Month: May 2020

On April 30, Compliance Week issued the 2020 Anti-Bribery & Corruption Benchmarking Report.  The risk solutions firm Kroll produced the Report (available via this link) based on survey responses from more than 150 compliance and risk professionals.  Overall, the Report covers four categories of anti-bribery and corruption (ABC) related concerns: third-party risk, enhanced due diligence, third-party training, and emerging technologies.

Key findings of the Report include the following:

• ABC Program Effectiveness: Only 56 percent of responses rated their companies’ ABC programs as highly effective (22 percent) or effective (34 percent), while 29 percent rated their programs moderately effective, 8 percent minimally effective, and 7 percent non-effective.
• Adequacy of Resources: A majority of respondents viewed “adequate resources” as a critical factor in ABC program success. 85 percent of those who rated their programs highly effective or effective said they had adequate resources.  In contrast, 67 percent of those who rated their programs moderately effective or lower said that they lacked sufficient resources.
• Changes in Bribery and Corruption Risks: When asked whether they anticipated that bribery and corruption risks to their companies would increase, decrease, or stay the same over the next two to three years,
  • Increase: 48 percent of those rating their programs moderately effective or lower, and 29 percent of those rating their programs highly effective or effective, said risks would increase.
  • Decrease: 17 percent of those rating their programs highly effective or effective, and only 3 percent of those rating their programs moderately effective or lower, said risks would decrease.
  • Stay the Same: 46 percent of those rating their programs highly effective or effective, and 39 percent of those rating their programs moderately effective or lower, said risks would stay the same.
• Third Parties in High-Risk Jurisdictions: An equal percentage (33 percent) of those rating their programs highly effective or effective and those rating their programs moderately effective or lower reported that they had third parties operating in high-risk jurisdictions internationally. 50 percent of those rating their programs highly effective or effective, and 40 percent of those rating their programs moderately effective or lower, reported that they did not.
• C-Suite Awareness of Potential Third-Party Risk: 61 percent of respondents said that their C-Suite was aware of the potential third-party risk that their enterprises faced prior to engaging with them. Another 23 percent said that their C-Suite was sometimes aware of that potential risk, while 13 percent said their C-Suite was not aware.
• Enhanced Due Diligence of Third Parties: The Report stated that “many companies, according to the survey results, still have mediocre ABC programs is particularly concerning when it comes to enhanced due diligence of third parties.”  More than half (56 percent) of those rating their programs highly effective or effective, and 43 percent of those rating their programs moderately effective or lower, said less than 25 percent of their third parties undergo enhanced due diligence (EDD).  More troubling, 5 percent of those rating their programs highly effective or effective, and 14 percent of those rating their programs moderately effective or lower, said that none of their third parties undergo EDD.
• EDD Challenges: 38 percent of respondents stated that their biggest challenge regarding EDD was lack of knowledge, while 34 percent rated cost and 15 percent rated delivery time as the biggest challenge.
• ABC Training for Third Parties: A surprising 46 percent of all respondents, and 37 percent of respondents with third parties in high-risk areas, said that they never train their third parties on ABC.  44 percent of those rating their programs highly effective or effective, and 39 percent of those rating their programs moderately effective or lower, said they trained their third parties annually.  19 percent of those rating their programs highly effective or effective, and 15 percent of those rating their programs moderately effective or lower, said they trained their third parties less frequently (every 2 or 3-5 years).
• ABC Training Methods for Third Parties: Methods that respondents said their companies were using for such training included “an anti-bribery statement in the Code of Conduct (55 percent), text within the onboarding questionnaire (39 percent), certifications in contract materials (35 percent), and online or Web-based training (25 percent).” As for followup on such trainings, 45 percent of respondents said that they used attestations, 37 percent questionnaires, 32 percent auditing, and 26 percent in-person meetings.  7 percent said that they did not do followup.
• Emerging Technologies: When asked what emerging technologies their companies currently user or plan to use to enhance their anti-bribery programs, 60 percent said that they did not plan to use artificial intelligence (AI), blockchain, or machine learning.  26 percent said they use or plan to use AI, 8 percent blockchain, and 18 percent machine learning.  In addition, 65 percent of respondents said that their third-party due diligence vendors do not use AI or any other sort of machine learning when conducting their checks.

Note:  ABC compliance officers should use this Report, as it recommended, to benchmark their own ABC programs and identify areas for review and improvement.  The survey results indicate that far too many corporate ABC programs have deficiencies that range from significant to severe, especially with regard to effectively managing third-party risk.  Even if the economic damage that companies are enduring from coronavirus is substantial and likely to last for one or more years, companies must still take stock of their current-state programs and make sure that those programs have a defensible amount of resources devoted to critical ABC compliance needs.

