SEC Settles Bristol-Myers FCPA Investigation in China for $14 Million

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Bristol Myers Squibb settled an enforcement action brought by the Securities & Exchange Commission into allegations that BMS violated aspects of the Foreign Corrupt Practices Act (FCPA) for $14 million.

The SEC alleged that the pharmaceutical manufacturer’s majority owned joint venture paid cash and other benefits to Chinese medical professionals in exchange for prescription drug sales. BMS was charged by the SEC with violations of the record keeping and internal controls provisions of the FCPA. The SEC did not bring charges against BMS for violating the bribery provisions of the FCPA.

Specifically, BMS recorded as advertising and promotional expenses cash payments and expenses for gifts, speaker fees, conference sponsorships and meetings provided to health-care practitioners at state-owned and state-controlled hospitals as well as employees of state-owned pharmacies made to secure prescription sales in China. BMS false recorded these transactions as legitimate business expenses in its books and records.

The SEC also cited the company for failing to respond effectively to red flags within the BMS China unit. Several employees reportedly wrote emails to the head of BMS China in late 2010 and early 2011 indicating that there was no other way to meet their sales targets other than to violate the bribe doctors. BMS China did not investigate.

BMS also did not have sufficient compliance initiatives in place or timely correct internal control deficiencies.. For example, there was no permanent compliance position in China until 2010 and the corporate compliance officer responsible for the Asia-Pacific region through 2012 rarely traveled to China. Issues with internal controls at BMS China were also identified in audits of BMS China between 2009 and 2013 and these problems were reported to BMS but went uncorrected.

China has been the source of numerous allegations of violations of the FCPA for companies listed on the U.S. stock exchanges. In one of the largest settlements in the past year, Avon Products agreed to pay $135 million to resolve the SEC’s investigation into its Chinese bribery. The last time that I looked, there were more than 80 corporations under investigation or self-disclosed violations of the law relating to their operations in China.

Multi-national companies selling pharmaceuticals and medical products in China have been particularly susceptible to violating the law. Mead Johnson and Bruker have both resolved charges with the SEC in the past year regarding improper payments concerning health care professionals. There is also a high profile investigation into GSK regarding behavior that already resulted in a record fine by the Chinese Government of $489 million in 2014.

One SEC official has already said that there is fertile ground within the SEC whistleblower program for FCPA whistleblowers. The SEC program pays 10 to 30 percent of monetary sanctions in qualifying enforcement actions to eligible whistleblowers providing key information. Given the large number of international whistleblowers (approximately 10% or more of tips every year), and the large enforcement actions that may result from violations of the law, it seems likely that there will be quite a few awards made by the SEC in this area in the future.

If you have need additional information, contact one of our FCPA whistleblower attorneys via our contact form or by calling 1-800-590-4116.

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Cybersecurity and Chinese whistleblowers Growing

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Defense law firms are increasingly warning their corporate clients and prospective clients about whistleblowers – and two areas have stood out in articles they have published in the media recently. The rise of whistleblowers from China and cybersecurity whistleblowers have both been on their radar. We’ve been talking about these two areas for a while now – so let’s look at what they have to say.

China

An article in Global Compliance News details the rise of internal complaints about corporate wrongdoing by Chinese whistleblowers. It notes the long history of tips to China’s anti-corruption campaign and indicates that this willingness to report misconduct is spilling over to impact international corporations operating within China. Accordingly, internal reports by whistleblowers in China have in recent years increased substantially because of greater ease in filing and public awareness of compliance initiatives.

The article also notes the number of options available if a whistleblower is dissatisfied about the way their complaint is handled internally. The employee can report both to authorities in China as well as the United States (in the case of multi-national corporations operating from the U.S. or listed on an exchange in the U.S.).

Indeed, the Communist Party of China’s Central Commission for Discipline Inspection (CCDI) has a mobile phone app that allows individuals to tip the Chinese Government to low-level corruption and disciplinary violations. As governments make it easier to blow the whistle and remain confidential to the public, we expect more citizens will take advantage of them.

