The contract was entered into in 2006 and the payments were made in 2007.  The £5.6 million to be paid by Abbot represents the profit made by the company under the contract, and is to be paid in three stages by 31 March 2015.  Since the corrupt payments were made, the ownership and structure of Abbot has changed significantly.

The corrupt payments had been brought to light in May 2011, following enquiries by an overseas tax authority.  Abbot subsequently employed a firm of solicitors and accountants to investigate, and reported the results of the investigation to the Crown Office and Procurator Fiscal Service (the “Crown”) in July 2012 under the Scottish self-reporting initiative (which runs to June 2013).

The Scottish self-reporting initiative had been approved and introduced by the Crown to mark the commencement of the Bribery Act 2010 (the “Act”). Under the initiative the Crown will accept reports from businesses (meaning bodies corporate or partnerships as referred to in Section 14(1) of the Bribery Act) who wish to report the discovery by them of conduct within their organisation which may amount to an offence under the Act, with a view to consideration being given by the Crown to refraining from prosecuting the business and referring the case to the Civil Recovery Unit (“CRU”) for civil settlement.

Further information on the Scottish self-reporting initiative and guidance on the approach of the Crown to reporting by businesses of bribery offences, is contained at http://www.copfs.gov.uk/Publications/2012/11/Guidance-Approach-Crown-Office-and-Procurator-Service-Reporting-Businesses-Bribery-Offences.

Following a self-report by Abbot to the Crown, the case was referred to the Scottish Civil Recovery Unit with a view to a civil settlement being agreed.

Following the outcome of the case, Ruaraidh Macniven, Head of the Civil Recovery Unit said, “Self-reporting is an important way to ensure that corruption is exposed and that companies put in place effective systems to prevent it”. 

The Abbot settlement is the first reported outcome of the Scottish self-reporting initiative (introduced on the 1 June 2011), and legal commentators have suggested that the case represents another encouraging example of a business taking corruption prevention seriously. 

It is interesting that the self-reporting friendly approach in Scotland, which is of course a separate jurisdiction, now no longer exists in England and Wales; the Government is instead proceeding with its plans to introduce deferred prosecution agreements (discussed in my article of 17 January 2013, below).

M&S currently operates 25 stores in India through a 51:49 joint venture agreement with Reliance Retail Limited, a subsidiary of Reliance Industries.  The retail giant is also planning to open ten new outlets in India over the next six to eight months period.

Jan Heere, International Director for M&S, told the Time of India on the 14 December 2012, “There will be no compromise with regards to compliance… we attach clauses related to UK’s anti-bribery act in all contracts that we enter, including with vendors” (http://timesofindia.indiatimes.com/business/india-business/MS-adds-anti-bribery-clause-in-Indian-contracts/articleshow/17606735.cms).

Given the UK Bribery Act claims jurisdiction over corrupt payments anywhere in the world, it is important that multi-national corporations such as M&S, who carry on a “business or part of a business” in the UK, are seen to exercise vigilance with regard to possible corrupt activity, and establish adequate procedures and compliance controls to prevent it.

 In a statement released through its website (http://www.rolls-royce.com/news/press_releases/2012/121206_reports_sfo.jsp), Rolls-Royce stated, “It is too early to predict the outcomes, but these could include the prosecution of individuals and the company.  We will cooperate fully”.

The UK Bribery Act, which was implemented in July 2011, claims jurisdiction over corrupt payments occurring anywhere in the world, if they are made by or on behalf of an organisation that “carries on a business or part of a business” in the UK.  The extent of its reach covers not only those who engage in bribery, but also companies who fail to implement adequate procedures and compliance controls to prevent it.

The Financial Times reported last week that the SFO approached Rolls-Royce earlier this year following allegations made by a whistleblower (a former employee) that the company had paid bribes to secure business for its civil aircraft engines in Indonesia.  These allegations dated back to 2006.  Rolls-Royce investigated and the results of their investigation were sent to the SFO, who have also informed and shared the information with the US Department of Justice.  Rolls-Royce could also be liable for acts by intermediaries under the US Foreign Corrupt Practices Act if it had “reason to know of any bribes”.

