Analogic, an airport security and medical-imaging technology provider, and BK Medical ApS, Analogic’s wholly-owned Danish subsidiary, have reached separate settlements with the Securities and Exchange Commission and the Department of Justice to resolve a Foreign Corrupt Practices Act case totaling payments of nearly $15 million.
BK Medical, a manufacturer of ultrasound equipment, entered into a non-prosecution agreement with the Justice Department and agreed to pay a $3.4 million penalty to resolve the government’s investigation into improper payments made in Russia and elsewhere in violation of the FCPA.
According to admissions made in the resolution documents, BK Medical engaged in a scheme with its distributor in Russia to make improper payments to third parties using fictitious invoices, falsely book those third-party payments and cause Analogic to falsify its books and records. BK Medical admitted that, as part of the scheme, after the terms of a sale had been agreed upon, the distributor requested that BK Medical issue invoices that falsely inflated the sales price on the equipment.
The distributor then overpaid BK Medical the inflated amount and BK Medical transferred the excess funds to third parties as directed by the distributor, the company admitted. BK Medical had no legitimate business relationship with those third parties and had not conducted due diligence on them, it admitted.
According to admissions in the resolution documents, at least some of these payments ultimately went to doctors employed by Russian state-owned entities. Although the scheme involving its Russian distributor was the most extensive, BK Medical also admitted that it engaged in similar schemes with distributors in five other countries.
BK Medical admitted that its conduct—creating and maintaining these fictitious invoices, representing to Analogic that BK Medical was complying with all Analogic accounting policies and signing Sarbanes-Oxley sub-certifications—caused Analogic to falsify its books, records and accounts in violation of the FCPA.
As part of its NPA, BK Medical has agreed to pay the criminal penalty, to continue to cooperate with the Department and with foreign authorities in any ongoing investigations and prosecutions relating to the conduct, including of individuals, to enhance its compliance program and to periodically report to the department on the implementation of its enhanced compliance program.
According to the Justice Department, BK Medical received credit for its self-disclosure and its remediation, including terminating the officers and employees responsible for the corrupt payments. It also received partial credit for cooperation because, as described in the NPA, it did not initially disclose certain relevant facts that it learned in the course of its internal investigation. Otherwise, by the conclusion of the investigation, BK Medical had provided to the Department all relevant facts known to it, including information about individuals involved in the FCPA misconduct.
Analogic also reached a settlement with the SEC under which it agreed to pay $7.67 million in disgorgement and $3.8 million in prejudgment interest to settle the SEC’s charges that it failed to keep accurate books and records and maintain adequate internal accounting controls. In determining the settlement, the SEC said it considered Analogic’s self-reporting, remedial acts, and general cooperation with the SEC’s investigation.
An SEC investigation found that Analogic’s Danish subsidiary, BK Medical ApS, engaged in hundreds of sham transactions with distributors that funneled about $20 million to third parties, including individuals in Russia and apparent shell companies in Belize, the British Virgin Islands, Cyprus, and Seychelles.
“Analogic’s subsidiary, BK Medical, allowed itself to be used as a slush fund for its distributors, funneling millions of dollars around the world at its distributors’ direction without knowing the purpose of the payments or anything about the recipients,” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said in a statement. “Issuers and their subsidiaries cannot turn a blind eye to suspicious payments, even if they believe they are simply ‘helping out’ a business partner.”
Lars Frost, BK Medical’s former chief financial officer, agreed to pay a $20,000 penalty to the SEC to settle charges that he knowingly circumvented the internal controls in place at BK Medical and falsified its books and records.
According to the SEC’s order instituting a settled administrative proceeding against Analogic and Frost:
From at least 2001 through early 2011, at the direction of its distributors, BK Medical participated in hundreds of highly suspicious transactions that posed a significant risk of bribery or other improper conduct, such as embezzlement or tax evasion.
At its distributors’ request, BK Medical would issue fictitious inflated invoices to the distributors and direct the overpayments it received to third parties identified by the distributors. BK Medical did not have a relationship with the third parties and did not know if the payments had any business purpose.
BK Medical’s Russian distributor accounted for at least 180 payments totaling more than $16 million. BK Medical participated in similar arrangements, but to a lesser degree, with distributors in Ghana, Israel, Kazakhstan, Ukraine, and Vietnam, for which BK Medical acted as a conduit for at least 80 payments totaling approximately $3.8 million.
Frost, who was BK Medical’s CFO from 2008 to 2011, personally authorized approximately 150 conduit payments and submitted false quarterly sub-certifications to Analogic.
Frost consented to the SEC’s order without admitting or denying the findings that he caused Analogic’s violations and that he violated provisions of the federal securities laws and a related SEC rule that prohibit the knowing circumvention of internal controls and knowing falsification of books and records.
As Compliance Week previously reported, Analogic first disclosed the proposed settlement in December 2015.