The FCPA Blog

The debate about medical ghosting has focused on the U.S. market. But could the DOJ and SEC now be looking at the practice overseas, where it might violate the FCPA?

Main Justice reported that in April, the DOJ and SEC sent letters to AstraZeneca PLC, Baxter International Inc., Eli Lilly & Co., and Bristol-Myers Squibb Co. The letters asked about business practices in Brazil, China, Germany, Greece, Italy, Poland, Russia, and Saudi Arabia.

Medical ghosting works like this. Drug companies hire outside firms to draft articles touting a drug, then retain a doctor or scientist to sign off as the author. The drug company then finds a publisher, who doesn't know the article was written by someone other than the person who signed it.

Doctors and scientists eagerly participate because publication credit increases their prestige and professional standing. And the drug-companies use the medical journal articles as "independent" proof that their drugs are safe and effective.

A Senate report released last month and quoted in the New York Times said: “Manipulation of medical literature could lead physicians to prescribe drugs that are more costly or may even harm patients."

The FCPA's antibribery provisions prohibit among other things (1) the giving of anything of value (2) to a foreign official (3) to obtain or retain business. See, e.g., 15 U.S.C. §78dd-1(a) [Section 30A of the Securities & Exchange Act of 1934].

Ghosting has those elements. Giving a doctor or scientist an unsigned manuscript for publication has real value. Doctors and scientists working in government-owned or managed hospitals overseas are "foreign officials" under the FCPA. And articles appearing to independently endorse a drug help its manufacturer obtain or retain business.

We don't know if medical ghosting will figure in any FCPA-related investigations of the drug companies. But it could.

San Jose, California-based VOiP company Veraz Networks, Inc. paid $300,000 to settle charges brought by the SEC that it violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) by making illegal payments to foreign officials in China and Vietnam.

The SEC said the company hired a consultant in China who in 2007 and 2008 gave gifts and offered improper payments worth about $40,000 to officials at a government-controlled telco to win business for Veraz. Also in 2007 and 2008, a Veraz employee made improper payments to the CEO of a government-controlled company in Vietnam to win.

Veraz had disclosed the $300,000 settlement with the SEC in March. It said then that because of the ongoing compliance investigations, it had to delay filing its quarterly reports for March and May 2008. That resulted in NASDAQ warning Veraz "that its common stock may be subject to delisting." NASDAQ ultimately granted an extension for the filings, which were made in July 2008, allowing Veraz's common stock to continue to be listed.

The company said in November 2009 that it had spent $2.5 million to investigate and handle the FCPA compliance issues. The SEC began investigating the company in early 2008. Veraz then launched an internal investigation and discovered potential FCPA violations in China and Indonesia, which it self-reported. The SEC then requested documents related to Vietnam.

The SEC said without elaborating that it had help in its investigation from the U.S. Department of Homeland Security.

Veraz Networks trades on NASDAQ under the symbol VRAZ.

View the SEC's Litigation Release No. 21581 (June 29, 2010) in Securities and Exchange Commission v. Veraz Networks, Inc., Case No. CV-10-2849 (PVT) (N.D. Cal. filed June 29, 2010) here.

View the SEC's civil complaint against Veraz here.

By Michael S. Diamant

Few FCPA compliance challenges are as vexing as the provision of everyday business courtesies, like gifts, meals, drinks, travel, and entertainment. Because the FCPA has no de minimis threshold, even minor expenditures could implicate the statute’s anti-bribery and accounting provisions. Although they are a necessary and common facet of international business, such benefits have led to enforcement actions against companies like Lucent Technologies, Avery Dennison, and UTStarcom.

Multinational companies that do business in China confront this challenge daily. The Chinese business environment particularly amplifies this risk for two reasons. First, the Chinese government owns a huge percentage of its domestic economy.  It is thought to own more than 70% of the country’s productive wealth, and it is the majority shareholder of 31% of publicly listed Chinese companies.

This has profound implications for FCPA compliance due to how the law is currently enforced: In their prosecution of companies like Schnitzer Steel, the U.S. regulators have taken an expansive view of the meaning of “foreign official.” The statute defines “foreign official” as an “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” According to the U.S. authorities, this includes for-profit businesses, like steel mills, that are only partially owned or controlled by a foreign government.

