Last week, Biomet Inc. announced in a filing with the U.S. Securities and Exchange Commission (SEC) that instead of its 2012 deferred prosecution agreement with the U.S. Department of Justice (DOJ) regarding violations of the U.S. Foreign Corrupt Practices Act (FCPA) expiring this week, the company would be monitored under it for an additional year. While the announcement is getting attention for a variety of reasons, one of the most important lessons companies can take away from it is that distributor conduct appears to have triggered the additional scrutiny. According to news reports, DOJ and SEC may have renewed their scrutiny of Biomet based, at least in part, on a whistleblower allegation that distributors had paid kickbacks to government doctors in Brazil.
FCPA liability based on the conduct of distributors is a concept companies often wrestle with when considering their anticorruption compliance risks. After all, unlike a broker, sales agent or other third party whose conduct can be tied more closely to a company and its oversight and control of their activities, distributors tend to take title to goods in a more arm’s-length fashion, and to thereafter sell on their own account with limited, and at times, no further involvement by the supplier company.
However, the landscape of FCPA enforcement actions is littered with allegations relating to distributor misconduct. Relevant enforcement actions most often have included allegations focusing on distributors serving as conduits for bribes, or having received unusually large discounts (used to fund improper payments) without adequate related due diligence, business justification or company oversight of distributor conduct. In at least one case, the granting of an exclusive distributorship was the improper inducement itself. Issues also have arisen in connection with marketing or trade incentives, whereby distributors can earn payments based on the volume of products sold, typically with the intention that those payments be used to fund marketing activities by the distributors.
As if those enforcement actions were not enough, the DOJ’s and SEC’s Resource Guide to the U.S. Foreign Corrupt Practices Act specifically references “unreasonably large discounts to third-party distributors” as a common third-party red flag, specifically identifies distributors as a common means for concealing improper payments, and includes distributors in numerous other discussions of third-party risk and risk mitigation.
Regardless of the outcome of the Biomet matter, it should remind companies considering the anticorruption compliance risks posed by the third parties with which they interact to not discount the potential for their distributors to create liability under the FCPA and under similar anticorruption laws and regulations around the world.