The other big option for people in China is the U.S. Security & Exchange Commission. The SEC pays rewards after successful enforcement actions resulting from information provided by whistleblowers. Because MNCs have been growing their China operations and employ large numbers of people in the country, this is increasingly an option for people who have interactions with them.

Although I don’t remember it being mentioned in the article, the specific reports are likely concerning the Foreign Corrupt Practices Act (FCPA). The U.S. anti-bribery law prohibits companies listed on an American stock exchange (U.S. issuers) from providing anything of value to foreign officials to obtain or retain business corruptly. The expense to corporations to investigate and defend these government investigations can be tremendous.

Cybersecurity

There have been a number of articles posted recently concerning cybersecurity whistleblowers as well. An article in The Recorder questioned how long it will be until we see cybersecurity whistleblowers become the next wave of tips to the SEC. The article also said that there is anecdotal evidence suggesting that the SEC is currently evaluating these claims. Furthermore, a National Law Review article from late September (from fellow whistleblower attorneys!) said that whistleblower tips related to cybersecurity may receive additional scrutiny because cyber-attacks are a hot-button issue.

These articles should come as no surprise since news of corporate hacking has increased and high profile incidents against Sony, Target and others have put this on the radar of Government regulators. Lately, the SEC has been pursuing enforcement actions against traders teaming with hackers to get access to material, non-public information about businesses and then taking advantage of it in the public markets.

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China’s Focus Media & CEO Get $55.6 Million SEC Fine

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China has been on the radar of U.S. businesses, investors and the SEC for some time now. And we aren’t just talking about it as a cause of the recent stock market tumble. China is the leading country for allegations of violations of the Foreign Corrupt Practices Act, and the SEC has been seeking information about Chinese companies to investigate potential accounting fraud. In light of these concerns and less advantage to being listed on a U.S. exchange, numerous Chinese companies have been delisting or entering going private transactions.

The agreement to settle an SEC investigation into Focus Media and its CEO over inaccurate disclosures to investors for $55.6 million isn’t surprising in that light, but it probably will open some eyes in China. Focus Media is a large Chinese advertising companies with displays in public locations such as elevators and outdoors. It was taken private in 2013 in a leveraged buyout.

In connection with the settlement, a SEC official in the New York office indicated that the SEC wasn’t going to let the geographic location of companies prevent them from ensuring public companies make accurate statements to investors. This is obviously aimed at sending a message to companies located outside of the United States that they can’t take advantage of the U.S. financial markets with impunity.

For whistleblower rewards, the SEC does not distinguish between the geographic location or citizenship of the source of the tip. Chinese whistleblowers can earn an award under the Dodd-Frank program the same as United States citizens.

Photo Credit. I have no idea if that is a Focus Media billboard or not, but I thought it was appropriate. Of course, I haven’t translated it.

Hitachi Settles SEC FCPA Investigation for $19 Million

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The Japanese conglomerate Hitachi, Ltd. has settled an investigation and enforcement act by the Securities and Exchange Commission into improper payments made as part of two contracts for power plants in South Africa. In the settlement of the FCPA investigation, Hitachi agreed to pay the SEC $19 million.

The allegations involve the sale of a minority interest in a subsidiary to a politically connected organization that was a front company for the African National Congress. Hitachi then paid the organization success fees of more than $1 million while booking those payments as consulting fees. Later, it paid a share of the profits from the contracts to the organization and labeled those payouts as dividends. The SEC charged it with violations of the books and records provisions of the Foreign Corrupt Practices Act.

Hitachi was an issuer prior to 2012 when it delisted its American Depository Shares from the New York Stock Exchange. Out of concerns for its extraterritoriality, the FCPA requires at least one tie to the United States in order to allow for an enforcement action brought by the Justice Department or SEC. Among them are the issuer requirement (required to report information to the SEC), the citizenship tie or geographical boundary (on U.S. soil or passing through the U.S.).

Humorously, on the same day that it announced the press release, a subsidiary of Hitachi issued a press release concerning new software that it had developed that offered advanced crime prediction in what can only be thought of as a bit of a nod to the Tom Cruise movie Minority Report. If only they had eaten their own dog food, they might have seen their own in-house crime before it had happened!

