FCPA Internal Controls: The Orthofix Complaint

From an internal control perspective in terms of global anti-bribery compliance, thecomplaint filed by the SEC in conjunction with its settlement with Orthofix International N.V. (“Orthofix”) provides a number of useful insights relative to the internal control provisions of the FCPA.  An issuer, Orthofix is a medical device company formed under the laws of Netherlands Antilles. It sells its products in Mexico through its wholly-owned subsidiary, Promeca S.A. de C.V. (“Promeca”).

The SEC’s complaint alleged that Promeca repeatedly paid bribes to officials of a Mexican government-owned healthcare and social services institution.  To obtain cash for the payments, Promeca executives wrote checks to themselves as cash advances.  Later, false receipts were submitted for “imaginary expenses”.  As the bribes increased in amount, the methodology changed to falsify records relating to training and promotional expenses. This led to training and promotional expenses being grossly over budget.

Later, Promeca established three front companies controlled by the officials of the healthcare and social services institution.   A percentage was paid to the front companies from the collected sales.   The bribes were concealed by having the front companies submit false invoices for training and other promotional expenses.  In addition, vacation packages, televisions, laptops, and appliances were employed to retain business with employees of the healthcare and social services institution.  Expenditures for these items were also falsely recorded as promotional and training expenses.

The action taken by the SEC with respect to Orthofix has been noted for the absence of an allegation of a violation of the anti-bribery provisions of the FCPA. But regardless of whether provable violations of the anti-bribery violations were involved, the SEC complaint looked to the clear violations of the accounting and record-keeping provisions of the FCPA.  Manifest were the countless violations of the record-keeping provisions associated with the false invoices and inaccurate record-keeping.

But, in particular, the SEC’s complaint provided useful insights as to the contours of theinternal accounting control provisions in an international context.  Among the factors cited was the failure to have an FCPA compliance and training program “commensurate” with the extent of its international operations and especially for a subsidiary which had substantial sales to government-owned enterprises.  The complaint also noted the failure to provide guidance and training in a local language.

In addition, the SEC also found that the frequency by which Promeca’s training and promotional expenses were over budget should have been perceived as a red flag calling for investigation.  Though unstated in the SEC’s complaint, in an industry where promotional expenses had been at the heart of many investigations, such a failure to monitor training and promotional expenses clearly reflected a failure to institute adequate internal controls.

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