It’s easier to fool people than to convince them they have been fooled – Mark Twain

The drug and medical device industries have been taking it on the FCPA chin for years. The risk factors in the international marketplace are significant – (1) healthcare professionals are normally government employees; (2) government regulation of healthcare is robust; and (3) healthcare professionals are underpaid and therefore demand “compensation” or “improper payments” for a host of medical care management decisions and activities.

The Justice Department and the SEC have mined the industries for significant number of enforcement actions relying on these risk factors and a body of cooperating witnesses and intelligence they have collected through the years.

In two recent enforcement actions, the Justice Department and the SEC returned to bring follow up enforcement actions for a second time against Zimmer Biomet and Orthofix.

I will review each of the actions and the lessons learned from the enforcement actions. Today’s posting is on Zimmer Biomet.

Zimmer Biomet agreed to pay a total of $30.5 million to settle DOJ and SEC FCPA enforcement actions . Under a deferred prosecution agreement, Zimmer Biomet agreed to pay $17.5 million and retain a compliance monitor for three (3) years. In addition, Zimmer Biomet agreed to pay the SEC $13 million in disgorgement and interest and civil penalties.

In 2012, Biomet, which was acquired by Zimmer Holdings in 2015, paid $23 million to settle DOJ and SEC FCPA enforcement actions, and entered into a DPA. A year later, in 2013, Zimmer Biomet discovered potential violations in Brazil and Mexico.

As part of the settlement reached in 2017, Zimmer Biomet entered into a new DPA for three years, the appointment of a compliance monitor for three years, and to have a subsidiary plead guilty to a criminal books and records violations.

Zimmer Biomet continued to use a Brazil distributor despite the fact that the distributor was identified for paying bribes as part of the initial enforcement action in 2012. Zimmer Biomet was supposed to terminate its relationship with the subject distributor but failed to do so.

A Zimmer Biomet Executive attorney was aware of an ongoing relationship with the prohibited distributor and an affiliated company. Despite overall responsibility for compliance with the initial DPA and third party risk management, the Executive attorney was aware that the relationship was continuing, took active steps to cover up the relationship and allowed the relationship to continue.

In Mexico, Zimmer Biomet failed to implement adequate internal controls at a subsidiary to prevent payment of bribes to customs officials through customs brokers and sub-agents. As part of the scheme, the bribery payments were made to allow imports into Mexico of Zimmer Biomet products that did not have proper registration or labeling.

Zimmer Biomet experienced difficulty in importing its products into Mexico in compliance with Mexican law. To remedy the problem, Zimmer Biomet orchestrated a scheme to import the products in smaller shipments through the Laredo, Texas border, while non-compliant products would be shipped through a customs sub-agent who paid bribes to Mexican customs officials. The Laredo, Texas border location was known to be more lax in enforcing Mexico’s import requirements.

The Zimmer Biomet enforcement action provides several important compliance reminders.

Hiding Continued Relationship: Zimmer Biomet represented to the government that it had terminated its relationship with the offending Brazil distributor. However, in fact it did not, and continued to do business through another entity, and it recorded the payments as if the transactions involved a different distributor.

Internal Controls: Zimmer Biomet failed to design and enforce its internal controls and compliance procedures surrounding third parties. The deficiencies included failing to use standard contracts, implementing appropriate oversight and monitoring of billing and payments through invoice verification, and prohibiting use of sub-agents unless Zimmer Biomet approved of the specific sub-agent.

Customs Risks: Zimmer Biomet sought to import products into Mexico, a high-risk country, and schemed to seek a lax border location where bribery was even a higher risk. Zimmer Biomet’s conduct is an important reminder that customs risks, especially in high-risk countries, should be subject to intense scrutiny.

Watching the Internal Watchdogs: Yet again we have another example of a senior attorney responsible for compliance who actively engaged in misconduct and sought to cover up identified red flags. C-Suite executives and compliance, legal and audit personnel are not above scrutiny and pose serious risks when they engage in misconduct.