Questions about this or other FCPA issues? We have put together an informational guide for FCPA whistleblowers that may answer your question. If you have need additional information, contact one of our FCPA whistleblower attorneys. We can also assist you in reporting your evidence of bribery by a publicly traded company or other covered entity to the Securities and Exchange Commission. Please contact an attorney via our contact form or call 1-800-590-4116.

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CFTC Warns Investors on Offshore Forex and Binary Options Entities

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The CFTC has launched a website alerting retail investors to foreign companies soliciting and/or accepting funds from U.S. investors without permission to operate in this country. The website lists FOREX and binary options brokers and is called the RED List. The new tool complements other CFTC initiatives to fight financial fraud such as the CFTC’s SmartCheck.

The SEC and CFTC previously issued a joint alert warning investors about fraudulent schemes involving binary options. Binary options are an all-or nothing payout – if the value of the underlying asset has increased as of the contract expiration, a pre-determined amount of money is paid out on the option. If not, no money is paid out. Unlike options that trade on the stock market, they do not offer the ability to purchase the underlying asset. Instead, they are exercised automatically and paid in cash.

Only a portion of binary options are listed on registered exchanges in the United States. A number of vendors offer internet-based trading in these securities. Providers of binary options operating in the United States in this fashion may be operating without a license in violation of section 5 of the Securities Act (unregistered offer and sale of securities) and Section 15(a) of the Exchange Act (unregistered broker-dealer).

Investors have reported securities fraud to the SEC and CFTC securities in connection with these platforms. In their alert, the agencies broke this down into three different categories of alleged fraud. They include (1) the failure to credit customer accounts or reimburse funds after accepting the money; (2) identity theft involving information provided; and (3) manipulation of the trading software and rules to game the results and avoid payouts to winning customers.

Forex investors have been the target of fraud by both the small players as well as the big players (recently fined more than $1 billion collectively for market manipulation and anti-competitive actions).

Although these firms may be overseas making enforcement difficult, the Dodd-Frank whistleblower programs created by the SEC and CFTC do offer up the possibility of a reward for reporting information about these frauds if one of the securities regulators is able to collect monetary sanctions as a result of their conduct. Our CFTC whistleblower attorneys can assist you with answers to questions about this information as well as assistance reporting violations of the Commodity Exchange Act to the U.S. Government. To speak to an attorney, fill out our contact form or call 1-800-590-4116.

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EB-5 Program Renewal Debate Spurs Fraud Talk

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There have been a number of articles and an Office of Inspector General report about the EB-5 visa program recently as the 25 year old program must be renewed by Congress for the tenth time by September 30, 2015 or it will expire. One of the reasons we are seeing that it hasn’t been renewed yet is that the EB-5 program is fraught with potential fraud for both investors and the government.

Because of their desire for a visa to the United States and language differences, Chinese investors can be particularly susceptible to scammers. U.S. Government investigators have identified at least 35 cases of securities fraud in the EB-5 program, according to a Government Accountability Office report. The Securities and Exchange Commission has received more than 100 tips about potential securities fraud violations involving the EB-5 program from Jan. 2013 through Jan. 2015. These reports have no doubt been facilitated by the SEC’s whistleblower program.

The applications to the U.S. Citizenship and Immigration Services also raise fraud concerns. The documentation is paper based and funds may come from prohibited sources such as the drug trade.

There have been two notable enforcement actions in this area, one leading to a sizable whistleblower reward and the other leading to the first enforcement action against two firms acting as unlicensed broker-dealers for the EB-5 program, raising $79 million.

For those not familiar with it, the federal EB-5 visa program allows immigrants and their families to get a green card if they invest at least $1 million ($500,000 in rural areas or high unemployment areas) and create 10 or more jobs.

Investments in the program are set to hit $3.6 billion this year, according to an industry trade group. This number has accelerated substantially since 2008 when there were investments of $321 million in the year. The first year to hit the maximum number of EB-5 visas was last year (2014), when the U.S. State Department issued 10,000.

The combination of Canada’s decision to limit immigration and the need for alternative financing for businesses because of the recession caused the program to balloon. Eighty-five percent of EB-5 visas in 2014 when to immigrants from China. South Korea, Mexico, Taiwan and Vietnam make up the rest.

