Just when you were thinking things could not get any bigger after the Odebrecht/Braskem Foreign Corrupt Practices Act (FCPA) enforcement action, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced the fourth largest enforcement action of all-time involving Teva Pharmaceuticals Industries Ltd., (Teva) coming in at $519MM, consisting of a criminal fine of $283MM and profit disgorgement of $236MM. The disgorgement amount is the second largest ever. The company entered into a three-year Deferred Prosecution Agreement (DPA) that requires an independent compliance monitor. The company also agreed to a Criminal Information, issued by the DOJ, and a Complaint filed by the SEC.

According to the DOJ Press Release, “Teva Russia has signed a plea agreement in which it has agreed to plead guilty to a one-count criminal information, also filed today in the Southern District of Florida, charging the company with conspiring to violate the anti-bribery provisions of the FCPA. The plea agreement is subject to court approval. The case was assigned to U.S. District Judge Kathleen M. Williams of the Southern District of Florida and Teva Russia’s initial court appearance has been scheduled for January 12, 2017.”

The enforcement action involved multiple bribery schemes in several countries, using a variety of techniques to make illegal payments. The largest bribery scheme was in Russia but there were additional bribery schemes in Mexico and Ukraine. I will begin a multi-part series to look at the matter and provide lessons to be learned by the compliance practitioner going forward.

The amount of the fine is significantly higher than any other previous FCPA enforcement action involving a pharmaceutical company. The prior highest amount was Johnson & Johnson (J&J) at $70MM back in April 2011. This matter even eclipses the (approximately) $498MM penalty levied on the British pharmaceutical giant GlaxoSmithKline PLC (GSK) by Chinese authorities for violations of Chinese domestic bribery laws in the summer of 2014.

What could have led Teva to face such a large penalty? Quite simply it was the breadth and depth of their multiple bribery schemes. In Russia, there was a bribery scheme that metamorphosed during the pendency of the events. The overall bribery program ran from 2006 through 2012. It involved payments of bribes through a local Russian wholesale company which was owned by a Russian government official, up through 2009. At that time the scheme morphed when the Russian government modified some health care priorities such that Teva’s drug Copaxone would receive priority for use in the country.

This change led Teva to institute a new arrangement with the Russian company to become the exclusive wholesaler and re-packager for Copaxone. At this point the principal of the Russian company was under investigation for allegations of corruption. There were other red flags raised internally by Teva employees about the use of the Russian wholesale company and by business partners of Teva as well. However, none of these red flags were investigated or cleared.

The reason these red flags were not cleared was articulated by a Teva Russia employee, “We suggest to cooperate [sic] with [Russian Distributor] to launch Copaxone local production. Russian Distributor is headed by [Russian Official] a representative from [a region in Russia] to Council of Federation of Russian Federation. He is a Deputy Chairman of [a Federation Council Committee] and he has a position of Chairman of [another government committee]. . . . [Russian Official]’s political network makes him a strong partner from market access stand point. The plan is to utilize his contacts to secure our shares and minimize generics risks.” Clearly the company was on notice as to the Russian government official connection.

The bribery scheme was effected by giving discounts to the Russian wholesaler who then resold the drug to the Russian government. The amount of the discount was not reported. However, in Russia, from 2010 to 2012 alone, Teva received business valued at “approximately $197,530,681.”

There is one point which bears mention here as it is a first in FCPA enforcement actions. At some point between October 2008 and January 2009, Teva’s business risk insurer decided to stop insuring transactions with the Russian wholesaler. While it is not entirely clear from the resolution documents, it appears it was because of allegations against the company for corruption. Take a minute to ponder on this point because if a business insurer is so uncomfortable in doing third party business in the form of writing insurance, that is one very massive red flag. Even if the articulate business reason for declining to extend coverage was some other reason, it still bore investigation by Teva.