The SFO has yet to confirm whether it has or will launch a formal investigation, but given recent comments by its new Director, David Green, there is a feeling by some commentators that the SFO are keen to signal an end to the perception they prefer civil settlements over criminal prosecutions.  Interestingly, many of the alleged transgressions predate July 2011, when the new tougher Bribery Act 2010 came into force in the UK, which will clearly impact on the SFO’s decision. 

Rolls-Royce has taken recent steps to strengthen its compliance system, and in a statement pointed to its new “Global Ethics Code” and a new “Intermediaries Policy”.  It also intends to “appoint an independent senior figure who will lead a review of current procedures and report to the Ethics Committee of the Board” (quotes taken from the Rolls-Royce statement on the 6 December 2012).  The recent steps taken by Rolls-Royce to implement effective compliance measures may suggest the company were concerned they might incur liability for failing to establish “adequate procedures” to prevent bribery under the UK Bribery Act.

Whilst it is not clear what measures the SFO will take against Rolls-Royce, the company’s approach to its compliance program and willingness to cooperate with the SFO and its investigations, are strong examples of proactive management, which may lead to a better outcome for the business.

In relation to enforcement, of the 37 signatory countries included in the report, (which does not cover Russia and Iceland), only 7 countries (which cover 28% of world exports), have been categorised as an ‘active enforcer’ of the Bribery Convention. These 7 countries are Denmark, Germany, Italy, Norway, Switzerland, United Kingdom and United States. The definition of ‘Active enforcer’ differs depending on the size of a country’s exports. If a Country has a share of world exports of 2 per cent or more, to be an ‘Active Enforcer’ it must have at least 10 major bribery cases on a cumulative basis (of which at least three were initiated in the last three years and at least three concluded with substantial sanctions). If a Country has a share of world exports of less than 2 per cent, to be an ‘Active Enforcer’ it must have at least three major bribery cases (including at least one concluded with substantial sanctions and at least one pending case which has been initiated in the last three years).

In 2011/12, the UK had 23 cases and 29 investigations (some under the old law rather than the Bribery Act 2010). According to Transparency International, the other 30 signatory countries fail to show adequate deterrence and fall within the categories of, “moderate enforcement”, “little enforcement” and “no enforcement”, as follows:

• Moderate Enforcement: Twelve countries with 25 per cent of world exports: Argentina, Australia, Austria, Belgium, Canada, Finland, France, Japan, Korea (South), Netherlands, Spain and Sweden
• Little Enforcement: Ten countries with 6 per cent of world exports: Brazil, Bulgaria, Chile, Hungary, Luxembourg, Mexico, Portugal, Slovak Republic, Slovenia and Turkey
• No Enforcement: Eight countries with 4 per cent of world exports: Czech Republic, Estonia, Greece, Ireland, Israel, New Zealand, Poland and South Africa

As only Active Enforcement provides an effective deterrent to foreign bribery, these figures arguably show that the overall level of enforcement remains inadequate. This is not always the case however. New Zealand is categorised as ‘No Enforcement’, however is perceived to have one of the lowest levels of corruption in the world (see Transparency International’s Corruptions Perceptions Index, available at http://cpi.transparency.org/cpi2012/results/#myAnchor1).

It is likely therefore that the OECD will exert pressure on a number of signatory countries to improve its enforcement, that rigorous OECD monitoring will continue and perhaps that other nations with a significant share of world exports (such as China, India, Indonesia, Malaysia, Saudi Arabia, Singapore and Taiwan) will be encouraged to join the OECD Convention.

