International Trade Law News

Published by Jacobson Burton Kelley PLLC

In another example of the high price paid by U.S. companies for violations of the Foreign Corrupt Practices Act (FCPA) committed by their foreign subsidiaries, a Los Angeles, California-based medical equipment manufacturer and exporter has pleaded guilty to bribing Chinese hospital officials and agreed to pay nearly $4.8 million in penalties and interest

Diagnostic Products Corporation (DPC) announced on May 20, 2005 that it and its wholly owned Chinese subsidiary, DPC (Tianjin) Co. Ltd. (DPC Tianjin), had reached agreements with the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) to settle issues related to violations of the FCPA.

The DOJ settlement was announced after the agency filed a one-count criminal information charging DPC Tianjin with violating the FCPA in connection with the payment of approximately $1.6 million in bribes in the form of illegal "commissions" to physicians and laboratory personnel employed by government-owned hospitals in the People's Republic of China. According to the criminal information, DPC Tianjin made cash payments to laboratory personnel and physicians employed in certain hospitals in China in exchange for agreements that the hospitals would obtain DPC Tianjin's products and services. This practice, apparently authorized by DPC Tianjin's general manager, involved personnel who were employed by hospitals owned by the legal authorities in China and, thus were considered to be "foreign officials" as defined by the FCPA. DOJ claimed that in most cases the bribes were paid in cash and hand-delivered by DPC Tianjin salespeople to the person who controlled purchasing decisions for the particular hospital department. DPC Tianjin recorded the payments on its books and records as "selling expenses" and DPC Tianjin's general manager regularly prepared and submitted to its parent company financial statements that reported such sales expenses. The "commissions," typically between 3 percent and 10% of sales, totaled approximately $1,623,326 from late 1991 through December 2002, and allowed DPC Tianjin to earn approximately $2 million in profits from the sales.

In its settlement agreement with DOJ, DPC Tianjin agreed to plead guilty to the criminal charge and to pay a criminal penalty of $2 million. In addition, DPC and DPC Tianjin agreed to adopt internal compliance programs and to appoint an independent compliance expert to audit the company's compliance program and monitor its implementation of new internal policies and procedures. In its settlement agreement with the SEC, the SEC ordered DPC to cease and desist from violating the FCPA and to disgorge approximately $2 million in "ill-gotten gains", representing DPC's net profit in China for the period of its misconduct, plus $750,000 in prejudgment interest.

The payments made by DPC Tianjin were voluntarily disclosed to the SEC and DOJ by DPC after the company's current U.S. management discovered the payments. While the improper payments and guilty plea were limited to DPC Tianjin and its activities in China, DPC announced that its remedial efforts include expanded company-wide FCPA and ethics policies and procedures.