How does a corporate compliance function work to prevent corruption when the customer is part of the bribery scheme? Compliance professionals should enhance their controls and oversight to both detect and prevent this new Foreign Corrupt Practices Act wrinkle, as this situation cropped up in three separate FCPA enforcement actions in 2018.
In September, the Petrobras FCPA enforcement action set many new standards, including the highest FCPA penalty in history. The corruption was so massive that the Justice Department said in the non-prosecution agreement (NPA) that the total amount of corruption was over $2 million, but “the precise number is unknown.” Yet, for the compliance professional, one of the most important lessons was how the pot of money to pay the bribes was generated. The NPA stated, “The money to pay the bribes was often funneled through fictitious costs, including consultancy agreements, incurred by the contractors in association with Petrobras … creating conditions … that allowed for the contractors to continue generating the funds needed to make the corrupt payments.” These inflated amounts paid to the corrupt contractors were capitalized as legitimate costs and hidden as part of the particular contracts by Petrobras. These excess funds were then transferred by the corrupt companies to offshore bank accounts.
The second FCPA enforcement action, also from September, involved medical technology company Stryker. Stryker used dealers as a business model in its India operations, approximating a distributorship sales model. The dealers purchased Stryker products at a discount and then sold the products at an uplift over their costs. In a twist from the standard distributor model, however, the dealers were not free to negotiate their sales prices with customers—hospitals, doctors, and healthcare providers (HCPs). These HCPs would then request and receive from the dealers an inflated invoice, with a price at an uplift above the agreed-upon pricing. These inflated costs were passed on to the HCPs’ patients, customers, and their insurers. The HCPs would pay the agreed-upon price and pocket the uplift paid by the patients, customers, and their insurers. It is not clear from the court order if this uplift was pocketed by individuals as bribes or was simply fraudulent over-charging by the HCPs.
The first line of defense is internal controls. If there are discounts given, make sure they are properly vetted by more senior company employees who should review and approve the discounts.
The third FCPA enforcement action, from December, involved Polycom’s Chinese business unit, which obtained business by offering and making corrupt payments to government officials who directed Polycom products to be purchased. The basic bribery scheme was a discount between the price reported to Polycom and that paid by the buyer. These discounts were not passed on to the customer, but the price differences were used to create a pile of money for the company’s distributors to pay bribes to the Chinese government officials. Once again, this discount formed the basis of the money to pay the bribe.
What can or should a compliance officer do to protect a company from such bribery schemes?
- First and foremost, the CCO must channel his inner Woodward and Bernstein and follow the money. This means following how money goes out of the company even if the business unit is actively trying to hide its nefarious conduct. The first line of defense is internal controls. If there are discounts given, make sure they are properly vetted by more senior company employees who should review and approve the discounts. These higher-ranking employees may have to look behind the façade of reasons presented to them for discounts such as competitive pricing and pricing concerns of customers. While some compliance oversight is difficult or requires extra effort, there is no excuse for careless monitoring.
- Next, the compliance officer must have a firm grasp on pricing so that if the pot of money to fund the bribe is built into the contract pricing it can be ascertained.
- Finally, pay attention to whom the company is doing business with from the corruption perspective, just as the company does with its sales channel partners.
Always remember that the money to fund a bribe must come from somewhere, and there is now a clear link between bribery and the company sales model. Chief compliance officers need to understand pricing and always be aware of what discounts were given, why they were given, and how they were given. Even if it takes some digging.