The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are investigating Biomet for alleged violations of the Foreign Corrupt Practices Act (FCPA), a federal law that prohibits US businesses and individuals from paying foreign officials in order to obtain or retain business. Biomet, a medical device maker owned by Goldman Sachs and a group of private equity firms, was in the spotlight once again due to an incident revealed after the SEC’s acceptance of a $13.5 billion merger with Zimmer Holdings.
Biomet allegedly authorized payments to public health care workers in Brazil to incentivize them to purchase Biomet’s medical devices. In an internal investigation, Biomet also discovered cases of bribery to Mexican custom officials. Though the merger is predicted to go through, a steep fine could impact the deal’s price.
FCPA violations, such as those that Biomet faces, may result in extensive penalties, damage to reputation, and loss of continuity of sales (e.g., temporary ban on participation in federal programs and loss of business from enterprise customers with non-tolerance of bribery in their supply chains), which could modify the owners’ asking price for the company. In another case, Lockheed Martin aborted a $2 billion acquisition of Titan, a defense contractor providing specialized services for military and intelligence agencies, due to federal bribery investigations.
Given the recent expansion of FCPA investigations, corrective actions, and whistleblower tips, coupled with steep fines for violations, private equity firms and their portfolio companies should implement an FCPA compliance process that prevents violations and identifies and corrects existing ones. Specifically, the DOJ took only 45 FCPA and related enforcement actions from 1994-2006, compared to 178 in the last 8 years alone. Also, The SEC reported that whistleblower tips increased to 159 in 2014, as compared to 149 and 115 in 2013 and 2012, respectively. When violations are uncovered, civil penalties and disgorgement (fines equal to expected or realized profits earned from illegal deeds) can be applied, with past penalties reaching $210 million (from a 2014 case) and disgorgement fines ranging from $260,000 to $350 million. As the financial sponsors, private equity firms may also be subject to successor liability for portfolio company’s violations even if these occurred prior to acquisition or if they were unknown to them.
In order to minimize the risk of FCPA violations, each portfolio company should take the following actions:
- Adopt a formal anti-corruption policy or include FCPA language in the company’s code of conduct
- Annually train all employees engaged in foreign affairs on anti-bribery and the FCPA
- Conduct regular internal audits of the SG&A expenses for irregularities
- Thoroughly diligence and conduct annual audits of third party sales groups for capacity to manage FCPA risk
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation.