Medtech Company Stuck With $15 Million Corruption Fine

Massachusetts medical device company and its Danish subsidiary agreed to settle civil and criminal corruption cases.

Nancy Crotti

Analogic Corp. and a Danish subsidiary are the latest medtech company running afoul of the U.S. Federal Corrupt Practices Act, stuck with having to pay nearly $15 million to settle civil and criminal cases.

The U.S. Securities and Exchange Commission and the Department of Justice had charged imaging-device maker Analogic (Peabody, MA) and subsidiary BK Medical under the Federal Corrupt Practices Act with issuing fake, inflated invoices to distributors and funneling the money to third parties. The company's Russian distributor accounted for at least 180 payments totaling more than $16 million, according to an SEC statement.

BK Medical had similar "highly suspicious" arrangements with distributors in Ghana, Israel, Kazakhstan, Ukraine, and Vietnam, funneling at least 80 payments totaling approximately $3.8 million to third parties, the agency said. The Danish company had no business relationship with the recipients, the SEC said.

"BK Medical's participation in these payment arrangements with its distributors created a significant risk that BK Medical was facilitating bribery or other prohibited conduct, such as embezzlement or tax evasion," the government said in its cease-and-desist order.

Analogic should have been able to detect BK Medical's behavior, which caused the parent company to maintain inaccurate books and records, the order adds. An executive of the parent company flagged the suspicious payments as possible FCPA violations in 2008, recommended FCPA training for BK Medical and advised Analogic's senior management to have the Danish subsidiary put in place an "official process for validating that their distribution partners do not, or are not likely to engage in prohibited behavior," according to the order.

Analogic then provided the training, but no official process was implemented, and no steps were taken to validate whether BK Medical's Russian distributor or any other distributor was engaged in prohibited behavior, it adds.

Lars Frost, BK Medical's chief financial officer from 2008 to 2011, personally authorized approximately 150 such conduit payments and submitted false quarterly sub-certifications to Analogic, according to the SEC. A Danish citizen, Frost neither admitted nor denied the allegations, including a charge that he violated an SEC rule that prohibits knowingly circumventing internal controls and falsifying books and records. Frost agreed to pay the SEC a $20,000 penalty to settle the civil charges.

Analogic reported the scheme to the U.S. and Danish governments in 2011 and cooperated with the investigation, the agency said. The SEC rejected Analogic's offer to settle the case for $1.6 million in September 2015, according to an SEC filing.

Other medtech companies in recent years have also had to spend millions of dollars to settle foreign corruption charges. Olympus, the biggest seller of endoscopes in the United States, stands to pay $22.8 million to resolve criminal charges relating to the Foreign Corrupt Practices Act in Latin America. In 2014, California clinical diagnostics company Bio-Rad Laboratories agreed to pay $55 million to FCPA settle charges that its subsidiaries made improper payments to foreign officials in Russia, Vietnam, and Thailand in order to win business.

There could be more on the horizon. In March 2016, diagnostics-maker Alere revealed that it had received a grand jury subpoena from U.S. Department of Justice, related to its sales practices in Asia, Africa, and Latin America, and to matters related to the U.S. Foreign Corrupt Practices Act. One month earlier, Abbott had announced a deal to acquire Alere for $56 in cash per share, or about $6 billion. News of the investigation sparked some reports that Abbott officials had cold feet about the deal.

Analogic agreed to pay the government $7.67 million from its ill-gotten gains and $3.8 million in prejudgment interest to settle the SEC's charges that it failed to keep accurate books and records and maintain adequate internal accounting controls. BK Medical agreed to pay a $3.4 million criminal fine.

Analogic spokesman Mark Namaroff told Reuters that the company was glad to settle, has improved its internal accounting controls, and has set aside money to cover the agreements.

Nancy Crotti is a contributor to Qmed.

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[Suited guy offering money image courtesy of Serge Bertasius Photography on FreeDigitalPhotos.net]