Following up on our prior blog post regarding Teva, on December 22, 2016, the US Department of Justice (DOJ) and the Securities Exchange Commission (SEC) announced a joint fine of approximately $519 million to settle parallel civil and criminal charges that Teva allegedly violated the Foreign Corrupt Practices Act (FCPA).
This announcement comes on the heels of Teva’s accurate appropriation of $520 million to cover expected expenses related to alleged violations that occurred between 2002-2012 when Teva employees paid bribes to foreign government officials in Russia, Ukraine and Mexico.
This settlement is notable for many reasons, including: (1) it will be the largest FCPA criminal fine imposed by the US government against a pharmaceutical company, (2) it ranks as the fourth largest settlement to date.
The DOJ stated that Teva made several admissions about their conduct in Russia, the Ukraine and Mexico mostly in relation to sales of Copaxane, a drug that treats multiple sclerosis. In Russia, Teva employees paid bribes to a high-ranking Russian government official intending to influence him to increase sales of Copaxane during annual purchase auctions held by the Russian Health Ministry. Through an agreement with a repackaging and distribution company that the government official owned with his wife, Teva earned approximately $200 million in profits on Copaxane sales to the Russian government and the Russian official earned approximately $65 million in corrupt profits through inflated profit margins to the company.
In the Ukraine, Teva admitted to paying bribes to a senior government official in the Ministry of Health to influence registration approvals necessary to market and sell its products. The bribes consisted of monthly stipends and other forms of remuneration, including travel, totaling approximately $200,000.
Lastly, Teva admitted that it failed to execute and enforce adequate compliance policies and controls which allowed its Mexican subsidiary to pay bribes to doctors in exchange for prescribing Copaxone. In fact, records show that Teva executives in Israel were aware of the Mexican subsidiary’s actions, but still approved policies and procedures that they knew were inadequate to detect payments to foreign government officials.
Teva entered a deferred prosecution agreement (DPA) and has agreed to: (1) pay the criminal penalty of over $283 million, (2) enhance its compliance program and implement rigorous controls, (3) retain an independent compliance monitor for three years and (4) continue to cooperate with the investigation. Teva also agreed to pay the SEC $236 million in disgorgement and interest, resulting in the combined total fines of approximately $519 million.
Since 2012, Teva has been forthright about the US government’s investigations and their own internal investigation. More recently, Teva has been vocal about their efforts to “transform [its] governance program” to institute a culture of compliance that is “designed to protect the company and its subsidiaries against future violations.” These statements and behaviors indicated a strong effort to comply with the DOJ FCPA enforcement pilot program which can influence the disposition, monetary fines and/or the need for an independent monitor. Under the DOJ’s pilot program, companies are eligible for reduced penalties if they: (1) voluntarily disclose FCPA violations, (2) fully cooperate with the DOJ’s investigation and (3) implement “appropriate remediation” upon detecting wrongdoing. See our prior blog post for further detail on Teva’s actions that indicate compliance.
Despite Teva’s efforts, they did not receive full cooperation credit. First, Teva did not disclose the violations in a timely fashion: the DOJ stated that Teva caused delays in the initial investigation by claiming overly broad attorney-client privileges and delaying document production. However, Teva did receive a 20% discount off the low end of the Sentencing Guidelines due to its cooperation with the DOJ investigation after the SEC served a subpoena, and its substantial efforts to remediate. Nevertheless, because Teva’s enhanced compliance program is relatively new and has not been tested, the DOJ still imposed an independent compliance monitor for three years.
This settlement highlights the importance of having a robust risk-based third party screening and due diligence program. On the most basic level, all companies should have global policies and SOPs that create a baseline for third party screening, as well as tailored policies and SOPs that reflect local operations. Additionally, a key aspect of a risk-based due diligence program is politically exposed persons (PEPs) screenings of officers for high risk vendors that may be engaging with the government on a company’s behalf. Lastly, it is important to remember that eliminating all risk is not the goal here; engaging with third parties is inherently risky so the goal is to effectively manage risks which can be done through strong governance that enables risk-based reporting of business operations.
 After Siemens for $800 million, Alstom for $772 million and KBR/Halliburton for $579