On April 30, the U.S. Department of Justice announced that it had filed a criminal information against Florida-based oncology group Florida Cancer Specialists & Research Institute LLC (FCS). The information charged FCS with violating section 1 of the Sherman Act by conspiring to allocate medical and radiation oncology treatments for cancer patients in Southwest Florida.  The Department’s release stated that over a 17-year period — beginning as early as 1999 and continuing until at least 2016 — FCS entered into an illegal agreement that allocated chemotherapy treatments to FCS and radiation treatments to a competing oncology group.

The Antitrust Division of the Department also announced that it had entered into a deferred prosecution agreement (DPA), resolving the Sherman Act charge, with FCS.  Under the terms of the DPA, FCS admitted to conspiring to allocate chemotherapy and radiation treatments for cancer patients.  It also agreed to pay a $100 million criminal penalty, to cooperate fully with the Antitrust Division’s ongoing investigation into market allocation in the oncology industry, and to maintain an effective compliance program designed to prevent and detect criminal antitrust violations.

In addition, on April 30 the Florida Office of the Attorney General (OAG) announced that after a parallel civil investigation into oncology market allocation, it filed a civil complaint against FCS, charging it with violating Florida antitrust laws by conspiring in the market-allocation scheme.  The OAG stated that it had reached agreement with FCS on a proposed consent decree “to pay more than $20 million in disgorgement of profits and other relief over four years to resolve the investigation.”

FCS also reportedly agreed to comprehensive injunctive relief, including undertaking a “robust compliance program to ensure conformity with Florida’s antitrust laws,” and to continue to cooperate with the OAG’s ongoing investigation into the alleged market allocation.  The proposed agreement with FCS will still need to be approved by a court.

Note:  Antitrust and health-care compliance officers should take note of these resolutions with FCS, which is reportedly one of the largest independent oncology groups in the United States.  The Justice Department release made a point of stating that the Sherman Act change against FCS was only the first in its ongoing investigation of market allocation in the oncology industry.  As the Florida OAG also noted that its investigation is ongoing, both the Department and the OAG are likely to announce further resolutions with Florida oncology practices.

Antitrust compliance officers should therefore brief their companies’ senior management about the FCS resolutions, making clear that market allocation is a core antitrust violation, and use those resolutions in their in-house antitrust complaint training programs.

On May 1, the U.S. Department of Justice announced that it had obtained a guilty plea from ice cream manufacturer Blue Bell Creameries L.P. (Blue Bell) to misdemeanor charges under the federal Food, Drug and Cosmetic Act that it had shipped contaminated ice cream products that were linked to a 2015 listeriosis outbreak.  It also stated that Blue Bell’s former president, Paul Kruse, was separately charged in connection with the outbreak, in an information charging seven felony counts of conspiracy and attempted wire fraud relating to Kruse’s alleged efforts to conceal from customers what Blue Bell knew about the listeria contamination.

Under the terms of the plea agreement, Blue Bell agreed to pay a criminal fine and forfeiture totaling $17.25 million.  Under a separate resolution with the Justice Department, it also “agreed to pay an additional $2.1 million to resolve civil False Claims Act allegations regarding ice cream products manufactured under insanitary conditions and sold to federal facilities.”  The $19.35 million total, the Department stated, constitutes “the second largest-ever amount paid in resolution of a food-safety matter.”

The charges against Blue Bell stemmed from a series of actions that Blue Bell took after Texas state officials notified it in February 2015 that two ice cream products from the company’s Texas factory tested positive for Listeria monocytogenes. This bacteria, according to the Mayo Clinic, can causes listeriosis, an illness that “can be fatal to unborn babies, newborns and people with weakened immune systems.”

The plea agreement with Blue Bell stated that Blue Bell “directed its delivery route drivers to remove remaining stock of the two products from store shelves, but . . . did not recall the products or issue any formal communication to inform customers about the potential listeria contamination.”  Two weeks after they were notified of the first positive listeria tests, “Texas state officials informed Blue Bell that additional testing confirmed listeria in a third product.  Blue Bell again chose not to issue any formal notification to customers regarding the positive tests.”

In March 2015, the Food and Drug Administration (FDA) and Centers for Disease Control and Prevention (CDC) conducted tests that “linked the strain of listeria in one of the Blue Bell ice cream products to a strain that sickened five patients at a Kansas hospital with listeriosis.”  On March 13, 2015, the FDA, CDC, and Blue Bell all issued public recall notifications.  On March 23, 2015, a second recall announcement was made after “[s]ubsequent tests confirmed listeria contamination in a product made at another Blue Bell facility in Broken Arrow, Oklahoma.”

