In September, the Securities and Exchange Commission brought an FCPA-driven enforcement action against Alere, Inc., a Massachusetts-based medical manufacturer, for the company’s extensive revenue recognition failures as well as for bribing foreign officials. 

Alere agreed to pay more than $13M for bribing foreign officials and committing accounting fraud to meet revenue targets. Of that sum, the company agreed to disgorge $3.3 million, interest of about $495,000 and pay a penalty of $9.2 million. 

The SEC found that the South Korean subsidiary of Alere Inc., which produced and sold diagnostic testing equipment, improperly inflated revenues by prematurely recording sales for products that were still being stored at warehouses or otherwise not yet delivered to the customers or the distributors.  

Alere also intentionally engaged in improper revenue recognition practices at several other subsidiaries from 2010 to 2015, noted the SEC order. It turned on a practice called “postponement of delivery” where customers agreed not to take delivery and submitted a “Declaration of Postponement” form to the company’s Chinese subsidiary.

There will no doubt be more overlap under the new revenue recognition rules that become effective in December. It is unsurprising that a company willing to play fast and loose with basic revenue recognition rules would also do the same around illegal bribery schemes.

The firm miscalculated its taxes due and made material misstatements on its financial returns, which led to a restatement of financials and in turn to the SEC finding a lack of effective internal controls over financials. But this shortcoming extended to compliance internal controls, as well.

The bribery schemes were equally straightforward. In Colombia, the company purchased BioSystems, a distributor of its products, and made it a corporate subsidiary, Alere Colombia. Alere had been making improper payments before the acquisition and continued to do so after the transaction closed. Biosystems disguised these improper payments as payments for purported consulting services from the employee’s husband, sister-in-law, and friend. 

In India, the company’s subsidiary was told by its Indian distributor that it would be required to make a 4 percent commission payment to government officials to win contracts. This corrupt payment was approved by the company’s vice president of marketing and sales, and the payment was affected. Worst of all, when the company discovered the illegal payments, it simply pocketed the profits it made from them.

There are several lessons to be garnered from the Alere FCPA enforcement action. First is the increasing interplay of revenue recognition and compliance programs. There will no doubt be more overlap under the new revenue recognition rules that become effective in December. It is unsurprising that a company willing to play fast and loose with basic revenue recognition rules would also do the same around illegal bribery schemes. Further, the lack of effective financial internal controls may well be some indicia of the lack of effective compliance controls. 

This also underscores the need to perform thorough pre-acquisition due diligence—including a forensic FCPA audit—prior to a merger or acquisition. If a company was engaging in bribery and corruption before before being purchased and it continued to do so after being purchased, it is now the parent company that is engaging in bribery and corruption.

The Alere FCPA enforcement action points to another key issue, the type of FCPA enforcement action involved in many cases. There has not yet been a resolution of the Department of Justice investigation into Alere, so there may well be criminal charges brought or some other type of DoJ resolution. Yet when you contrast Alere with the Telia Co. FCPA enforcement action, also from September, one is struck by both the quantitative and qualitative difference in the actions. There is a spectrum of FCPA enforcement actions leading down a line. Telia was a criminal matter and involved a $965 million fine. This is an administrative resolution, which the SEC is well-suited to provide, and perhaps this could be a model for a more regulatory approach to FCPA enforcement going forward.

While the lion’s share of the work on this case was done under the prior administration, the matter provided clear guidance that under Attorney General Jeff Sessions, the DoJ will actively and aggressively prosecute obvious legal wrongdoers.

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