Two recent enforcement actions against life sciences companies demonstrate that the Securities and Exchange Commission (SEC or Commission) is continuing to use the Foreign Corrupt Practices Act's (FCPA) accounting provisions to police companies operating in challenging jurisdictions. Reliance on these provisions allows the regulator to avoid the heightened requirements under the FCPA's anti-bribery provisions, which require that the government demonstrate an improper intent.
In the sections that follow, we examine these recent resolutions and their implications for companies operating in countries where recordkeeping practices traditionally have not been robust.
The FCPA in a nutshell
The FCPA has two prongs: the anti-bribery provisions and the accounting provisions. The anti-bribery provisions prohibit individuals and businesses from bribing foreign officials in order to obtain or retain business. The accounting provisions require issuers to develop and maintain recordkeeping and internal controls and prevent entities from knowingly falsifying an issuer's books and/or records.
The anti-bribery provisions cover payments, offers, authorizations or promises to pay anything of value to a non-US government official in a wide range of interstate or international ways with the "corrupt intent" to influence that actor for a "business purpose," ie, in order to help obtain or retain business or to secure an improper advantage.
Although the anti-bribery provisions commit a substantial amount of power to the SEC and the US Department of Justice (DOJ), they still require the government to show the company intended to bribe the non-US government officials in question. This scienter requirement refers to intent that is "voluntar[y]" and "intentional, and [one carrying a] bad purpose of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means."
While the FCPA's accounting provisions work in tandem with the anti-bribery provisions, the former do not have a scienter requirement. The accounting provisions give the government "authority over the entire financial management and reporting requirements of publicly held United States corporations." An issuer is required to maintain books and records that "in reasonable detail, accurately and fairly reflect the transactions and dispositions of [its] assets." Issuers must also develop and maintain a system of internal accounting controls capable of: (i) detecting and preventing improper payments to foreign officials; and (ii) of deploying accepted methods of accounting.
Two recent enforcement actions shed light on the SEC's use of the FCPA's accounting provisions to police multinational life science companies operating in Middle Eastern and Eurasian countries.
In September 2018, a multinational pharmaceutical company agreed to pay $25.2 million to resolve allegations that it engaged in a multinational bribery scheme directed at various countries' foreign officials responsible for awarding tenders. The SEC alleged that the company's distributors in Kazakhstan were part of an elaborate kickback scheme to corruptly influence the awarding of government tenders. According to the order: "The funds paid to foreign officials were derived from discounts and credit notes extended to several distributors who colluded with senior managers to kick back funds to [company] employees in Kazakhstan which were then used to pay Kazakh officials."
The SEC further alleged that company personnel engaged in a pay-to-prescribe scheme in several Middle Eastern countries. According to the order, "sales managers and medical representatives . . . engaged in a long-standing scheme to submit false travel and entertainment reimbursement claims, pool the illicit proceeds of the false schemes, and distribute the illicit proceeds to [healthcare professionals] in the private sector in order to increase prescriptions." The SEC stressed that bribery was at the core of the allegations even though the action was brought under the FCPA's internal accounting controls and recordkeeping provisions. The government, therefore, was not required to prove the company's intent.
Just a few weeks later, a US-based medical device manufacturer agreed to pay $7.8 million to resolve allegations that it contravened the FCPA's accounting and recordkeeping provisions. This time the enforcement action was based on the company's alleged lack of sufficient internal controls in various countries where it operates. The SEC alleged that, in India, the company "paid commissions to dealers for which the supporting documentation did not provide a clear justification." The order stated that "consulting fees [this company] paid to doctors [in India lacked] adequate explanation of the doctors' consulting services or hours billed, and payments for [healthcare professionals'] travel with documentation . . . appeared falsified or lacking an appropriate basis for the travel."
The SEC alleged that the company also lacked sufficient controls in Kuwait to ensure that its distributors were not engaged in bribery. According to the order, the company "failed to implement its internal accounting controls to test or otherwise assess whether [its] Kuwait Distributor was complying with [its anti-bribery] policies."
The SEC further alleged that in China, the manufacturer lacked sufficient internal controls to reasonably reassure all parties that its distributors would not commit bribery. According to the SEC order, the company "failed to vet, approve, train, and monitor subdistributors of its . . . product in accordance with the company's policies, thereby increasing the risk of bribery . . . in connection with the sale of [that] product."
From the government's repeated invocations of the heightened risk of bribery, its concern for the lack of accounting procedures and internal controls to detect bribery may be inferred. But here, too, the government did not have to prove intent.
These cases demonstrate the need for companies to develop, maintain and pressure-test internal accounting and recordkeeping controls in sensitive geographies. The challenges are heightened for businesses – like life sciences companies – that frequently rely on distributors and other third parties. Under such circumstances, proper training given to, and efforts to integrate, the distributors and other third parties could help companies ensure they comply with the FCPA's accounting and recordkeeping requirements.
Learn more about the implications of these cases for your business by contacting either of the authors.
1 An "issuer" is any foreign or domestic company that has either issued SEC-registered securities or must otherwise file reports.
2 United States v. Liebo, 923 F.2d 1308, 1312 (8th Cir. 1991). The provision's legislative history has been understood to incorporate the intent requirement. See id.
3 When proceeding criminally against a person for violating the accounting provisions, however, the SEC must prove they "knowingly" falsified the salient books, records, or account, or circumvented or failed to implement internal accounting controls. 15 U.S.C. § 78m(b)(5).
4 S.E.C. v. World-Wide Coin Investments, Ltd., 567 F.Supp. 724, 746 (N.D. Ga. 1983).
5 15 U.S.C. § 78m(b)(2)(A).
6 World-Wide Coin Investments, Ltd., 567 F.Supp. at 745—49.