On March 3, 2016, the United States Securities and Exchange Commission (SEC) accepted an offer in the amount of $375,000 from Nordion (Canada) Inc. (Nordion Canada) as civil penalty for resolution of an anti-corruption enforcement proceeding. While the quantum of penalty that Nordion Canada will pay is fairly low relative to recently imposed penalties by the SEC, disclosure documents filed by Nordion when it was a public company indicate that the internal investigation, co-operation with authorities and development of remedial measures cost in excess of $20 million in fees. In addition, the 2014 merger discussions undoubtedly were complicated by the ongoing investigation. This all would likely have been avoided by the establishment and maintenance of a robust anti-corruption compliance program and training.
The acceptance of the $375,000 penalty by the SEC, in conjunction with Nordion Canada's consent to a cease and desist order requiring compliance with the books and records and internal controls provisions of the Securities Exchange Act of 1934 (Exchange Act), brings to a close a four year SEC investigation into payments made indirectly by Nordion Canada's predecessor company to Russian government officials between 2005 and 2011 for the purpose of obtaining approval for the use of its liver cancer treatment in Russia. In the SEC's order accepting the offer from Nordion Canada, it referenced the following factors as influencing its decision: the prompt hiring by the company of outside legal counsel and forensic investigators to examine and revise policies, procedures and internal controls once the wrongful conduct came to its attention; the commencement of an independent and thorough internal investigation by outside legal counsel to determine the scope of potential compliance issues related to its business in Russia; the swift self-reporting by the company to enforcement authorities in Canada and the United States coupled with the full co-operation extended to the authorities in the parallel investigations; the voluntary production of witnesses from Canada for interviews in the United States; and the undertaking of significant remedial measures to avoid future violations including hiring new compliance personnel.
Nordion Canada's predecessor company, Nordion Inc. (Nordion), a global health science company, was during the relevant period headquartered in Ottawa and traded on the New York Stock Exchange and the Toronto Stock Exchange. In August 2014, while the anti-corruption investigation was ongoing, Nordion was acquired by privately-held Nordion Canada, a newly created subsidiary of Sterigenics International LLC headquartered in Deerfield, Illinois.
The anti-corruption investigation provided evidence of a scheme involving a Canadian-based employee, Mikhail Gourevitch, who introduced the company to a Russian businessman and his wholly-owned company (collectively the Agent). In early 2002, Nordion executed its first written consulting agreement with the Agent to obtain medical isotopes from a Russian government instrumentality.
Thereafter, Nordion expanded the relationship by retaining the Agent to assist Nordion in obtaining government approval for the sale of its liver cancer treatment, TheraSphere, in Russia. From 2005 through 2011, Nordion paid the Agent approximately $235,043 in connection with these services. A portion of these funds were used by the Agent to bribe Russian government officials and at least $100,000 was also transferred to Mr. Gourevitch in a kickback arrangement. Ultimately Nordion was unable to distribute the product in Russia.
Internal investigation and remedial measures
In 2012, Nordion discovered evidence of the improper payments and shortly thereafter publicly announced that it was conducting an internal investigation into compliance with the Foreign Corrupt Practices Act (FCPA) and the Canadian Corruption of Foreign Public Officials Act (CFPOA). Nordion self-reported to the authorities in Canada and the United States and fully co-operated with the authorities' respective investigations. Nordion also hired outside counsel and forensic auditors to review and update its policies, procedures and internal controls and conduct an independent investigation.
Significantly, Nordion terminated all contracts with the Agent, dismissed Mr. Gourevitch and implemented extensive remedial measures, including: hiring a new Director for Corporate Compliance and staffing additional compliance personnel; making compliance a component of its annual employee performance reviews; and providing anti-corruption, internal accounting controls and finance training to its board of directors, management and employees. Nordion also implemented risk assessment procedures for retaining agents and determining their compensation. Nordion also now requires all of its agents to adopt its anti-corruption policies and sign contracts that include FCPA warranties and representations.
SEC decision and penalty
The SEC found that Nordion had failed to record the payments made by the Agent in a manner that accurately and fairly reflected the transactions. Nordion also failed to: devise and maintain adequate internal controls to provide sufficient assurances that its funds were used lawfully by its agents and representatives; implement proper due diligence procedures for appointing agents; and establish adequate anti-corruption training of its employees.
In agreeing to the settlement of $375,000, the SEC considered the prompt remedial action undertaken by both Nordion and its successor company, and its self-reporting and the co-operation provided throughout the SEC's investigation including voluntarily producing witnesses from Canada for interviews in the United States and translating documents.
