possible sanctions against the company, demonstrating that once again the DOJ will reward certain types of behavior.

The matter is also a cautionary tale for any company which may wish to acquire a company going through a FCPA investigation, enforcement action or under the auspices of a DPA. As JERDS Information stated, “In June 2015, Zimmer Holdings, Inc. (“Zimmer”) acquired LVB Acquisition, Inc., which owned all of Biomet, Inc. (“Biomet”). The combined entities and their subsidiaries became ZIMMER BIOMET, headquartered in Warsaw, Indiana and incorporated in Delaware. Thus, ZIMMER BIOMET knowingly assumed all the rights and obligations of Biomet under the 2012 DPA, including under the compliance monitorship that was part of the 2012 DPA.”

In the mergers and acquisition (M&A) context, failing to perform adequate pre-acquisition due diligence can be a very costly lesson. You should learn from Zimmer and its travails over the Biomet acquisition rather than learning it for yourself.

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, 2017

 

Show Notes for Episode 35, week ending January 13, the Friday the 13th edition:

  1. Hernandez and Beech FCPA guilty pleas. Hernandez Criminal Information, Beech Criminal Information.
  2. VW guilty plea in emissions-testing scandal. Link to article in New York Times.
  3. VW executive Oliver Schmidt arrested in US. See article on FCPA Compliance and Ethics Blog.
  4. Zimmer Bio-Met in follow-up FCPA enforcement action. See article on FCPA Blog.
  5. Mondelez FCPA enforcement action. See SEC Cease and Desist Order and article on FCPA Compliance and Ethics Blog.
  6. Supreme Court to take up 5 year statute of limitations for profit disgorgement under Securities Act, which applies to FCPA enforcement actions brought by SEC. Article in Law360.
  7. NFL Playoff update on Patriots, Cowboys and Texans.

In this episode, I visit with Shearman & Sterling partner Philip Urofsky who leads a team which produced the 2017 FCPA Digest, one of the top annual compendium of annual FCPA reviews of the prior year’s enforcement actions and related issues. We  discuss the following:

  1. Any trends or highlights observed in the Digest;
  2. How cases of Qualcomm, JPMorgan, and VimpelCom reflect new expansions of regulators’ views as to the scope of the term “anything of value” in FCPA bribery cases;
  3. Why the ruling in the SEC’s ongoing case against the Magyar executives upheld a novel theory on its jurisdiction to enforce the FCPA;
  4. His thought on the Pilot Program; is it as a success? Where might it go after this first year? Will it be renewed or made permanent? Could it be modifed?
  5. Do the Embraer and Odebrecht cases portend greater global anti-corruption enforcement?