The full report, entitled “Exporting Corruption? Country Enforcement of the OECD Anti-Bribery Convention Progress Report 2012” is available at http://www.transparency.org/whatwedo/pub/exporting_corruption_country_enforcement_of_the_oecd_anti_bribery_conventio

In 2009, CCI pleaded guilty to a three-count criminal information that charged two counts of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violate the FCPA and Travel Act. CCI violated the FCPA by making corrupt payments totaling approximately US$4.9 million to officers and employees of state-owned enterprises (SOEs) – “foreign officials” under the FCPA – in China, South Korea, UAE and Malaysia for the purpose of obtaining or retaining business. CCI generated approximately US$31.7 million in net profits as a result of these corrupt payments.

In April 2012, the Carsons in turn pleaded guilty to separate one-count superseding informations charging them with violating the anti-bribery provisions of the FCPA.

Mr. Carson was sentenced to four months in prison to be followed by eight months of home detention and was ordered to pay a $20,000 fine.

Ms. Carson received no prison time but was sentenced to three years probation, to include six months home confinement, was ordered to pay a $20,000 fine, and was ordered to complete 200 hours of community service. In its sentencing memorandum, the Court notably rejected the Department of Justice’s argument that Ms. Carson’s Chinese upbringing entitled her to a downward variance, observing that “[t]here is no cultural defense to the present crime or any other under black letter law.”

George Osborne, the Chancellor of the Exchequer, has championed the role of British manufacturers and, in the 2011 annual budget speech, envisaged a Britain “borne aloft by the march of the makers”. This would mean re-focussing efforts on high-growth export markets, such as the BRIC countries of Brazil, Russia, India and China, along with what the Confederation of British Industry identified as the “Next Eleven” in its November 2011 report “Winning overseas: boosting business export performance”.  Namely Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.

Yet this re-focussing of UK exports could lead to companies being exposed to increased levels of corruption. Andrew Kakabadse, a professor of international management development at Cranfield University, has claimed that in two-thirds of the world, what are euphemistically called “transactional costs”, would need to be incurred in order to obtain and do business. Professor Kakabadse estimates that approximately 80% of deals outside of Europe and the US encounter instances of corruption and bribery.

Ernest & Young’s 12^th Global Fraud Survey lends some weight to these claims. The survey found that bribery and corruption was more pervasive in rapid-growth markets. For example, in Brazil, 84% of respondents reported that corruption was widespread. The findings for the Far East also gave cause for concern. In Indonesia, 60% of respondents considered the making of cash payments to secure business as acceptable, whilst in Vietnam, 36% of respondents felt it was acceptable to misstate a company’s financial performance.

Europe has also been proven to be far from corruption free. Recently, Siemens signed a £261.4 million settlement with the Greek Government, in relation to allegations that Siemens bribed public officials to obtain a number of communications and security contracts.

The Ernst & Young survey also found that the current economic climate has weakened compliance with the anti-bribery legislation that is in place. The responses revealed, after years of cost-cutting, relatively labour-intensive measures were less frequently cited as anti-bribery and anti-corruption (“ABAC”) controls in the respondents’ businesses, This perception of ABAC controls weakening because of the global economic recession is further strengthened by another Ernst & Young report, seen and reported on, by Construction News. This found that half of financial workers and executives in the UK real estate and construction industries stated that their firms were willing to cut corners on ABAC controls because of the economic climate. This was exacerbated by construction companies often bidding on large state-run infrastructure projects in high-risk economies. These are areas which are particularly susceptible to instances of what Professor Kakabadse refers to as “transactional costs”.

Given that it is an offence for British firms to offer bribes whilst operating abroad, or to bribe a foreign public official, under the UK Bribery Act 2010, these indications of ABAC controls weakening are worrying. If George Osborne’s “march of the makers” is not only to be successful but also legal, UK manufacturers and exporters will need to ensure robust ABAC controls are in place to avoid convictions under the UK Bribery Act.

