Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you four compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee and listen to the Daily Compliance News. All from the Compliance Podcast Network.
Stories we are following in today’s edition of Daily Compliance News:
The award-winning, Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to explore a subject more. In this episode, we consider the recent collapse of the cryptocurrency trading platform FTX. We look at it from a variety of angles. Highlights include:
· Where does FTX rate in terms of catastrophic business failures?
· What were the internal control failures?
· How much fraud was involved?
· FTX is domiciled outside the US. What does that mean for the review process?
· Will this lead to regulation over crypto?
Resources
Matt Levine in Bloomberg on FTX’s balance sheet
Matt Kelly in Radical Compliance
We continue our exploration of one of the most public cases of corporate moral bankruptcy where Lafarge SA and its Syria unit Lafarge Cement Syria, or LCS, each pled guilty to a count of conspiring to provide material support to foreign terrorist organizations and will pay a total of $777.78 million. According to the Plea Agreement, this amount consisted of a total criminal fine of approximately $91 million and forfeiture of $687 million. As I noted in Part 1, this is not a Foreign Corrupt Practices Act (FCPA) enforcement action, but an enforcement action based on USC §2339B for one count of conspiracy to provide material support to one or more foreign terrorist organizations. While this is not a FCPA enforcement action, the mechanisms by which Lafarge paid bribes or otherwise funded the terrorist organizations ISIS and ANF are instructive for the anti-corruption compliance professional. These strategies were laid out in the Statement of Facts.
As noted in the Department of Justice (DOJ) Press Release, “After the start of the Syrian Civil War in 2011, Lafarge and LCS negotiated agreements to pay armed factions in the Civil War to protect LCS employees, to ensure continued operation of the Jalabiyeh Cement Plant, and to obtain economic advantage over their competitors in the Syrian cement market… LCS executives purchased raw materials needed to manufacture cement from ISIS-controlled suppliers; paid monthly “donations” to armed groups, including ISIS and ANF, so that employees, customers and suppliers could traverse checkpoints controlled by the armed groups on roads around the Jalabiyeh Cement Plant; and eventually agreed to make payments to ISIS based on the volume of cement that LCS sold to its customers, which Lafarge and LCS executives likened to paying “taxes.” Lafarge and LCS executives intentionally structured their agreements with ISIS to compensate the terrorist organization based on the amount of cement that LCS was able to sell – effectively, a revenue-sharing agreement – to incentivize the terrorist group to act in LCS’s economic interest.”
From August 2013 through October 2014, Lafarge and LCS paid ISIS and ANF, through intermediaries, the equivalent of approximately $5.92 million, through a variety of schemes. One consisting of fixed monthly “donation” payments to ISIS and ANF. According to the Statement of Facts, “LAFARGE and LCS conspired to make various payments, through intermediaries, to and for the benefit of ISIS and ANF, which the government estimates totaled the equivalent of approximately $5.92 million. These payments consisted, at various times, of flat monthly “donation” payments totaling approximately $816,000.”
There was also a variable payment scheme based on the amount of cement LCS sold that totaled approximately $1,654,466. Under this variable payment scheme, it tied Lafarge’s and LCS’s obligation to pay ANF and ISIS to the amount of cement sold from the plant. This arrangement should ensure “that the payments would be made by LCS’s customer-distributors directly to ANF and ISIS, and to ensure that PYD and ISIS were able to collect the full amount of the payments from the customer-distributors, LCS would provide PYD and ISIS with records of LCS’s sales to its customer-distributors.”
Finally, there were the “payments to ISIS-controlled suppliers to purchase raw materials needed to produce cement that totaled approximately $3,447,528.” These payments were made through intermediary brokered material supply agreements. These ISIS controlled suppliers then paid monies to ISIS based on the amount of their sales to LCS.
