Stryker Suffers “Strike Two” and Settles SEC FCPA Case
Stryker Corporation has suffered a second FCPA enforcement action, and will now bear the stigma of FCPA “recidivist.” In reaching a settlement with the SEC and agreeing to pay a $7.8 million civil penalty, Stryker will now be subject to an SEC-imposed compliance monitor. (Here).
Stryker’s recent set of violations surrounded books and records violations and deficient accounting and compliance controls in India, China and Kuwait.
On October 24, 2013, Stryker agreed to pay approximately $13.2 million to the SEC to settle its original FCPA enforcement action for violations of books and records and internal accounting controls stemming from payment of approximately $2.2 million in illegal payments in Mexico, Poland, Romania, Argentina and Greece.
The most significant area of concern centered on Stryker’s dealers in India. Approximately 85 percent of Stryker India’s revenues were generated from sales to private hospitals. In an interesting twist to an improper funding scheme, Stryker’s dealers regularly issued inflated invoices when requested by certain private hospitals, which in turn passed on the inflated costs to their patients or patients’ insurers. The private hospitals retained the difference between these inflated payments and a lower cost agreement to pay a Stryker dealer for the product.
Stryker India was cited for its failure to follow internal accounting controls and Stryker’s code of conduct which required, among other among other things, that Stryker India takes steps to ensure that all payments made to government or non-government officials, employees, and customers were proper, and adequately documented.
Stryker’s dealers in India were required to follow Stryker’s policies regarding the proper conduct of their business, which included a prohibition on making, requesting, or accepting any “improper payments to government or non-government officials, employees, or entities.” The contracts also obligated dealers to “maintain complete and accurate records relating to [their] promotion, marketing, use and distribution of [Stryker] Products.” Finally, under its contracts with dealers, Stryker India held audit rights to inspect the books and records of any of the 198 dealers through which Stryker products were sold in India.
In 2012, Stryker received allegations of misconduct concerning some of its dealers. In response, Stryker exercised its audit rights over three dealers in India. The audits revealed deficiencies in financial record keeping and internal accounting controls in all three dealers. In addition, Stryker identified suspicious expenses in one dealer where the dealer over-billed a hospital in response to a specific request by the hospital.
The SEC specifically cited Stryker’s failure, in response to the three audits, to conduct further audits of its dealers. By restricting its audits and remediation to the three dealers, Stryker failed to take appropriate action to verify other dealers’ compliance with its books and records and accounting controls. Despite the obvious red flags, and the number of complaints about its dealers, Stryker took no action to determine the scope of dealer-inflated invoices until three years later.
In 2015, Stryker audited other dealers in India and discovered that other dealers were also inflating invoices to private hospitals. Many private hospitals were routinely requesting Stryker India to provide inflated invoices to permit the private hospital to earn a windfall between the actual negotiated price with Stryker India and the amount paid by patients or their insurers. Stryker’s audits also revealed that its India dealers did not adequately maintain their financial records and had provided questionable payments to healthcare professionals in violation of Stryker’s code of conduct.
The SEC also cited Stryker’s failure, from 2010 to 2015, to maintain accurate books and records relating to payments to its dealers and HCPs. Interestingly, the SEC noted that a forensic review of Stryker India’s general ledger for the five-year period found a lack of documentation for 144 out of 533 transactions selected as a sample of Stryker India’s highest-risk and compliance-sensitive accounts, including consulting payments to HCPs, payments of travel and lodging for HCPs, payments to event organizers, discounts on the price of Stryker products to dealers, commissions awarded to dealers, and marketing expenses.
For many other high-risk transactions, Stryker India recorded payments with inaccurate or inadequate documentary support. For example, Stryker India paid commissions to dealers for which the supporting documentation did not provide a clear justification, or the amount of such commissions exceeded Stryker India’s commission guidelines. Stryker India also failed to generate documentation for HCP consulting payments, and payments for HCP travel.
In China, Stryker’s subsidiary maintained at least 21 sub-distributors of Stryker’s Sonopet product that were not vetted, approved or trained as required by Stryker’s policies. Stryker China employees worked directly with these unauthorized sub-distributors, and other times they falsified records to hide the involvement of the unauthorized sub-distributors.
In Kuwait, Stryker relied on one primary distributor that sold Stryker’s orthopedic products to the Kuwait Ministry of Health. Over a two year period, from 2015 to 2017, the Kuwait distributor made over $32,000 in improper per diem payments to Kuwaiti healthcare professionals to attend Stryker events despite the fact that Stryker paid the costs for lodging, meals and local transportation for these individuals. Stryker failed to implement policies to test or otherwise assess whether the Kuwait distributor would allow the company to exercise its audit rights.