 Change of Legal Environment

 1.       Areas:

            New law or regulation

            Update:

            State level: No developments

            Local level (Beijing & Shanghai): No developments

            Communist Party Rules: No developments

 2.        Areas:

            Upcoming law or regulation

            Update:

            None Identified

 3.       Areas:

            Government Action

            Update:

 (1)  On September 18, 2012, Li Bingchun (“Li”), the former Chief of the Liqiao township government in Shunyi District, Beijing City, was sentenced to death with two years’ reprieve by the Second Intermediate People’s Court in Beijing for corruption, taking bribes, and misappropriation of public funds. Such a death sentence with a two-year reprieve is often reduced to life in prison if the convicted person behaves well during the term of imprisonment.  Li was found guilty of receiving more than RMB 38 million (USD 6.03 million) from 2006 to 2007 from a demolition compensation fund that had been established for use in connection with the construction of two highways. He also accepted a bank card giving access to an account containing RMB 80,000 and a gold bar valued at RMB 153,000 (USD 24,280) from two companies whom he helped to win bids and land use rights. In addition, Li was accused of lending more than RMB 178 million (USD 28.25 million) of public funds to several real estate developers between 2006 and 2010. All of his private assets were confiscated.

(2)  On September 17 and 18, Wang Lijun (“Wang”), the former Vice Mayor and former Police Chief of Chongqing, was tried in the Intermediate People’s Court in Chengdu, Sichuan Province for attempted defection, abuse of power, bribe-taking, and bending the law for selfish ends. On September 24, Wang was sentenced to 15 years in prison.

Wang was charged with neglecting his duty to investigate and suppress criminal acts and bending the law for personal gain. He also violated relevant laws and regulations by using technical eavesdropping measures against many people on various occasions. Wang purportedly took advantage of his position and illegally accepted money and property worth more than RMB 3.05 million (USD 484,127), in return for securing benefits for other individuals.

(3)  On September 21, 2012, Wu Zhiming (“Wu”), the former Deputy Secretary General of Jiangxi Provincial Government, went to trial in the Intermediate People’s Court in Jiujiang City, Jiangxi Province for allegedly taking bribes according to a court statement.

Wu was prosecuted for accepting cash and properties valued at RMB 47.48 million (USD 7.53 million) during his term as Head of Xihu District, Nanchang City, Sectary of Commission of Qingshanhu District, Nanchang City, Mayor Assistant of Nanchang Government and Deputy Secretary General of Jiangxi Provincial Government from 2002 to 2011, and, in return, helping the bribe-givers seek benefits in projects and helping them with job transfers and promotions through the misuse of his post.

(4)  On September 23, 2012, Liu Xiquan (“Liu”), the former Deputy Head of Choyang District, Beijing City, was sentenced to 13 years in prison by the First Intermediate People’s Court in Beijing for taking bribes. Liu’s personal assets of RMB 100,000 have been confiscated.

Liu was convicted of involvement in six cases of bribery, receiving in the aggregate RMB 1.85 million (USD 300,000) from 2008 to 2010 by taking advantage of his position as Member of the Standing Committee of the Party Committee and Deputy Head of Choyang District.

(5)  On September 25, 2012, Ren Jie (“Ren”), the former Party Secretary and Chairman of Jiangxi Phoenix Optical Instruments Group Corporation and Wang Xiyan (“Wang”), the former Party Secretary and General Manager of Jiangxi Phoenix Optical Instruments Group Corporation, were sentenced to 14 years and 14.5 years in prison respectively by the Intermediate People’s Court in Xinyu City, Jiangxi Province.

Ren was alleged to have received RMB 464,000 (USD 73,637) and USD 80,000 during his term with Phoenix Optical Instruments Group Corporation from 1993 to 2008 in return for helping others to undertake businesses and real estate development and other activities. Wang was accused of accepting bribes totaling RMB 876,940 (USD 139,170) for benefiting others during his time with Phoenix Optical Instruments Group Corporation from 2001 to 2008. Ren and Wang violated relevant laws and regulations by taking advantage of their positions with Phoenix Optical Corporation Ltd. to accept compensation amounts of more than RMB 9 million.

