FCPAméricas Blog
Stryker Shines Light on Latin American FCPA Risks
10.30.2013
Spanish and Portuguese translations of this article will be posted in the coming days.
On Thursday, the SEC announced a settlement of FCPA violations with Stryker Corporation, making it the latest company penalized in connection with bribes paid in Latin America. This enforcement action highlights certain FCPA risks, and poses questions arising from the relatively light penalty.
Stryker is a publicly listed medical device company headquartered in Michigan, with operations in more than 100 countries. The bribes underlying Stryker’s books and records violations were apparently paid between 2003 and 2008 in Argentina, Mexico, Poland, Romania and Greece. Because hundreds of payments were made over numerous years, the SEC found that “the company’s internal controls were fatally flawed,” a violation under the accounting provisions of the FCPA, described here.
Risks Highlighted
The FCPA risks highlighted by this settlement include the following:
1. Attorneys as Bribe Payers. In at least one instance, Stryker’s Mexican subsidiary directed its outside Mexican counsel to pay a bribe of approximately $46,000 to a Mexican official in order to retain a contract. Stryker Mexico violated the books and records provisions by recording these improper payments as legitimate legal expenses, though no legal services were provided.
Using outside counsel this way is an increasingly familiar bribe scenario in Latin America. According the New York Times, Wal-Mart also used Mexican attorneys to pay bribes to local officials. As described by FCPAmericas in January, an Ecuadorian judge accepted bribes from lawyers and representatives of local indigenous groups to obtain a fraudulent judgment against Chevron. This scenario is not limited to Latin America – a 2010 study by the UN, OECD and International Bar Association confirmed that around the world, attorneys are regularly approached to act as agents or middlemen in transactions that could reasonably be suspected to involve corruption.
2. Extortion by Government Officials. Medical device sales present significant FCPA enforcement risks, as shown by prior FCPA cases including Biomet and Smith & Nephew.
Many factors contribute to the risk in this sector: Medical devices are often sold to government-owned hospitals; marketing often involves meals and entertainment or travel to congresses; sellers may need to provide training to potential users. The Stryker settlement adds another FCPA risk to this list – that the government official may extort a seller. As noted by the SEC: “the Mexican Agency was threatening to revoke a contract that Stryker Mexico had won… unless Stryker Mexico paid an employee of the Mexican Agency.”
3. False “Honoraria” Paid to Doctors: Another FCPA risk factor in medical device sales arises from a particular marketing practice: compensating doctors in connection with presentations made regarding medical devices at medical conferences. “Honoraria” paid for these and similar services are allowable expenses, but can be abused. In Argentina, Stryker falsely recorded as “honoraria” commission payments made to doctors employed by public hospitals.
It is worth noting that while the aggregate commission numbers are impressive – Stryker paid nearly one million dollars in illicit commissions over three years, with a commission rate between 20% and 25% – the average bribe / commission payment was less remarkable: around $2500.
4. Domestic Focus. Companies that are primarily focused on domestic sales may fail to focus on the FCPA as a key compliance issue. At Stryker, approximately two-thirds of Stryker’s sales were made inside the United States. It makes sense for Stryker to focus compliance efforts where the bulk of its sales are – especially since Stryker settled charges for violations of domestic marketing rules in 2007. But as this action demonstrates, any level of international activity, whether by a company or its subsidiaries, can present corruption risks and require adequate compliance structures.
5. Independent Foreign Subsidiaries. While Stryker sold products through third-party dealers, distributors and wholly owned regional subsidiaries – all of which can present FCPA risks – the settlement only addressed FCPA violations by foreign subsidiaries. The risks presented by the independence of these subsidiaries is evident from the SEC’s description of how those subsidiaries were managed:
Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within [that] country… [E]ach of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anticorruption, but these policies were inadequate and insufficiently implemented on the regional and country level.
Relatively Light Penalty
Another notable aspect of this settlement is the penalty paid by Stryker, which is relatively light and includes features that make it more tolerable than other recent FCPA penalties. The settlement requires Stryker to pay a civil penalty of $3.5 million, plus $9.78 million in disgorgement and interest. In contrast, the average FCPA penalty last year was over $20 million per corporation. Moreover, it does not include any criminal penalties or require a compliance monitor, and Stryker was not required to admit wrongdoing – a significant benefit for a listed company concerned about shareholder derivative lawsuits and potential debarment from public contracting.
While this penalty was likely influenced by the significant remedial efforts undertaken by Stryker, the SEC’s relative light-handedness gives rise to several questions. How did Stryker avoid criminal liability – especially since Ralph Lauren received criminal penalties for bribes paid by its foreign subsidiaries? Was the low penalty related to the timing of the offenses, which appear to have stopped in 2007? Did the fact that this investigation followed an investigation into similar domestic marketing violations affect the outcome?
The facts summarized in this settlement shine a light on some things not to do. Answers to these questions might help companies learn what they should do when they detect FCPA violations.
The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.
© 2013 FCPAméricas, LLC
Post authored by Matthew Fowler, FCPAméricas Contributor
Comments
November 17th, 2014 at 4:16 pm
[…] DOJ and SEC teams have developed a specialization in Latin America. They work cases like Alcatel, Stryker, Ralph Lauren, and Direct Access Partners, each with an important Latin American component. They […]