FDA inspections in March and April 2015 found sanitation issues at Blue Bell’s Texas and Oklahoma facilities, “including problems with the hot water supply needed to properly clean equipment and deteriorating factory conditions that could lead to insanitary circumstances.”  After temporarily closing all of its plants in April 2015 to clean and update the facilities, Blue Bell reopened its facilities in late 2015.  The Justice Department credited the company with “tak[ing] significant steps to enhance sanitation processes and enact[ing] a program to test products for listeria prior to shipment.”

The Justice Department’s civil False Claims Act settlement with Blue Bell resolves allegations that the company

shipped ice cream products manufactured in insanitary conditions to U.S. facilities, and later failed to abide by contractually required recall procedures when its employees removed products from federal purchasers’ freezers without properly disclosing details about the potentially contaminated ice cream to the appropriate federal officials.

The Justice Department also stated that the information against Kruse alleges that he “orchestrated a scheme to deceive certain Blue Bell customers after he learned that products from the company’s Texas factory tested positive for Listeria monocytogenes.”  In particular, Kruse allegedly “directed other Blue Bell employees to remove potentially contaminated products from store freezers without notifying retailers or consumers about the real reason for the withdrawal,” and “directed employees to tell customers who asked why products were removed that there had been an unspecified issue with a manufacturing machine instead of that samples of the products had tested positive for listeria.”

In a public statement issued on May 1, Blue Bell said that in 2015, it was “heartbroken” about the events that led to its voluntary recall of all of its ice cream from the market, and apologized “to everyone who was impacted.”  It acknowledged that the May 1 agreement with the Justice Department “reflects that we should have handled many things differently and better.”  Since it resumed production in 2015, the company noted, it tests its ice cream “and deliver[s] it to stores only after independent tests confirm it is safe.”

Note:  Coming only ten days after the $25 million fine against Chipotle Mexican Grill for criminal charges stemming from food adulteration that sickened more than 1,100 people, this resolution with Blue Bell provides a strong indication that the Justice Department is treating food safety as a significant consumer-protection and criminal-enforcement issue.  That commitment to food-safety enforcement may become more evident in the coming months, as law enforcement and regulatory agencies monitor food manufacturers’ and chain restaurants’ efforts to reopen in the midst of the coronavirus pandemic.

The Kruse information also provides a strong reminder to all corporate executives that when confronted with potentially damaging information about their companies’ products or services, it is never an acceptable option to limit the damage by concealing that information from, or lying outright to, their customers or the public.  (P.S.: The fact that Kruse was charged by information is noteworthy, as the Justice Department routinely charges by information only when it expects the charged defendant to plead guilty to those charges.)

On April 30, two announcements by the U.S. Department of Justice disclosed that Israel’s largest bank, Bank Hapoalim B.M. (BHBM), and its Swiss subsidiary, Bank Hapoalim (Switzerland) Ltd. (BHS), would pay a total of approximately $904 million in multiple resolutions with federal and state agencies, regarding two separate investigations into tax-evasion facilitation and a money-laundering conspiracy associated with the Fédération Internationale de Football Association (FIFA) soccer bribery scandal.

Tax-Evasion Facilitation

First, the U.S. Attorney’s Office for the Southern District of New York and the Justice Department announced that BHBM and BHS had entered into multiple resolutions with the U.S. Department of Justice and other agencies “for conspiring with U.S. taxpayers and others to hide more than $7.6 billion in more than 5,500 secret Swiss and Israeli bank accounts and the income generated in these accounts from the Internal Revenue Service (the “IRS”).”  In connection with its resolutions with the Justice Department, BHBM and BHS agreed to pay approximately $874.27 million — which included restitution to the IRS, fines, penalties, and forfeiture – to the U.S. Department of the Treasury, the Federal Reserve Board, and the New York State Department of Financial Services.

Under the terms of the resolutions with the Justice Department, BHS agreed to plead guilty to a criminal information charging BHBM and BHS with conspiracy to defraud the United States and the IRS, to file false federal income tax returns, and to evade federal income taxes for the period from 2002 to 2014. BHBM entered into a deferred prosecution agreement (DPA) under which it agreed “to refrain from all future criminal conduct, implement remedial measures, and cooperate fully with further investigations into hidden bank accounts.“  As part of thee resolutions, BHBM and BHS agreed to pay a total of $616.91 million in restitution, forfeiture, and fines.

According to the Justice Department, from at least 2002 to at least 2014 employees of BHBM and BHS assisted U.S. customers in concealing their ownership and control of assets and funds held at BHBM and BHS (the “Bank”), which enabled those U.S. customers to evade their U.S. tax obligations, by engaging in six specified types of conduct:

1. “Assisting U.S. customers with opening and maintaining accounts in the names of pseudonyms, code names, trust accounts, and offshore nominee entities;”
2. “Opening customer accounts for known U.S. customers using non-U.S. forms of identification;”
3. “Enabling U.S. taxpayers to evade U.S reporting requirements on securities’ earnings in violation of the Bank’s agreements with the IRS;”
4. “Providing “hold mail” services for a fee, avoiding any correspondence regarding the undeclared account being sent to the U.S.;” and
5. “Offering back-to-back loans for U.S. taxpayers to enable them to access funds in the United States that were held in offshore accounts at the Bank in Switzerland and Israel;” and
6. “Processing wire transfers or issuing checks in amounts of less than $10,000 that were drawn on the accounts of U.S. taxpayers or entities in order to avoid triggering scrutiny.”