The leading area projects is in construction and real estate, where the investments lead to hotels, hospitals, offices, housing projects and mixed-use developments.

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U.S. Among Leaders in Anti-Bribery Enforcement; Brazil Makes Gains

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U.S. enforcement of the Foreign Corrupt Practices Act puts our nation among the top four enforcers of international standards against cross-border corruption, according to a report by Transparency International released at the end of August.

The report divides the 41 OECD anti-bribery convention countries into those with active, moderate, limited or no enforcement. The United States, German, United Kingdom and Switzerland were the four countries with active enforcement. Four countries improved one category from their 2014 progress report.

Still, there are problems. More than half (22 of 41) of the countries failed to investigate or prosecute any foreign bribery case during the last four years. The OECD Anti-Bribery Convention established legally binding standards to criminalize bribery of foreign public officials in international business transactions. 32 OECD members and 7 non-member countries adopted the Convention, which went into force on February 15, 1999.

Brazil’s enforcement is still classified as little or no enforcement however it was able to more than double its scoring under the point system and it was only one point below classification among the countries with limited enforcement. Brazil has been pursuing enforcement actions against corruption inside its country related to Petrobras and the government’s tax collection.

We expect that the United States will make additional gains in FCPA enforcement as it continues to work through leads in this area provided pursuant to the SEC whistleblower program.

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More FCPA Whistleblowers Expected in Customs and Tax Bribery Cases

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We have long looked at cases of customs fraud for whistleblowers as part of the False Claims Act. And Eric Young in our office was the first to represent a client receiving a tax whistleblower award under the IRS whistleblower program. But the growth of international whistleblowers has opened up the possibility that we will now see tax and customs whistleblowers located overseas reporting violations of the Foreign Corrupt Practices Act to the Securities and Exchange Commission instead.

The SEC Whistleblower Office pays rewards to eligible individuals providing information resulting in monetary sanctions of more than $1 million. The program was created by Congress in the Dodd-Frank Act which passed in 2010 and recently celebrated its five year anniversary. An SEC employee previously said that they expect the FCPA to be fertile ground for whistleblowers

We’re seeing a number of news reports in the last year about foreign officials caught up in scandals related to bribery of government tax and customs workers, and we expect based on this that there are potential whistleblowers out there as well that will come forward.

In Guatemala, there is reportedly a reasonable suspicion that the former Vice President took $3.7 million in bribes. Businesses evaded import duties by calling “La Linea”, a special number available to those paying bribes.

Cases like this one have already led to FCPA investigations. FedEx has disclosed allegations of bribery of government officials in Kenya in order to clear shipments through customs without inspections. A similar investigation is under way against Ford for bribing officials at a port in Russia to get through the logjam at the docks in that country.

It is not limited to customs. In Brazil, the corruption reportedly allowed business to avoid paying more than $1 billion in taxes to the government. If I remember earlier reports correctly, U.S. companies were involved.

Normally, FCPA violations involve securing or retaining business contracts. But a 5th Circuit ruling previously held that the FCPA applies broadly and customs or tax cases in order to avoid payments are also covered.

For those considering blowing the whistle, the FCPA does not require money to exchange hands. The FCPA applies broadly to the provision of anything of value (other than certain de minimus items). The enforcement action against BNY Mellon for the hiring of interns related to family members of sovereign wealth fund officials is just one example of the potential bribes implicated. Paid travel that masquerades as business trips when it is in fact a luxurious vacation, as well as other gifts, are violations of the law as well when they go to individuals classified as foreign officials and are used to obtain or retain business.

If you are interested in learning more about the SEC whistleblower program or wish to speak to one of our FCPA whistleblower attorneys, contact us or call 1-800-590-4116.

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If a Global Recession Hits, International Whistleblowing Could Be Up Big

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In 2002, Time Magazine made three whistleblowers the persons of the year. If a global recession hits in the next few years, it is looking more likely that the people who blow the whistle on misconduct this time will actually be living overseas.

