Analogic and Johnson Controls Settlements Shed Further Light on the Implementation of DOJ’s FCPA Pilot Program

These resolutions provide further insight into how DOJ is implementing the Pilot Program and, specifically, underscore the importance of fully disclosing all relevant facts if a company chooses to self-report and avail itself of the Pilot Program.

A.   BK Medical and Analogic Settlements

According to the settlement documents, from at least 2001 through early 2011, BK Medical engaged in an improper payment scheme involving its largest Russian distributor. Specifically, after the terms of a sale between BK Medical and a distributor had been agreed upon, BK Medical would issue invoices falsely inflating the sales price of the sold equipment at the request of its distributor. The distributor then overpaid BK Medical, which, in turn, transferred the excess payments to third parties as directed by the distributor. In total, as part of this scheme, BK Medical channeled approximately $20 million in payments to various third parties, and concealed those payments by incorporating fictitious invoices into BK Medical's financials, which were ultimately incorporated into Analogic's books and records.[3]  In 2011, upon discovery of some of these transactions, Analogic began an internal investigation and voluntarily disclosed the questionable conduct to the DOJ and the SEC. 

In addition to suspicious transactions in Russia, the settlement documents indicate that, to a lesser extent, there were also suspicious transactions to distributors in Ghana, Israel, Kazakhstan, Ukraine and Vietnam from December 2001 to early 2011. The arrangements followed the same structure as the transactions in Russia but the distributors' creation of fictitious documents varied in degree. BK Medical served as a conduit for at least 80 payments to third parties pursuant to arrangements with these other distributors, totaling approximately $3.8 million. The SEC took the position that BK Medical's payment arrangements with its distributors created a significant risk that BK Medical was facilitating bribery or other prohibited conduct, such as embezzlement or tax evasion. The SEC has taken similar positions in other recent settlements, such as with BHP Billiton, where there appeared to be clear evidence of a risk of bribery, but not of actual bribery.[4]

On June 21, 2016, it was announced that BK Medical and Analogic had entered into settlements with the DOJ and the SEC. Specifically, BK Medical agreed to enter into a non-prosecution agreement ("NPA") with the DOJ and to pay a $3.4 million criminal penalty for violating the books and records provision of the FCPA. Analogic also agreed to pay the SEC $7.7 million in disgorgement and $3.8 million in prejudgment interest to settle charges that it failed to keep accurate books and records and maintain adequate internal accounting controls. The total amount paid in connection with these settlements is approximately $14.9 million. 

According to the DOJ, in deciding to resolve this matter by an NPA, the DOJ considered that BK Medical had no prior criminal history, committed to continue enhancing its compliance program and internal controls and to continue cooperating with the DOJ and with "foreign authorities that are prosecuting individuals involved in this matter". Although the self-reporting occurred prior to the announcement of the Pilot Program, the NPA makes clear that the DOJ nonetheless evaluated the resolution using the Program's criteria. BK Medical received "full credit" for its voluntary disclosure, and for "engag[ing] in extensive remedial measures, including enhanced financial controls related to payments and invoicing, enhanced FCPA training, and a new distributor due diligence program."[5] Notably, BK Medical did not receive full cooperation credit because, in the view of the DOJ, BK Medical's "cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts"  including "information that was known to [BK Medical] and Analogic about the identities of a number of the state-owned entity end-users of the Company's products, and about certain statements given by employees in the course of the internal investigation."  The NPA also notes that, by the conclusion of the investigation, BK Medical "had provided to the [DOJ] all relevant facts known to it, including information about individuals involved in the FCPA misconduct."  

While the Pilot Program allows for a discount of up to 50% off the bottom of the U.S. Sentencing Guidelines fine range, BK Medical received only a discount of 30% off the bottom of the range presumably because it did not provide what DOJ considered to be "full" cooperation.

B.   JCI Declination and SEC Settlement

According to the settlement documents, from 2004 to 2006, York Refrigeration Marine China Ltd. ("YRMC"), a subsidiary of York International ("York"), made improper payments to agents and others, including Chinese government personnel at the shipyards, to obtain business. The payments were described in YRMC's books and records as commissions, sales and marketing expenditures, or gifts and entertainment. JCI acquired York in 2005, while York was subject to an ongoing SEC investigation related to FCPA misconduct. Subsequent to JCI's acquisition, the SEC brought an enforcement action against York in 2007, which included charges based on YRMC's conduct. As part of the SEC's resolution with York, JCI had certain obligations, including the appointment of an independent compliance monitor who was required to ensure that JCI properly integrated York into its anticorruption compliance program. JCI devoted additional resources to its compliance program specific to its China-based operations, including hiring a new managing director for its subsidiary, limiting the use of agents, and conducting multiple compliance trainings for its employees. 

Despite JCI's remediation efforts, from 2007 to 2015, the new managing director and approximately 18 employees of JCI's China-based subsidiary made payments to sham vendors, some of which were then used to make improper payments of approximately $4.9 million to employees of Chinese government-owned shipyards, ship-owners and others, to obtain and retain business, as well as to personally enrich employees of the subsidiary. The improper vendor payments were incorporated into JCI's books and records, and the SEC alleged that JCI failed to devise and maintain a system of internal accounting controls that could detect and prevent such payments. JCI learned of the vendor-related conduct in December 2012 when it received the first of two anonymous hotline reports alleging that certain employees at its Chinese subsidiary were making payments to sham vendors.[6]  JCI self-disclosed the potential violations to the SEC and the DOJ and conducted an internal investigation.

On July 11, 2016, it was announced that JCI received a declination letter from the DOJ and entered into a settlement agreement with the SEC with respect to this conduct. In connection with the  SEC settlement, JCI will disgorge $11.8 million in profits and pay $1.38  million in prejudgment interest and a fine of $1.18 million for a total payment of approximately $14.4 million.

As with Analogic and BK Medical, while JCI's self-report occurred before the announcement of the Pilot Program, the DOJ considered the matter under the Pilot Program criteria.  The factors considered by the DOJ in declining include: JCI's voluntary self-disclosure; JCI's thorough internal investigation; JCI's full cooperation in the matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct); JCI's efforts to enhance its compliance program and its internal accounting controls; JCI's full remediation,[7] profit disgorgement and payment of a civil penalty to the SEC; and JCI's agreement to continue to cooperate in any ongoing investigations of individuals.[8]

The DOJ's declination letter warned that the DOJ would reopen the investigation if additional information or evidence so warrants.[9]