Lafarge and LCS executives actively concealed their scheme to provide material support to ISIS and ANF. According to the Press Release:
Once again there are multiple compliance lessons from this recitation. The use of ‘donations’ to cover the payments to ISIS should have been a glaring red flag for anyone looking. The lack of due diligence on the intermediaries and suppliers is also a glaring oversight. The attempts to hide the nature of the transactions by Lafarge’s executives by requiring the intermediaries to create entities with names not associated is another red flag. Of course, the fraudulent descriptions for services should also be considered. Finally, there was the deletion of the name of Lafarge of LCS from its written contracts with ISIS.
There is one other area that bears consideration by the compliance professional. It is in the area of internal communications. As noted, “Many of the Lafarge and LCS executives involved in the scheme used personal email addresses, rather than their corporate email addresses, to carry out of the conspiracy.” In September, the Securities and Exchange Commission (SEC) announced “charges against 15 broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of more than $1.1 billion, and have begun implementing improvements to their compliance policies and procedures to settle these matters.”
Now consider that whopping fine and enforcement action in the context of the fraud of Lafarge executives. They were using communication tools outside standard communication channels to facilitate their crimes with ISIS and ANF. While in this matter, the emails were preserved (and made a part of the Statement of Facts); compliance professionals need to work with their corporate IT folks to make sure no executives or employees are using tools outside standard communications channels like AOL accounts or Gmail.
Join us tomorrow for some final thoughts on this sordid matter.
In today’s edition of Daily Compliance News:
In today’s edition of Daily Compliance News:
In today’s edition of Daily Compliance News:
Today we conclude our series on a Federal Anti-Kickback enforcement action which was announced last week, involving the Oregon based medical device manufacturer Biotronik Inc. (Biotronik). Today, I want to consider the corruption schemes and the lessons learned for the compliance professional. As stated in the Settlement Agreement, Biotronik “knowingly caused the submission of false claims for payment to federal healthcare programs by providing remuneration to physicians to induce them to use Biotronik’s CRM devices in violation of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b).”
I. The Bribery Schemes
a. Abuse of Training Programs
The Settlement Agreement alleges “Biotronik knowingly paid excessive payments to physicians with a purpose of inducing and rewarding their use of Biotronik’s pacemakers, defibrillators, and other cardiac devices. One of ways the company did so was through “its new employee training program (“Training Program”) by knowingly paying some of its physician customers (“Training Physicians”) to provide excessive employee trainings.” Under this scheme, the Training Physicians were to be paid a fixed fee of approximately $400.00 each time a Biotronik employee trainee received training during one of the Training Physician’s CRM implant procedures. For instance, under the Training Program implant procedure, the “Training Physician was supposed to educate the employee trainee on Biotronik’s devices and teach how to assist a physician during an implant procedure.”
However, it was the sales team which set up these training programs. Biotronik’s compliance and training functions warned that “Biotronik’s salespeople had too much influence in the selection of Training Physicians, that the Training program and resulting payments were being over- utilized, and that the goal of educating Biotronik employees could be achieved without paying Training Physicians.” However, “Biotronik permitted trainees to attend an excessive number of training procedures for which Training Physicians received payment from Biotronik without first conducting an adequate assessment of the trainee’s need for additional training.”
To further line the pockets of the Training Physicians, “salespeople, including managers, intentionally prevented otherwise qualified trainees from successfully completing the Training Program, not because they needed additional training, but rather as a means of ensuring that the trainee could attend more trainings, thereby purportedly justifying additional payments to Training Physicians.” Biotronik also knowingly paid Training Physicians for some trainings that either never occurred or was of little or no value to trainees. This included paying one “Training Physician for certain trainings for which there was no trainee physically present to observe the implant procedure.”
b. Lavish Entertainment
The Settlement Agreement also alleged that “Biotronik knowingly paid for lavish meals, entertainment, and travel for certain physicians who are known to Biotronik and the United States (hereinafter the “Subject Physicians”) with a purpose of inducing and rewarding their use of Biotronik’s pacemakers, defibrillators, and other cardiac devices.” The company “did not require sign in sheets for lavish meals with physicians and did not use adequate methods to verify the number or identity of attendees or to confirm whether the meals were for a legitimate business purpose.”
