Compliance officers have yet another massive bribery case to add to their growing library of epic anti-corruption compliance failures. This one is a result of the largest Foreign Corrupt Practices Act enforcement action of all time.

Teva Pharmaceutical Industries and its wholly-owned Russian subsidiary, Teva, entered into resolutions with the SEC and Department of Justice last month and agreed to pay more than $519 million in total fines and penalties to settle parallel civil and criminal charges for paying bribes to foreign government officials in Russia, Ukraine, and Mexico. It also entered into a deferred prosecution agreement with the Justice Department.

Among Teva’s admissions in resolving the charges:

Teva executives and Teva Russia employees paid bribes to an influential Russian government official in exchange for increased sales of Teva’s multiple sclerosis drug, Copaxone, in annual drug purchase auctions held by the Russian Ministry of Health. Between 2010 and 2012, Teva earned more than $200 million in profits on Copaxone sales to the Russian government.

Teva paid bribes to a senior government official within the Ukrainian Ministry of Health to influence the Ukrainian government’s approval of Teva drug registrations, which were necessary for the company to market and sell its products in the country. Between 2001 and 2011, Teva paid this “registration consultant” a monthly fee and provided him with travel and other things of value totaling approximately $200,000.

Teva failed to implement an adequate system of internal accounting controls and failed to enforce the controls it had in place at its Mexican subsidiary, which had been paying bribes since at least 2005 to doctors employed by the Mexican government.

“While the conduct that resulted in this investigation ended several years ago, it is both regrettable and unacceptable, and we are pleased to finally put this matter behind us,” Teva’s President and CEO Erez Vigodman said in a statement in response to the settlement. “Since becoming CEO, I have worked diligently to make our culture of compliance central to everything Teva does.”

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“The Teva of today is a fundamentally different company,” Vigodman added. “Teva has a compliance culture that begins with a strong tone-at-the-top, including our executive regional and local management and a culture of compliance that underpins every single business decision that Teva makes.”

Lessons learned

For compliance officers looking for yet another case study on how not to implement an anti-corruption compliance program, Teva’s FCPA enforcement action provides a litany of compliance lessons.

“The Teva of today is a fundamentally different company. Teva has a compliance culture that begins with a strong tone-at-the-top, including our executive regional and local management, and a culture of compliance that underpins every single business decision that Teva makes.”
Erez Vigodman, CEO, Teva

Failure to self-disclose FCPA violations. In 2012, Teva received subpoenas and informal document requests from the Justice Department and SEC asking for the production of documents concerning the company’s compliance with the FCPA in certain countries.

“Upon learning of initial FCPA concerns from both Teva employees and the U.S. government in early 2012, Teva began a voluntary and comprehensive investigation into our global operations, in addition to responding to the government’s specific requests for documents and information,” the company stated. “Teva engaged independent counsel to assist in the investigation and conducted a global corruption risk assessment and a multi-country survey.”

In the course of its internal investigation, Teva said it identified at that time potential FCPA violations in Russia, certain Eastern European countries, and certain Latin American countries. It then brought these issues to the attention of the U.S. government.

At that point, however, it was too little, too late. According to the plea agreement, Teva “did not timely voluntarily self-disclose the FCPA violations to the Fraud Section and, as a result, the company and the defendant were not eligible for a more significant discount on the fine amount or the form of resolution,” the Justice Department stated.

Paper anti-corruption compliance program. Rather than choose to enforce an anti-corruption compliance program, certain Teva executives, instead, merely put in place a paper program. In one example, Teva executives in Israel who were responsible for the development of the company’s anti-corruption compliance program in 2009 knew of the bribes paid to government doctors in Mexico. “Nevertheless, Teva executives approved policies and procedures that they knew were not sufficient to meet the risks posed by Teva’s business and were not adequate to prevent or detect payments to foreign officials,” the DPA stated.

Teva further admitted that its executives put in place managers to oversee the compliance function who were unable or unwilling to enforce the anti-corruption policies that had been put in place. For example, in January 2011, at a meeting of the company's compliance team that oversaw Teva Mexico, while discussing whether the compliance department would approve certain payments, the regional compliance officer expressed an opinion that ‘compliance[’s] role will be [to] not interfere with the ultimate decision made by business heads.’ During this same time period, the regional compliance officer also ‘emphasized that the compliance program, current local policy, and sales and marketing guidelines were not relevant for the [Latin America] region and were to be ignored,’” according to the DPA.