In respect of Mr. Gourevitch, the SEC found that he violated the anti-bribery provisions, falsified records, and violated books and records provisions of the Exchange Act. Pursuant to a separate cease and desist order, Mr. Gourevitch will pay $100,000 in disgorgement, $12,950 in prejudgment interest, and a $66,000 civil monetary penalty.
At the time of the writing of this Update, it is not clear whether the Canadian enforcement authorities will take any further action against Nordion Canada. However, this appears to be unlikely as Nordion Canada would otherwise have made an agreement to jointly settle with both the U.S. and the Canadian enforcement authorities.
Significance for Canadian companies
The Nordion settlement offers the following key lessons for other Canadian companies:
- Benefits of self-reporting and co-operation with enforcement authorities – Nordion took immediate steps to investigate the matter, including the retention of experienced outside counsel to carry out a thorough and independent investigation. Companies that promptly react to potential wrongful conduct of one or more of their employees/agents by investigating such conduct will be in a better position to achieve a favourable settlement with the enforcement authorities. To demonstrate that a company is undertaking a thorough and independent investigation, it should retain a law firm with expertise in conducting internal investigations and that reports to the company's board of directors rather than management. Based on the results of legal counsel's investigation, Nordion voluntarily reported itself to the Canadian and U.S. enforcement authorities. When a company uncovers potential corruption, it needs to consider whether it will report itself and, if it decides to do so, the reporting should be done promptly and to one or more enforcement authorities. The pro-active measures taken by Nordion benefited the company's settlement negotiations with the SEC, by not only substantially reducing the fines it would have otherwise had to pay, but also in achieving a more timely resolution of the investigation.
- Implementing remedial measures – Upon uncovering potential corruption, Nordion also engaged its external advisors including legal counsel to review and revise its policies, procedures and internal controls so as to effectively mitigate future corruption risks. While an internal investigation is ongoing, a company should begin taking remedial measures such as improving its anti-corruption compliance program and procedures. Such prompt remedial action upon uncovering potentially wrongful conduct is viewed very favourably by enforcement authorities.
- Significance of establishing and maintaining anti-bribery procedures – While the corruption could be attributed to a rogue Nordion employee who could be terminated as result of the conduct, Nordion's compliance review nonetheless uncovered a serious lack of effective anti-bribery procedures and controls within the company. Nordion had some internal controls in place, but they were not followed and ultimately were insufficient to detect the improper payments. A robust and effective anti-corruption program is one that is endorsed and enforced by management, designed to address the unique circumstances of a company, and routinely reviewed to ensure it continues to adequately address the company's specific risks. An effective compliance program if properly implemented can save a company from reputational damage, costly investigations not only by way of legal and forensic auditor fees but also management time, and potentially very serious fines and penalties including jail terms for officers involved in the wrong doing.
- Importance of conducting appropriate due diligence on third party agents – It is critical that a company protect itself from potential corruption allegations by implementing proper procedures for vetting third parties who act as its agents and representatives. Such vetting may involve appropriate background checking and other due diligence measures and requiring the inclusion of anti-corruption warranties and representations in agency agreements.
- Implications for parties to M&A transactions – While the anti-corruption investigation in this case was publicly disclosed approximately two years prior to the acquisition of Nordion, in many other cases a purchaser may unknowingly be buying into an unquantifiable liability if sufficient anti-corruption due diligence is not undertaken before proceeding with a M&A transaction. Evidence of a seller's robust anti-corruption compliance program and training may provide some comfort to a purchaser. Equally important for a purchaser is requiring that the seller provide anti-corruption warranties and representations in the merger agreement.
- Continued enforcement of the books and records and internal controls provisions – Nordion's settlement is yet another example of enforcement action based on violations of the books and records and internal controls provisions of the FCPA. Generally, it is more difficult for the enforcement authorities to prove the existence of bribes than to establish that a company failed to: (a) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; and (b) maintain internal accounting controls sufficient to assure management's control, authority and responsibility over the company's assets. For details regarding other very recent enforcement action based on the violation of the books and records and internal control provisions, please refer to Technology Company Pays $28 Million to Settle FCPA Violations for Improper Gifts and Entertainment and SAP'S Recent Settlement Of FCPA Related Charges: Reaffirmation Of The Books and Records Anti-Corruption Compliance Obligation on Canadian Companies.
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