4.         Areas:

            Others

            Update:

 On September 20, the State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”) organized a video training for state- owned enterprises on anti-corruption management. Qiang Weidong, the Member of SASAC CPC Committee and Secretary of the Discipline Inspection Committee, pointed out that SASAC was researching on the standard and method of evaluating the anti-corruption activities and will include democratic meetings, anti-corruption institutional improvement, complainant processing and so on into the scope of the evaluation.

Change of Legal Environment

1.     Areas:

New law or regulation

         Update:

State level:  No developments

Local level (Beijing & Shanghai):  No developments

Communist Party Rules: No developments

2.     Areas:

Upcoming law or regulation

Update:

None identified

3.    Areas:

Government Action

Update:

(1)  On August 3, 2012, the report of an internal investigation conducted by the Ministry of Railways revealed that Liu Zhijun (“Liu”), the former minister of railways, committed six disciplinary violations, including taking bribes and sexual misconduct.

Liu was removed from his position in 2011 on charges of corruption and expelled from the Communist Party of China earlier this year. Reportedly, Liu was charged with helping Ding Shuimiao (“Ding”), a Shanxi business woman, secure railway supply contracts in the amount of RMB 3 billion (USD 470 million) and allowed middlemen to take kickbacks during contract procurement. Ding’s company is alleged to have accepted RMB 10 million (USD1.6 million) from railway construction companies in bribes as sponsorship fees. In addition, Liu is also suspected of receiving bribes from four railway officials, some in the form of calligraphy paintings and other valuable artwork.

(2)  On August 9, 2012, He Fuchang (“He”), the former Deputy Party Secretary and Deputy Chief of the Ningbo Public Security Bureau (“PSB”), was sentenced to death with two years’ reprieve by the Ningbo Intermediate People’s Court for receiving bribes exceeding RMB 16 million (USD 2.6 million) and for abusing his power as a government official. A death sentence with a two-year reprieve is usually reduced to life in prison if the convict behaves well while serving the term.

During his term from 2000 to 2011 as the acting mayor of Yuyao city and the party secretary of Ningbo PSB, He purportedly abused his power by manipulating the process for grant of land use rights and improperly assisting the promotion of certain government officials in exchange for bribes totaling RMB 16 million (USD 2.6 million).

(3)  On August 10, 2012, Li Ji (“Li”), the former mayor of Haitangwan Town, Sanya, was sentenced to death with two years’ reprieve for receiving and seeking bribes in the amount of RMB 14.4 million (USD 2.2 million).

During Li’s term as the Mayor of Haitangwan Town, the Head of Haitangwan Management Committee and the Deputy Secretary of Hitangwan Town, Li was reportedly found guilty for abusing his position to facilitate, for the benefit of others, in the process of approval of land compensation and payment for contract engineering, in exchange for bribes from 2009 to 2011.

According to a spokesperson for the Sanya Discipline Inspection Committee, Li’s case was one of a series of corruption cases in recent years involving Haitangwan Town and there are as many as 104 suspects involved.

(4)  On August 25, 2012, Cai Yabin (“Cai”), the former Deputy Director of the Shaoyang Public Security Bureau, Hunan Province, was sentenced to 12 years’ in prison by Shaoyang City Beita District People’s Court on charges of accepting bribes, providing bribes and failing properly to account for the sources of personal assets.

During Cai’s term from 1997 to 2012, Cai abused his position to seek illegal gains for others in administrative enforcement procedures and infrastructure construction projects and received over RMB2. (USD 7,870) and USD 3,000 to the former Chief of 19 million (USD 344,719) in bribes. In 2006, Cai also provided RMB 50,000 Xiangtan City Public Security Bureau.  In addition, Cai was unable to identify the source of nearly RMB 6 million (USD 944,436) of his personal assets.