Global growth has been the talk of the morning with the Dow Jones Industrial Average plummeting more than a thousand points on the open before reversing course to a much more modest decline by mid-day. It reminds me of the volatility that hit the stock market in late 2007 as the financial crisis took hold. Unlike the past two recessions here in the United States where much of the talk of domestic excesses was oriented within the country at the tech bubble and the real estate bubble, this time it’s the world economy that is squarely on the radar of the financial professionals.

International Whistleblowers have made up slightly more than 10% of tips to the Securities & Exchange Commission for the past few years. But if this recession starts overseas, then that’s the most likely area to see whistleblowing.

This could also be the first time that multinational corporations are forced to shrink their workforces overseas and people who believe they are wronged by companies start talking to employment lawyers about their options. As the Wall Street Journal pointed out a few months ago, more misconduct is discovered during recessionary periods and emerging markets have been growing the entire existence of the SEC Whistleblower program.

Among these areas that we’re expecting to see misconduct with international ties include:

Accounting Fraud: China and Japan

There’s concern that both Chinese and Japanese companies are engaged in problematic accounting. The Toshiba scandal has put international companies squarely on the radar of investors in what has been described as the equivalent of Enron for Japan. And Chinese companies have been living in a quick growing economy that has sparked concern that investors will be left holding the bag when the music stops.

Currencies

Some of the big banks have already settled investigations into market manipulation in the foreign exchange market but it is possible that this is only the tip of the iceberg. Emerging market currencies have been in for a wild ride so far this year and it’s possible that a global market selloff could create further problems as countries try to orient their monetary policies to the new reality and prop up the economy.

Commodities & Oil

Oil is under $40 a barrel and the Bloomberg Commodity Index hasn’t been this low since 1999. As demand for raw materials from developing economies has shrunk, the possibility for the discovery of issues at miners, oil companies or others selling to foreign countries to meet this demand. As the recession ends, it’s possible that there could be more violations of the Foreign Corrupt Practices as well as businesses try to get a jumpstart on the market.

Emerging Market Bonds

Investors have removed more than $2.5 billion from mutual funds in this area over the past week. If there is a “run on the bank” and these funds are not able to sell these illiquid investments at reasonable prices in order to keep up with outflows, the SEC may be forced to take a look at the disclosures made to investors or the practices of the banks selling these bonds for the foreign countries.

United States

There’s areas in the United States, of course, where there is enough frothiness to potentially get a regulator to dive in with enforcement actions. These areas include High Frequency Trading in the market, the Bond Market, Venture Capital funds investing in tech startups and health care fraud. But right now, it looks like the biggest jump could be from foreign countries.

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BNY Mellon Fined for Internships; Ford Investigated for Russian Customs Bribes

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Bank of New York Mellon has agreed to pay $14.8 million to settle the SEC investigation into possible violations of the Foreign Corrupt Practices Act regarding internships it provided to family members of sovereign wealth fund officials.

The SEC accused BNY Mellon of hiring the family members to win or keep investment contracts involving the sovereign wealth fund assets. Their internship programs are highly competitive and the investment bank did not apply the normal rigorous process to applicants related to individuals qualifying as foreign officials under the FCPA. BNY Mellon neither admitted nor denied the charges in the settlement.

Investment banks have been under investigation since 2011 when the SEC began its industry-wide bribery investigation by seeking information from multiple banks within its jurisdiction. Goldman and Deutsche Bank have also disclosed investigations into their hiring practices.

In other FCPA news, the SEC is reportedly investigating Ford for Russian customs bribes. The SEC has joined a German investigation into bribes by U.S. automaker Ford and German freight company Schenker into suspected bribery at the port of St. Petersburg in Russia. According to Reuters, the port is known for long delays and the alleged bribes were to speed the passage of containers through Russian customs. As a U.S. issuer trading on the New York Stock Exchange, Ford must comply with the terms of the Foreign Corrupt Practices Act.

Questions about this or other FCPA issues? We have put together an informational guide for FCPA whistleblowers that may answer your question. If you have need additional information, contact one of our FCPA whistleblower attorneys. We can also assist you in reporting your evidence of bribery by a publicly traded company or other covered entity to the Securities and Exchange Commission. Please contact an attorney via our contact form or call 1-800-590-4116.

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