In Ukraine, the bribery scheme ran from 2002 through 2011 and involved payments of cash to a Ukrainian government official of more than $200,000 and payment for trips to Israel. The travel was business class and at least once include the government official’s wife. Interestingly, the payments were made by Teva until the end of 2009 and at that time the payments to the Ukrainian government official were made by Teva’s Ukrainian subsidiary. As noted in the Complaint, “although some of the compensation Ukrainian Official received from Teva was in cash, at least seven payments were wired through U.S. correspondent banks.”

Finally, were the bribery schemes in Mexico. After reading the resolution documents about the only thing one can conclude was that Teva’s Mexico business unit was definitely old school as they believed in bribery in the old fashioned way, cold hard cash paid out to doctors directly to prescribe their drugs. Teva also routinely entertained the same government officials. Perhaps most interestingly was that back in 2007, the company uncovered the bribery scheme in Mexico, after having been alerted to it by an anonymous whistleblower. This led to the termination of 11 Mexico business unit employees but with no corresponding enhancement in internal controls.

Partly in response to this scrutiny from the business unit’s past sins, it then moved payments from Teva Mexico to its distributors system. As stated in the Complaint, “Shortly thereafter, the Teva Mexico manager told a subordinate, another manager, that the money that the doctors had been previously receiving as part of the promotions budget would now be paid in cash by Teva Mexico’s Copaxone distributor in Mexico.”

Thereafter, “the Teva Mexico manager then gave the same subordinate a list of doctors, their phone numbers, and the amounts of money that they should be paid. The Teva Mexico manager then directed the same subordinate to call the doctors who had been receiving money from Teva and inform them that they would continue to be paid. Consistent with those assurances, Teva Mexico continued to pay Mexican doctors in 2012.” The payments made to Mexican officials were “between $9,600 and $30,000 each per year to influence their Copaxone prescription decisions. In 2012, Teva paid Mexican officials approximately $159,000.” The company generated over $16MM from sales of the drug in 2011 and 2012.

The DOJ Press Release noted the assistance of the Mexican Attorney General’s Office (Procuradura General de la República or PGR). There was no mention of assistance from either Russian or Ukrainian officials. Interestingly, the SEC Press Release cited the assistance of Financial Services Commission of the British Virgin Islands in developing the case. It was not apparent from the resolution documents as to the connection of the British Virgin Islands in this case. It may well be from a money-laundering angle.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

Show Notes for Episode 33, week ending December 23, 2016-Holiday edition

  1. Odebrecht/Braskem FCPA enforcement action. Braskem Information, Braskem Plea Agreement, Odebrecht Information, Odebrecht Plea Agreement, SEC Civil Complaint.
  2. Goldman Sachs further ensnared in 1MDB scandal. Link to article in Wall Street Journal.
  3. Teva FCPA enforcement action. Teva Information. Teva Plea Agreement. Teva DPA
  4. Pre-taliation enforcement heats up, on Radical Compliance.
  5. NFL Playoff update on Patriots, Cowboys and Texans.

In this episode SCCE CEO Roy Snell and I continue are exploration of issues of import to the compliance profession. We consider the penalty assessed by the NCAA on Notre Dame for it use of two ineligible football players and whether the punishment fit the crime; the forced transparency leading to hyper transparency for today’s corporate scandals and the sanctions assessed against former Wells Fargo CEO John Stumpf; advise not send out stupid emails and consider how the safety industry evolved 20 years ago and what implications it might have for the compliance profession going forward.

qtq80-DIi8N8I end my week based upon recent obituaries by focusing on one from late 2015 that has been the most significant to me in the year of 2016. It was that of my father, Dr. Milden Jean Fox, Jr., who passed away on this date one year ago. He was born in 1926 and was part of what we rightfully call the “Greatest Generation”. We call them this for a whole host of reasons, not in the least their collective fight against the forces of evil in the world. Name any right you hold sacred as an American and the men and women of that era fought to defend it. Right to vote, freedom of expression, freedom of religion, are but a few. However, there are many other rights that you might not think of that we owe to these men and women who fought and sacrificed for us during this conflict.

