DOJ-SEC Resolve FCPA Actions – Consider Cooperation
A Massachusetts based medical imaging company resolved FCPA charges with the DOJ and the SEC stemming from actions taken by its Danish subsidiary and its CFO. The actions center on about 180 suspicious transactions in Russia involving $21.6 million in revenue and another 80, valued at about $3.8 million, in Ghana, Israel, Kazakhstan, Ukraine and Vietnam. The transactions took place from 2001 through early 2011. The DOJ resolved the action with a non-prosecution agreement and the payment of a criminal fine based on partial cooperation. The SEC, noting that the firm “generally cooperated,” resolved its case with a settled administrative proceeding involving the firm and the former CFO of the subsidiary. In the Matter of Analogic Corporation, Adm. Proc. File No. 3-17305 (June 21, 2016).
Analogic Corporation is based in Peabody, Massachusetts. The firm sells advanced medical imaging, ultrasound and security technology systems. Lars Frost, also named as a Respondent by the SEC, is a resident of Denmark. Beginning in late October 2008, and continuing through September 2011, he served as the corporate controller and CFO of BK Medical ApS, a wholly owned Danish subsidiary that sells ultrasound equipment.
Analogic’s ultrasound business is largely conducted by BK Medical. Sales are to end users either directly or through distributors. The scheme at the center of the two actions was implemented through distributors. The transactions in Russia are typical. They were implemented in a series of steps:
Sale terms: The terms of the deal were set. BK Medical and the Russian distributor agreed on the terms of a sale and its actual price. BK Medical then created a fictitious invoice at an inflated price which was often 100% higher than the actual price.
Invoice: BK Medical’s customer service staff created a false invoice using a cut and paste process. The false invoice would accompany the product when shipped.
Contract: Frequently the distributor would send BK Medical a proposed contract for the sale at the inflated price. The contract would be executed.
Payment: The distributor would pay the inflated price. BK Medical only recorded the agreed upon actual price. The balance of the payment was credited to the accounts receivable for the distributor. That resulted in a net credit position for the distributor.
Third party payments: Later the distributor would direct BK Medical to make a payment from the accounts receivable balance to a third party. The payment would be made without any due diligence. The payees included apparent shell companies in various parts of the world. The payments were not made through BK Medical’s accounts payable system as required by the internal controls. Rather, there was just a credit to cash and an offsetting debit to the distributor’s receivables account. Signatures were executed on the fake invoice.
Amounts: The majority of the third party payments were less than the amounts by which the distributor had previously overpaid.
A similar procedure was used to implement the scheme in the five other countries involved. The BK Medical CFO personally signed off on 150 of the payments.
The scheme either emerged, or a red flag appeared, in two instances during its course, but it continued. The first was in 2004 when the BK Medical vice president of sales made inquiries at the Russian distributor. He learned that in the Russian market the word “bribe” is not used. Rather, the discussion focused on customer obligations. The second was in 2008 when a senior vice president at Analogic concluded that BK Medical presented a significantly greater risk of FCPA violations than the firm’s other lines of business. A recommendation was made to validate the partners of the distributor and business ethics and training was undertaken.
The DOJ resolved this matter with BK Medical by entering into a non-prosecution agreement. The firm admitted to the facts of the scheme in the agreement and paid a $3.4 million penalty. The DOJ considered the fact that the firm self-reported and its remediation for which it received credit. Only partial credit was given because initially only part of the facts learned in the firm’s internal investigation were disclosed.
The SEC’s Order alleged violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The firm consented to the entry of a cease and desist order based on Sections 13(b)(2)(A) and 13(b)(2)(B). It will pay disgorgement of $7,672,651 and pre-judgment interest. Mr. Frost consented to the entry of a cease and desist order based on the same Sections, and, in addition, Section 13(b)(5). He will pay a penalty of $20,000.
In resolving the case the SEC considered the firm’s cooperation which included: 1) self-reporting; 2) improving BK Medical’s distributor due diligence and distribution agreements; 3) terminating a number of employees including Mr. Frost, the vice president of sales and disciplining others; 4) enhancing the parent’s general oversight of the subsidiary and hiring a corporate compliance officer; 5) remediating and improving the internal controls; and 6) requiring additional and ongoing compliance training at the parent and subsidiary agreement.