This led to some Biotronik employees falsifying “receipts and participant lists, making it possible to exceed the company’s compliance spending limit per attendee.” These meals and outings often included little or no legitimate business discussion. There was also the amount of the entertainment expense, which included “winery tours, annual office holiday parties, and lavish meals with certain Subject Physicians and their guests at high-end restaurants.” Yet another example of spending far too much on entertainment was “one Subject Physician’s international business class airfare and honoraria in the thousands of dollars for a short, 30-minute talk at an international conference.”
II. Biotronik Remediation
No doubt one of the reasons Biotronik did receive the settlement amount was that, at some point, it recognized the issues and instituted remediation. With the training programs “beginning in 2017, Biotronik added new compliance measures and oversight of the Training Program, limited the number of Training Program events, and reduced payments made in connection with such Training Program events.” In April 2021, Biotronik hired a new Vice President of Compliance and was able to get the lavish entertainment under control by adding “new compliance measures related to the provision of meals and travel to healthcare providers which provided additional employee training, imposed new restrictions, and improved oversight to identify and prevent meal and travel policy violations.”
III. Lessons Learned
There are multiple lessons here for the compliance professional outside the laws under which Biotronik ran afoul. Perhaps the clearest and foremost is that compliance not only needs visibility into areas of risk about also some modicum of control. In the area of Physician Training, the Settlement Agreement specifically noted that the Biotronik compliance function “warned that Biotronik’s salespeople had too much influence in the selection of Training Physicians, that the Training program and resulting payments were being over-utilized, and that the goal of educating Biotronik employees could be achieved without paying Training Physicians.” Here a control should have been put in place which required compliance approval before payments and reimbursements were made for the training. This is similar to a compliance oversight and control of expenses paid or reimbursed to foreign government officials in a Foreign Corrupt Practices Act (FCPA) compliance program.
Interestingly, the Department of Justice (DOJ) also discussed a more nuanced approach to determining if the Physician’s Training is both initially warranted and then continues to be warranted. This is ongoing monitoring. Obviously for Biotronik, one of their risks was when the company paid for training provided by doctors who could also prescribe the company’s products and services. The risk to the company is similar to the risk of an internationally focused company doing business with foreign governments or state-owned enterprises, under the FCPA. If you are paying out monies for training and that puts you in a high-risk category, you need to make sure those receiving the training are required to receive it or even need it.
Under the lavish spending on entertainment and travel, the same type of analysis can apply. The key is both “reasonable spending and business purpose.” The amount spent must be reasonable for the time, locale and participants. There should also be an articulated business purpose for the dinner or other event.
Under the FCPA, there is no threshold that a Company can establish a value for business entertainment. However, I believe there are clear guidelines which should be incorporated into your business expenditure policy, which should include the following:
The incorporation of these concepts into a compliance policy is a good first step towards preventing potential violations from arising, but it must be emphasized that they are only a first step. There must be procedures to implement these policies. At a minimum, you must require a business justification from the business representative requesting to provide the gift or business entertainment. Next it should be reviewed and approved by a front-line compliance professional. Then, depending on the amount and nature of the request, it may need Chief Compliance Officer (CCO) approval. Finally, if there is a Compliance Committee it should go to that Committee for a final check to make sure everything is in order.
These guidelines must be coupled with active training of all personnel, not only on a company’s compliance policy, but also on the corporate and individual consequences for violation of the policy. Lastly, it is imperative that all such business entertainment be properly recorded, as required by the books and records component of the FCPA.
And, as always, do not forget the gut check test.
Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to more fully explore a subject. In this episode, we dive deeply into the recent story of an in-house attorney who was disbarred for fraudulent activities in creating fraudulent claims and settlements. Highlights include:
· Background facts.
· Conflicts of Interests.
· What were the internal control failures?
· Were they material?
· Lessons for the compliance professional.
Resources
Matt in Radical Compliance