Therefore, China’s broad ownership of its publicly listed companies qualifies a huge percent of Chinese businesspeople as “foreign officials” according to U.S. regulators.  When you discuss a prospective deal over dinner or a drink with a Chinese business executive, you might be giving a thing of value to a foreign official!

Second, Chinese business culture typically values the provision of things of value to build relationships. This development of business connections, termed guanxi, is especially important for multinational companies trying to develop business in China and make inroads into that country’s booming economy. Further, the failure to reciprocate courtesies that have been provided by your business counterparties in the past may be seen as rude and could hamper business. The risk of offending on one hand may be balanced against the risk of violating the FCPA on the other.

Over the years, we have advised numerous multinational companies on how to handle this conundrum.  This month we published an article in the Virginia Law & Business Review that gathers some of our accumulated wisdom on the issue, both by performing a legal analysis of the FCPA’s anti-bribery provisions to determine why certain business courtesies are permissible while others are not and by providing some internal compliance suggestions to manage this risk with regard to a company’s Chinese operations. We hope readers of the FCPA Blog find it helpful. It can be downloaded here.

Michael Diamant is a member of the white collar defense and investigations practice group in the Washington, D.C. office of Gibson, Dunn & Crutcher. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. He has conducted internal investigations in eleven countries on four continents regarding possible FCPA violations and assisted clients in complying with government subpoenas and negotiating settlements with enforcement agencies.

A story in the Financial Times (here) earlier this year said authorities in the U.S. and Ghana are investigating corruption allegations involving a privately held Texas oil company, Kosmos Energy. It controls a large share of the 1.8 billion barrel Jubilee field, one of Africa's biggest recent oil finds.

The paper said Ghanian prosecutors are preparing criminal charges against Kosmos' local partner, EO. It said EO was formed by two allies of John Kufuor, Ghana's president until last year. One of EO's founders was Houston-based businessman George Owusu, who was Kosmos’ representative in Accra. The other was Kwame Bawuah Edusei, later appointed Ghana's ambassador to the U.S.

The report said the U.S. Justice Department "is also understood to be probing the relationship between EO and Kosmos, although the department on Thursday declined to confirm or deny this."

Kosmos' local partner, EO, reportedly holds a 3.5 percent stake in the offshore oil block found to be commercial in 2007. In October last year, Kosmos announced the sale of all its interests in Ghana, including the Jubilee field assets, to Exxon Mobil Corporation for $4 billion. EO's stake, the Financial Times said, could be worth more than $200 million.

The Financial Times said EO brought Kosmos into Ghana three years ago. In exchange, Kosmos gave EO the 3.5 percent interest and paid EO's "share of exploration and development costs, according to an agreement between the two companies obtained by the Financial Times."

Kosmos is mainly owned by private equity firms Warburg Pincus and Blackstone Capital Partners.

The charges in Ghana against EO, according to the Financial Times, would include causing a financial loss to the state, money laundering, and making false declarations to public agencies. Both EO and Kosmos have denied any wrongdoing.

Kosmos told the Financial Times that "Ghana now wants to secure a share of the profits by forcing Kosmos to sell itself at a knock-down price to GNPC, the state oil group, which could then sell it to the highest bidder."

A few days ago, a Ghanian website reported that Ato Ahwoi, Board Chairman of GNPC -- the Ghana National Petroleum Corporation -- and other key government officials with diplomatic passports were initially "refused visas to travel to the U.S. for no specific reason, sparking huge diplomatic controversy." The officials, later granted visas, were reportedly traveling to attend meetings with Kosmos' owners Warburg Pincus and Blackstone Capital Partners.

The Wall Street Journal said last month: "The fiasco has become an embarrassment for the Obama Administration, which singled out Ghana as an example of good governance during the President's trip to Africa last year. The State Department has lately stepped up criticism of the country, suggesting that future aid and investment will be contingent on the country's behavior, noting that the resolution of the Kosmos issue 'reflects on Ghana's reputation as an investment destination.'"