Below is an excerpt from the deferred prosecution agreement describing Teva's future cooperation and disclosure requirements.
The company shall cooperate fully with the Fraud Section in any and all matters relating to the conduct described in this Agreement and the Statement of Facts, and any individual or entity referred to therein, as well as other conduct related to corrupt payments, false books, records, and accounts, or the failure to implement adequate internal accounting controls, subject to applicable law and regulations, until the later of the date upon which all investigations and prosecutions arising out of such conduct are concluded, or the end of the term specified in paragraph 3.
At the request of the Fraud Section, the Company shall also cooperate fully with other domestic or foreign law enforcement and regulatory authorities and agencies, as well as the Multilateral Development Banks ("MDBs"), in any investigation of the Company, its parent company or its affiliates, or any of its present or former officers, directors, employees, agents, and consultants, or any other party, in any and all matters relating to corrupt payments, false books, records, and accounts, or the failure to implement adequate internal accounting controls. The Company agrees that its cooperation pursuant to this paragraph, the scope of which is set forth above, shall include, but not be limited to, the following, subject to local law and regulations, including relevant data privacy and national security laws and regulations:
The Company shall truthfully disclose all factual information not protected by a valid claim of attorney-client privilege or work product doctrine with respect to its activities, those of its affiliates, and those of its present and former directors, officers, employees, agents, and consultants, including any evidence or allegations and internal or external investigations, about which the Company has any knowledge or about which the Fraud Section may inquire. This obligation of truthful disclosure includes, but is not limited to, the obligation of the Company to provide to the Fraud Section, upon request, any document, record or other tangible evidence about which the Fraud Section may inquire of the Company.
Upon request of the Fraud Section, the Company shall designate knowledgeable employees, agents or attorneys to provide to the Fraud Section the information and materials described in Paragraph 5(a) above on behalf of the Company. It is further understood that the Company must at all times provide complete, truthful, and accurate information.
The Company shall use its best efforts to make available for interviews or testimony, as requested by the Fraud Section, present or former officers, directors, employees, agents and consultants of the Company. This obligation includes, but is not limited to, sworn testimony before a federal grand jury or in federal trials, as well as interviews with domestic or foreign law enforcement and regulatory authorities. Cooperation under this Paragraph shall include identification of witnesses who, to the knowledge of the Company, may have material information regarding the matters under investigation.
With respect to any information, testimony, documents, records or other tangible evidence provided to the Fraud Section pursuant to this Agreement, the Company consents to any and all disclosures, subject to applicable law and regulations, to other governmental authorities, including United States authorities and those of a foreign government, as well as the MDBs, of such materials as the Fraud Section, in its sole discretion, shall deem appropriate.
In addition to the obligations in Paragraph 5, during the Term, should the Company learn of any evidence or allegations of conduct that would be a possible violation of the FCPA anti-bribery or accounting provisions had the conduct occurred within the jurisdiction of the United States, the Company shall promptly report such evidence or allegations to the Fraud Section.
Source: Justice Department

In another example, in April 2011, a Teva employee responsible for overseeing the implementation of the anti-corruption controls e-mailed a senior executive responsible for overseeing compliance in Latin America. The e-mail explained that a senior Teva executive had been “specifically instructed not to implement a robust system that will enable us to monitor and assure that the same doctor wasn't invited to a meal more than three times (for example)” and that the purpose of a system to track payments was “mainly to automate the manual forms.”

No due diligence. Prior to engaging one particular Mexican company as a distributor, Teva Mexico failed to conduct any due diligence, did not have a written distribution agreement in place, and did not require the company to certify its compliance with Teva’s anti-corruption policies, the DPA stated.

False books and records. In a parallel complaint, the SEC charged Teva with creating false books and records to conceal illegal payments to government officials in Russia, Ukraine, and Mexico. “As we allege in our complaint, many of these bribes were concealed as legitimate payments to distributors,” Eric Bustillo, director of the SEC’s Miami Regional Office, said in a statement. “While distributors can help companies navigate complex regulatory environments and provide valuable industry relationships, they also can create significant corruption risks for companies.”

Inadequate internal accounting controls. Teva’s internal accounting controls were inadequate, “because they failed to prevent such payments or detect red flags which should have alerted its employees that these payments, in whole or in part, were bribes to foreign government officials,” the SEC complaint stated. “Moreover, the internal accounting controls were circumvented to allow employees to authorize payments with little or no supporting documents.”

Remediation credit

Although Teva did not voluntarily self-disclose the conduct in a timely manner, the Justice Department said that the company did cooperate with the investigation “after the SEC served it with a subpoena.” As a result, Teva received a 20 percent discount off the low end of the U.S. Sentencing Guidelines fine range for “substantial cooperation and remediation.”

As described in the DPA, Teva’s remediation measures have included:

The removal of at least 15 employees who were involved in the misconduct;

Enhancements to its compliance function by implementing a number of policies and procedures designed to prevent prohibited conduct, including the establishment of a system to monitor transactions with members of the healthcare community;

Adopting an improved anti-corruption training program;

Adopting a standalone third-party due diligence program and terminating business relationships with certain third parties;

Enhancing the independence of the company’s control functions and establishing an office charged with addressing reports of misconduct; and

Establishing a dedicated global compliance audit group and strengthening the company’s internal audit and investigations teams.

In a statement, Teva described in further detail the anti-corruption compliance enhancements it has since made. For example, none of the employees involved in the improper payments are still employed by Teva, “including in Russia where the entire leadership team was replaced in 2013,” the company stated.

In 2012, Teva named a global head of compliance and said it has completely transformed its governance program and processes on every level. “This resulted in actions including, terminating problematic business relationships with third parties, separating relevant employees from the company, overhauling the management of several subsidiaries, and ceasing operations in several countries,” Teva stated.

“We have also restructured the company through a new global organizational structure and chain of command that reduces risks,” Teva added. “In order to institute a culture of compliance throughout the organization, we have also trained tens of thousands of employees on compliance and anti-corruption measures, protocols, and best practices.”

Because many of the company’s compliance enhancements were more recent—and, therefore, have not been tested—the DPA imposes an independent compliance monitor for a term of three years. In response, Teva CEO Vigodman said, “We welcome working with the monitor as an added step in our process to ensure the program we have put in place is working as designed.”