In April 2016, the Department of Justice (DOJ) announced its Foreign Corrupt Practices Act Enforcement Plan and Guidance, which includes a one-year pilot program to incentivize individuals and companies to voluntarily self-disclose Foreign Corrupt Practices Act-related (FCPA) misconduct, cooperate with DOJ investigations and remediate controls and compliance programs. Under the guidance, the DOJ may extend credit up to a 50% reduction off the bottom end of the U.S. Sentencing Guidelines and may not require the appointment of a monitor for those companies that meet the standards set forth by the pilot program. Additionally, when certain conditions are met, including disgorgement of all profits from the FCPA misconduct, the DOJ may decline prosecution.
Earlier this month, the DOJ issued letters to two companies, Akamai Technologies Inc. and Nortek, Inc., indicating that investigations of FCPA violations at the companies were closed. The DOJ stated that each company’s self-disclosure and cooperation ultimately led to its decision not to prosecute. In parallel, as we reported, the SEC entered into non-prosecution agreements (NPAs) with each of the companies as a result of their disclosure, cooperation and remedial measures, and required the companies to disgorge profits plus interest. These two cases presented the first public instances in which the DOJ declined to prosecute since the announcement of its pilot program.
More recently, on June 21, the DOJ concluded its first corporate enforcement action under its pilot program, offering clues on how companies can cooperate with government investigations to benefit from available mitigation credit in the event of an FCPA violation. This enforcement action was targeted at Analogic Corp. (Analogic), a Massachusetts-based medical tech company, its Danish subsidiary, BK Medical ApS (BK Medical) and BK Medical’s former CFO, all of which settled FCPA violations with the SEC and DOJ. Analogic’s subsidiary, BK Medical, engaged in hundreds of sham transactions with distributors that funneled $20 million to third parties, including individuals in Russia, and apparent shell companies in Belize, the British Virgin Islands, Cyprus and Seychelles. These transactions included the issuance of invoices to distributors that falsely inflated the sales and prices of the medical equipment sold, with the excess amount from those transactions then transferred to third parties as directed by the distributors. BK Medical admitted that creating and maintaining these false invoices, representing to its parent company that BK Medical was complying with all Analogic accounting policies and signing SOX subcertifications, caused Analogic to falsify its books, records and accounts in violation of the FCPA.
The SEC settled the matter via an administrative order; Analogic agreed to pay $7.67 million in disgorgement and $3.8 million in prejudgment interest to settle the SEC’s charges that the company failed to keep accurate books and records and maintain adequate internal controls. The SEC noted that it considered Analogic’s self-reporting, remedial acts and general cooperation with the investigation as part of the settlement. Additionally, Lars Frost, BK Medical’s former CFO and a Danish citizen, agreed to pay $20,000 in penalties to the SEC to settle charges that he knowingly circumvented the internal controls in place at BK Medical and falsified its books and records.
The DOJ entered into an NPA with BK Medical, citing positively the company’s self-reporting, cooperation and remedial efforts, leading to the DOJ’s decision to provide the company with a discount of 30% off the bottom of the U.S. Sentencing Guidelines. As a result, BK Medical was required to pay a monetary penalty of $3.4 million under the NPA. Furthermore, BK Medical also agreed to continue to cooperate with the DOJ and foreign authorities in any ongoing or future investigations to enhance its compliance programs, and to periodically report to the DOJ on the implementation of its enhanced compliance programs.
As noted above, BK Medical did receive credit for its self-reporting and remediation, which included terminating the officers and employees responsible for the corrupt payments. The DOJ explained that the company received only partial credit for its cooperation because BK Medical did not initially disclose certain relevant facts that it learned during the course of its internal investigation:
…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…
By way of contrast, the SEC NPAs entered into with Akamai and Nortek on June 7 noted comprehensive, organized and real-time cooperation by the companies during the course of their respective internal investigations. Specifically, the companies provided the SEC with summaries of witness interviews and made witnesses available to the SEC staff. This cooperation led to the DOJ’s decision not to prosecute Akamai and Nortek under the FCPA. The DOJ’s NPA with BK Medical specifically addressed a lack of disclosure of information gleaned from the company’s internal investigation. This failure to disclose led to BK Medical receiving less mitigation credit.
When faced with FCPA misconduct, companies should work with outside counsel during internal investigations to assess whether a disclosure strategy is in the company’s best interests. Assuming the answer is yes, there are a number of important steps to be taken early on to provide prompt disclosure of discovered facts to the Government, as well as to keep the Government informed as to the progress of the internal investigations, ensure maximum cooperation and address any and all FCPA-related control and compliance issues.