The Department also stated that “[a]t least four senior executives of the Bank, including two former members of BHS’s board of directors, were directly involved in aiding and abetting tax evasion of U.S. taxpayers.”

In announcing the resolutions with BHBM and BHS, the Justice Department stated that the fine and penalty amounts

take into consideration that the Bank, after initially providing deficient cooperation through an inadequate internal investigation and the provision of incomplete and inaccurate information and data to the Government, thereafter conducted a thorough internal investigation, provided client-identifying information, and cooperated in ongoing investigations and prosecutions.

For example, according to the DPA, the Justice Department

uncovered evidence of the criminal misconduct of a BHS senior executive and board member in July 2016 through its own investigation, with no assistance from the Bank. In addition, the Bank provided unreliable data to the Department regarding, among other things, the identification of U.S. related accounts at BHS, and did not engage an external accounting firm for the purpose of assisting in providing data to the Department until May 2017.

The DPA further stated that the Bank “failed to take adequate steps to preserve email, in that the Bank did not retain all available email records, and certain relevant email boxes were deleted up through mid-2016 and certain relevant back-up tapes were deleted up through mid-2018.”

In addition to the Justice Department resolutions, the Federal Reserve Board settled with BHBM, imposing a civil money penalty of $37.35 million.  Although BHBM neither admitted nor denied any statements by the Board concerning the Bank’s conduct, the Board stated in its order that from at least 2002 through 2014, BHBM “offered certain products and services that U.S. taxpayers used to conceal their assets from U.S. tax authorities, including back-to-back loans offered through [BHBM’s U.S. branches.]”  (Back-to-back loans, the Board explained, frequently involved a loan from the U.S. Branches to a U.S. taxpayer that was secured by an undeclared offshore account owned or controlled by the same taxpayer at BHBM or [BHS] . . . .”  These back-to-back loans “allowed U.S. taxpayers to access the economic value of the undeclared offshore funds without actually transferring them to the United States, preventing a paper trail that could alert U.S. tax authorities to the funds.”)

Finally, the DFS, in coordination with the Board, imposed an additional penalty of $220 million on BHBM and BHBM’s New York branches.  The DFS noted that the penalty amount in part reflects BHBM’s “initial failure to meet expectations for cooperation” with DFS investigations:

During the initial phase of DFS’ investigation, the Bank, through its then-lead outside counsel, conducted an internal investigation, but it involved only a limited review of the Bank’s operations, and, as a result, some of the information the Bank provided to DFS later proved to be incomplete and therefore inaccurate.

Money-Laundering Conspiracy

Second, the U.S. Attorney’s Office for the Eastern District of New York and the Justice Department announced that BHBM and BHS had entered into a non-prosecution agreement (NPA) under which BHBM and BHS “agreed to forfeit $20,733,322 and pay a fine of $9,329,995 to resolve an investigation into their involvement in a money laundering conspiracy that fueled an international soccer bribery scheme.”  In particular, BHBM and BHS “admitted that they, through certain of their employees, conspired to launder over $20 million in bribes and kickbacks to soccer officials with Fédération Internationale de Football Association (“FIFA”) and other soccer federations.”

Based on a statement of facts to which BHBM and BHS stipulated,

from approximately December 10, 2010 to February 20, 2015, BHBM and BHS personnel conspired with sports marketing executives, including executives associated with Full Play Group S.A. (“Full Play”), a sports media and marketing business based in Argentina, and others, to launder at least $20,733,322 in bribes and kickbacks to soccer officials.  In exchange for those bribes and kickbacks, the soccer officials awarded or steered broadcasting rights for soccer matches and tournaments to the sports marketing executives and their companies.

Even though BHS compliance personnel “repeatedly rais[ed] concerns about certain payments made to soccer officials from the accounts associated with Full Play, BHBM and BHS failed to take action,” and “the banks’ relationship managers continued executing illicit bribe and kickback payments on behalf of Full Play.”

Note:  On their face, these two cases involve different categories of criminal conduct.  Taken together, however, they illustrate the importance of maintaining consistently effective compliance programs across all areas of financial crimes.  They also indicate, unfortunately, that any company or financial institution under investigation needs to have a clear understanding of the scope and methodology that outside counsel propose for their internal investigation, and should validate that methodology and internal-investigation findings before those findings are submitted to law enforcement or regulatory agencies.