The New York Times reported in October last year that Kosmos' sale to Exxon Mobil requires approval by Ghana’s government, which is itself interested in buying the assets. Ghanian sources have also said the government opposes Kosmos' sale to Exxon Mobil and is "considering cutting a deal with a leading Chinese oil company for the stake."

The Financial Times reported that Duke Amaniampong, a California-based lawyer working for the Ghanaian investigation, said Ghana’s attorney general had accumulated “enough evidence of criminal culpability to bring charges against the EO group and its directors." A website called Modern Ghana said Amaniampong was appointed to help Ghana's attorney general prosecute “Kufuor's men." It said he is a graduate of Santa Clara University law school and was admitted to the State Bar of California in 1996.

When production begins later this year from the Jubilee field -- expected to be 120,000 barrels a day -- Ghana will become an oil exporting country.

[Editor's note: A version of this post originally appeared on the Global Graft Report, a site not currently available to the public. It is republished here with updates by special request.]

Avon Products Inc. on Friday said its expenses for an internal FCPA investigation that started two years ago have increased enough to impact results. Main Justice reported the costs to be $18 million for the last quarter.

In a release, the company said it incurred "significant professional fees associated with the company's internal investigation resulting from an allegation of Foreign Corrupt Practices Act ("FCPA") violations in China."

Last month Avon suspended four employees pending its internal bribery investigation. It put three executives in China and another in New York on administrative leave.

CEO Andrea Jung on Friday said during a conference call that the initial corruption allegations were contained in a letter written to her by an undisclosed whistleblower. The allegations concerned only China and related to travel, entertainment and other expenses. She said the company immediately "began an internal investigation under the oversight of our audit committee and conducted by outside counsel. Most importantly we voluntarily self-reported the allegations to the U.S. Securities and Exchange Commission as well as the Department of Justice."

The investigation has now expanded to at least "four international business units outside of China," she said.

Explaining the wider scope, she said: "I also want to emphasize again the allegation that triggered our investigation was in China only. Conducting compliance reviews in these additional markets is the appropriate thing to do in investigations of this type, and as we stated we've been cooperating with both governmental agencies."

Avon's investigation is following a typical path. Companies that self-report sensitive payments to the DOJ and SEC are always in a hurry to resolve any potential violations. The problem is that the feds need convincing there aren't more payments still left to be uncovered. Before the DOJ and SEC will settle a case, they want to be sure all the cards are on the table.

Siemens, for example, needed about a year more than it hoped to reach a deal with the U.S. government. The company's internal investigation kept uncovering more corrupt payments. So it had to do more and more to convince prosecutors they were seeing all the dirty laundry. In the end, according to some with knowledge of the investigation, Siemens' total costs topped $1 billion. But without the enormous effort, it couldn't have convinced U.S. agencies the case was ripe for resolution.

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Avon's FCPA disclosure in its 2009 annual report (available here) said:

We are investigating Foreign Corrupt Practices Act (FCPA) and related U.S. and foreign law matters, and from time to time we may conduct other internal investigations and compliance reviews, the consequences of which could negatively impact our business. From time to time, we may conduct internal investigations and compliance reviews, the consequences of which could negatively impact our business.

Any determination that our operations or activities are not in compliance with existing United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, termination of necessary licenses and permits, and other legal or equitable sanctions. Other legal or regulatory proceedings, as well as government investigations, which often involve complex legal issues and are subject to uncertainties, may also follow as a consequence. It is our policy to cooperate with U.S. and foreign government agencies and regulators, as appropriate, in connection with our investigations and compliance reviews.

As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws in China and additional countries. The internal investigation and compliance reviews, which are being conducted under the oversight of our Audit Committee, began in June 2008. We voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation and compliance reviews and we are, as we have done from the beginning of the internal investigation, continuing to cooperate with both agencies and have signed tolling agreements with them.

The internal investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing.

At this point we are unable to predict the duration, scope or results of the internal investigation and compliance reviews.

Any determination that our operations or activities are not in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, equitable remedies, including disgorgement, injunctive relief and other sanctions against us or our personnel. In addition, other countries in which we do business may initiate their own investigations and impose similar sanctions. Because the internal investigation and compliance reviews are ongoing, there can be no assurance as to how the resulting consequences, if any, may impact our internal controls, business, reputation, results of operations or financial condition.