My father was a university professor and labor arbitrator. He firmly believed that working people should have due process regarding their jobs and as an arbitrator he put that belief into practice by requiring companies who terminated employees to follow the due process requirements of termination for just cause. Put another way, if an employer is going to deliver a penalty sanction in the workplace, in the form of job termination, it must do so fairly and justly. This does not prevent management from exercising its rights or running its business. At a bare minimum, it means that a company must have an agreed upon disciplinary process in place and that process must be followed if the company is going to terminate an employee. A company must investigate and it must allow an employee to tell his or her side of the story, the employee must have the right for union or other representation in the process and someone other than the original decision maker must make the final appeal of any termination. In other words, an internal control.

Today we call this the Fair Process Doctrine. One of the American freedoms we enjoy today is this right of work place justice because of women and men like my father. This concept is so important and so universal that it permeates many facets of the workplace today, specifically including the realm of anti-corruption compliance. I often write about the Fair Process Doctrine as it relates to a part of any best practices compliance program, such as internal investigation and discipline. From my father’s perspective, if a company wanted to terminate or in any other way discipline an employee, they had to follow a prescribed process. Follow that process and he would almost always uphold a company’s decisions. Fail to follow the process and the employee would be required to engage in remedial action.

However, this concept is now a part of the broader concept of institutional justice. Companies that seem to get into the most trouble are those that lack this basic concept. It means more than simply fair and equitable treatment; it requires employees concerns, once raised, be listened to and addressed, all without the fear of retaliation. Wells Fargo is the most recent and best example. At the company many former whistleblowers allege they were terminated for raising concerns internally that the fraudulent account-opening scheme was a violation of the company’s Code of Conduct or even illegal. Such whistleblowers allege they were singled out for unfair and discriminatory treatment for speaking up or even trying to speak up. Others allege they were told to meet their sales quotas by any means necessary, with a wink and a nod to how they might do so. Finally, employees who failed to meet the unreasonable quotas were sanctioned through wage loss or discipline up to termination.

Yet institutional justice reaches beyond simply the nuts and bolts of corporate life. Recall now former Wells Fargo Chief Executive Officer (CEO) John Stumpf blaming the entire scandal of the 5300 terminated employees as the bad apples, who violated the law, all without the knowledge or consent of their superiors or even senior management. This denial of responsibility by Stumpf flew in the face of 5+ years of whistleblower complaints, concerns raised through employee surveys and other communications, internal investigations, external investigations and even external reporting by the Los Angeles Times.

Both the Fair Process Doctrine, which was so important to my father, and the more recent concept of institutional justice are central to the modern compliance profession. Roy Snell is one of the leading advocates of the compliance profession saying that even if a company can engage in an action, it should not always do so. Sometimes the reputational damage, even if an action is legal, is so great that the risk cannot be managed. The compliance discipline within every company is the one corporate function most well suited to bringing institutional justice into the fabric of a company.

My father and his greatest generation effected a model of workplace justice built upon those who developed the theoretical concepts before them, the current generation of compliance professionals is building upon the tactical concepts of the Fair Process Doctrine to create wider institutional justice. Command and control works in the military. It tends to work in businesses where many of the employees served in the military. For my father’s generation, all this was very familiar. However, both the generations and businesses have evolved over time. Just as my father’s generation gave way to my generation of Baby Boomers who gave way to the Gen Xers, who gave way to the Millennials who have given way to the iGens; Institutional justice draws a straight line from the Fair Process Doctrine.

Thanks Dad.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

 

In this episode SCCE CEO Roy Snell and I take a deep dive into corporate governance and compliance, the public skewering of former Wells Fargo CEO John Stumpf and ask if a CEO should be involved in the hiring of a CCO.