(5)  On August 27, 2012, Wang Baojun (“Wang”), the Secretary of Beijing Chaoyang District Agriculture Committee, was reportedly sentenced to ten years in prison for corruption involving RMB260,000 (USD41,000).  Wang’s case is one of a series of corruption prosecutions against the agriculture committee following the arrest of some of the committee’s finance staff. The former Chaoyang District deputy mayor Liu Xiquan is likewise facing charges for accepting bribes totaling RMB 1.8 million (USD284,000) in connection with the case.

(6)  In late August, 2012, Wang Guoqiang (“Wang”), the former Party Chief of Fengcheng City, Liaoning Province, allegedly left China in April or May after transferring more than RMB 200 million (USD 31.4 million) in embezzled funds to the United States on April 24, 2012. Wang was being investigated for taking bribes from a local heating company and some property developers from April 28, 2012 and was removed from his position and expelled from the Communist Party of China on August 15, 2012.

4.    Areas:

Others

Update:

(1)  On August 21, 2012, He Guoqiang (“He”), a member of the Standing Committee of the CPC Political Bureau and Secretary of the Central Commission for Discipline Inspection, said in a meeting that China will implement a five-year plan for eliminating corruption after the upcoming national congress of the Communist Party of China. He stressed the importance of improving anti-corruption efforts and described the improvement as a “dynamic and long-term strategic project”.

(2) To further clear systemic obstacles to social and economic development and to curb corruption, the State Council of China announced its decision to remove or modify 314 administrative examination and approval items. The decision was made in a statement released after an executive meeting of the State Council that was presided over by Premier Wen Jiabao on August 22, 2012.

 (3) On August 12, China’s supreme procuratorate called for an intensified crackdown on officials abusing positions of power in the railway sector. According to the Supreme People’s Procuratorate, efforts will be centered on crimes involving ticket sales, construction projects, and procurement and supply of materials.

Guidance

Transparency International UK has published guidance (the “Guidance”) on anti-bribery due diligence for corporate transactions[2]. The Guidance emphasizes a proportionate approach to the anti-bribery due diligence process based around three overarching considerations:

1. Anti-bribery due diligence should be applied to all investments but on a risk-based approach, with the level of due diligence being proportionate to the investment and the perceived likelihood of risk of bribery.
2. In many cases the necessary information for due diligence may not be accessible, such as in acquisition of public companies, hostile take-overs, auctions or minority investments. This does not obviate the need for anti-bribery due diligence, but has an effect on the timing – i.e., it may need to be undertaken post-closure.
3. A good practice approach characterises ethical and responsible businesses, but is also the most effective means for companies to manage bribery risks across multiple jurisdictions and in a changing legal and enforcement environment.

Following the Guidance should mean that companies comply with the legal requirements in the UK, but also any other jurisdiction that the transaction involves.

What level of due diligence is required?

The level of bribery and corruption due diligence required should be determined using a risk based approach as some targets may be judged to present low risks and require lower levels of due diligence whereas others will have higher risks. A proper assessment of what is proportionate can however only be made if the risks are properly understood. The size of investment should not be a determining factor as small investments can carry disproportionate risks and the material risks attached to bribery may not necessarily reflect the size of the bribe.

According to the Guidance, the key things to look for in anti-bribery due diligence are as follows:

• Has bribery taken place historically?
• Is it possible or likely that bribery is currently taking place?
• If so, how widespread is it likely to be?
• What is the commitment of the board and top management of the target to countering bribery?
• Does the target have in place an adequate anti-bribery programme to prevent bribery?
• What would the likely impact be if bribery, historical or current, were discovered after the transaction had completed?

The extent and methodology of the anti-bribery due diligence will depend on the transaction, but could include the following:

• Discussing the risks of bribery and corruption as well as the measures in place to prevent bribery with management of the target.
• Visiting and interviewing other actors within the relevant sectors and countries, such as customers, suppliers, industry experts, regulatory authorities, business associations, embassy officials, NGOs. 
• Completing corporate intelligence and background checks on the target’s business and key owners/directors and management.
• Examining the target’s anti-bribery programme to assess its adequacy and any risks of bribery.
• Conducting walk-through tests, carried out to confirm that policies and procedures are effectively implemented. 
• Reviewing data provided by the target company.
• Completing a detailed financial review.

