FCPAméricas Blog
Eli Lilly’s Distributor in Brazil: The Non-Obvious FCPA Risk
12.31.2012
A common misconception about the FCPA is that distributors do not create corruption risk for companies. After all, distributors take title to goods. What they do with those goods is their business, not the producer’s. Eli Lilly’s recent $29.4 million FCPA settlement with the SEC dispels this myth.
Actually, enforcement officials have been sending the message about distributor risk throughout 2012. In February, the DOJ and SEC settled with UK-based Smith & Nephew for $22.2 million for improper payments made by its Greek distributor to public doctors. The FCPA Guidance provides a hypothetical on page 64 showing how distributors can create third party risk, just like sales agents, local consultants, and customs brokers.
For those of us who work with Brazil, we have grown accustomed to distributor risks. Certain public procurements necessitate that the provider be Brazilian, requiring non-Brazilian manufacturers to structure their sales accordingly. Onerous customs implications might mean that companies choose to make their sales indirectly to government clients. Regulatory requirements can also be extremely complex, requiring unique local expertise. In additional, distributors know the local language and culture. They often have developed deep industry relationships that can make sales processes more efficient.
What makes distributor risks unique? Since distributors often purchase large quantities of goods for resale, they can demand significant discounts. Depending on the circumstances, enforcement officials can see these discounts as potential “loose money” that can be used for bribe payments. This is especially the case when the distributor is engaging in other activities on behalf of the producer, like marketing, licensing, and customs clearance. Is the distributor really just a distributor?
In the Eli Lilly settlement, the SEC determined that Eli Lilly generally gave a discount of between 6.5% and 15% to its distributors, with the majority receiving 10%. When Eli Lilly then gave an unusually large discount of 17% and 19% to one particular distributor who was reselling to the government, the company failed to apply additional safeguards to ensure that the savings were not being used for bribes. Eli Lilly’s sales to this distributor were valued at approximately $1.2 million. The SEC found that the distributor used approximately 6% of the purchase price (approximately $70,000) to bribe officials.
In the settlement, the SEC noted that the company’s pricing committee approved the distributor’s price without further inquiry. The SEC considered the policies and procedures that Eli Lilly had in place to flag unusual discounts to be deficient. It noted that the company relied on representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions. Kara Brockmeyer, the SEC’s chief FCPA enforcer, stated:
Eli Lilly and its subsidiaries possessed a “check the box” mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.
In Brazil, local know-how is essential when considering such “surrounding circumstances.” Regional expertise is also important when structuring the specific safeguards and ongoing monitoring practices that ensure compliance is not “paper-thin.” Consideration of specific factors in the Brazilian context also allows companies to take a risk-based approach when managing their potential exposure. This enables compliance efforts to be cost-effective and not overly burdensome. Not all distributors will require the same degree of attention, and compliance oversight should be proportionate to potential risk.
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© 2013 Matteson Ellis Law, PLLC
Post authored by Matteson Ellis, FCPAméricas Founder & Editor
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