It is acknowledged that there are a number of challenges to anti-bribery due diligence. These can include a lack of information being available, time pressure, lack of senior management support and insufficient expertise in the deal team. These challenges must however be overcome if the buyer is to protect itself adequately.

What if bribery or corruption is identified?

If bribery or corruption is identified, this may mean that the target and potentially individuals working for the target, are in breach of the Bribery Act and liable to prosecution and criminal penalties. This liability can pass to the buyer in a corporate transaction. There may also be obligations on the buyer and / or its legal advisors to report such bribery under the Proceeds of Crime Act 2002. If the transaction proceeds and the bribery continues, individuals at the buyer may also become liable.

Identifying acts of bribery through due diligence does not have to be a deal breaker. It however allows investors and purchasers to prepare themselves to deal with it. It may even be possible to agree with the enforcement authorities a grace period, following acquisition, during which agreed mitigation steps are carried out. This may save companies a large amount of money.

Despite the information above, bribery due diligence is often not undertaken, neglected, or allocated insufficient time and resources. Adding bribery and corruption to the scope of due diligence already completed in corporate transactions is relatively simple, quick and inexpensive. It can however reveal significant issues that may otherwise not come to light. 

[1] SFO press release of 13 January 2012 – ‘Shareholder agrees civil recovery by SFO in Mabey & Johnson’

[2] http://www.transparency.org.uk/our-work/publications/227-anti-bribery-due-diligence-for-transactions

Conduct

• Orthofix is a Texas-based orthopedic medical device company.

• Promeca S.A. de C.V. (“Promeca”), Orthofix’s Mexican subsidiary, bribed officials at Mexico’s government health care and social service provider, Instituto Mexicano del Seguro Social (“IMSS”) in order to secure lucrative sales contracts from IMSS hospitals.

• From 2003 to 2010, Promeca paid bribes totaling approximately $317,000 to Mexican officials. These bribes, internally referred to as “chocolates,” generated a net profit of nearly $5 million. Promeca falsely recorded the bribes as cash advances and falsified its invoices. When the bribes increased, Promeca falsely recorded them as promotional training costs. Some of the gifts intended to influence IMSS employees included vacation packages, laptop computers, televisions, appliances, and in one case, the lease of a Volkswagen Jetta. Eventually, after learning of the bribery, Orthofix self-reported it to the SEC. The company took corrective action including firing the Promeca executives who orchestrated the bribery scheme.

• The SEC complaint alleged that Orthofix “failed to implement adequate internal control to prevent the bribery or to ensure that transactions were properly recorded. Orthofix failed to implement an FCPA compliance and training program commensurate with the extent of its international operations and particularly its ownership of Promeca… Further, even though Orthofix knew that Promeca’s training and promotional expenses were often over budget, it did nothing to act on the red flag.”

Penalties

• According to the SEC’s release, Orthofix agreed to pay $4,983,644 in disgorgement of profits and more than $242,000 in prejudgment interest. The final judgment would permanently enjoin the company from violating the books and records and internal control provisions of the FCPA. Under the terms of the agreement, Orthofix also agreed to monitor its FCPA compliance program and issue reports to the SEC over a two-year period.

• In its deferred prosecution agreement with the DOJ, Orthofix agreed to pay a $2.22 million penalty and to report to the DOJ annually during the term of the agreement regarding remediation and implementation of the compliance measures. The DOJ has agreed not to pursue any criminal charges against the company regarding this matter if the company complies with the terms of the agreement for a period of three years.

Additionally, neither the SEC settlement nor the deferred prosecution agreement require Orthofix to appoint an independent external compliance monitor.

We thank Squire Sanders summer associate Cristina Sanchez for contributing to this post.