ZIMMER BIOMET HOLDINGS, INC. (FORMERLY BIOMET, INC)

INDUSTRY

Pharmaceuticals /Medical Devices /Health

CORPORATE HEADQUARTERS

Warsaw, Indiana, United States of America

SUMMARY OF ALLEGATIONS

Nationality of Foreign Officials: Argentina

Summary of Allegations:

The Argentine tax law required that all payments made to doctors be reported. In order to conceal Biomet's payment of about 15-20% of its sales of medical devices to publicly owned hospitals, the company used fake invoices from the doctors, charging for professional services which in fact were not rendered. These payments were recorded as "consulting fees" or "commissions." In 2000, the tax law changed, and no untaxed payments to doctors were allowed, so Biomet began recording the payments as "royalties" or "other sales and marketing." Biomet executives and auditors allegedly were aware of this practice, and took no steps to check the transactions. In February 2006, Biomet's Latin America Auditor sent an internal report to the Senior Vice President, the Operations Manager, and other executives and managers, stating that allegations concerning "fraudulent product registration certificates, bribery of customs officials" were being investigated by Biomet, and that it had been determined "that certificates were fraudulent and bribes were made."

In November 2006, the Latin America Auditor recommended that payments to the doctors that were labeled "commission expenses" on the company records should be changed to "royalties." And even after the Company received a letter from the SEC regarding payments in other jurisdictions, it continued to make improper payments to surgeons in Argentina and reflect the 15-20% commissions in its accounting records. However, in August 2008 the Company distributed new compliance guidelines, and this precipitated a suspension of all sales in Argentina.


Approximate Alleged Payments to Foreign Officials: USD 436,000

Business Advantage Allegedly Obtained: At least USD 4,360,000 worth of medical device sales

Nationality of Foreign Officials: Brazil

Summary of Allegations:

Biomet sold its devices in Brazil through Biomet International, Ltd. ("Biomet International"), a wholly-owned subsidiary of Biomet. Biomet International allegedly engaged a distributor ("Brazilian Distributor") allegedly to pay bribes to physicians employed by public hospitals, as an inducement for them to buy Biomet medical implants. Brazil has a public healthcare system that provides universal health care to all Brazilian citizens, and the majority of hospitals in Brazil are government instrumentalities. Thus health care providers in Brazil's public sector are "foreign officials," under the U.S. Foreign Corrupt Practices Act ("FCPA").

At least as early as 2001, Biomet allegedly knew of these bribe payments. In February 2002, for example, the Director of Internal Audit stated in a memorandum to Biomet's Senior Vice President and Operations Manager: "Brazilian Distributor makes payments to surgeons that may be considered as a kickback. These payments are made in cash that allows the surgeon to receive income tax free . . . The accounting entry is to increase a prepaid expense account. In the consolidated financials sent to Biomet, these payments were reclassified to expense in the income statement." In April 2008, Biomet had accountants and outside counsel allegedly perform due diligence on Brazilian Distributor, in anticipation of Biomet's purchase of the latter. The due diligence allegedly revealed "cash payments to doctors and debit card purchases on behalf of doctors that raised red flags of bribery." Biomet allegedly terminated its relationship with Brazilian Distributor, and temporarily ceased selling its products on the Brazilian market. The Company allegedly wrote off USD 4.2 million in accounts receivable owed to it by the distributor.

In or around June 2009, Biomet allegedly signed an agreement with Brazilian Distributor and its affiliated company (Brazilian Distributor Company A) terminating their relationship and prohibiting Brazilian Distributor from representing Biomet in the future. However, from in or around 2009 until in or around 2013, Biomet, through Biomet International, allegedly continued to use Brazilian Distributor and another one of his affiliated companies (Brazilian Distributo Company B) to distribute its products in Brazil.  Biomet allegedly did not implementing additional controls to ensure that further bribes would not be paid and allegedly took steps to conceal Brazilian Distributor's relationship with Brazilian Distributor Company B.

Between in or around 2009 and 2013, Biomet allegedly earned approximately USD 3,168,000 in profits from sales of its products in Brazil through Brazilian Distributor and Brazilian Distributor Company B, some of which Brazilian Distributor Company A had allegedly imported for Brazilian Distributor Company B.


Approximate Alleged Payments to Foreign Officials: USD 1.1 million

Business Advantage Allegedly Obtained: Approximately USD 3,168,000 in profits from sales

Nationality of Foreign Officials: China

Summary of Allegations:

Biomet sold its medical devices in China through subsidiaries Biomet China and Scandimed. They used the Chinese Distributor to pay bribes to doctors employed in publicly owned hospitals, beginning at least in 2001.

The Chinese Distributor called the bribe payments "rebates" of 10-15%. In February 2001, Scandimed wrote to Biomet's president of International Operations in Indiana, as well as Biomet employees in the UK that "as we understand it, giving commission [sic] or gifts of various kinds to surgeons is common in China," eliciting a response about sales margins from the President of International Operations. The benefits conferred upon doctors in China included travel, as evidenced in a May 2001 email from Chinese Distributor to Biomet's Associate Regional Manager explaining how to overcome objections by a particular doctor "[Doctor] will become the most loyal customer of Biomet if we send him to Switzerland." Another email mentioned that doctor was the head of a department in a public hospital in Shanghai, and that "many key surgeons in Shanghai are buddies of his Dinner has been set for the evening of the 24th But dinner aside, I've got to send him to Switzerland to visit his daughter." Some emails contain clear explanations of how the commissions were paid, as in one from the Chinese Distributor to the Associate Regional Manager, dated 21 April 2002: "When we say 'Surgeon Rebate included,' it means the invoice price includes a predetermined percentage for the surgeon. For example, a vendor invoices the hospital for a set of plate & screws at RMB 3,000.00. The vendor will have to deliver RMB 750.00 (25% in this case) in cash to the surgeon upon completion of surgery [sic]."

Emails from 2005 indicate that payments made to doctors in connection with clinical trials were recorded in the Company's books as "entertainment," and that doctors conducting clinical trials are paid a 10-15% "consulting fee." In 2006, Biomet elected to cut the Chinese Distributor out of its Chinese operations, and to use Biomet sales staff instead. In October 2007, the Company paid for 20 Chinese surgeons to fly to Barcelona and Valencia for training, with "a substantial portion of the trip" devoted to sightseeing and entertainment. In the same month, a product manager in Biomet China discussed ways to evade anti-corruption measures that had been taken by the Chinese government, noting "Obviously, China government [sic] doesn't have ability to forbid the corruption from hospitals & surgeons." The product manager suggested falsifying invoices, among other methods.


Approximate Alleged Payments to Foreign Officials: Commissions and travel expenses

Business Advantage Allegedly Obtained: Obtain and retain business

Nationality of Foreign Officials: Mexico

Summary of Allegations:

Beginning in or around no later than April 2008, Biomet allegedly became aware that certain of its third-party distributors, including those in Latin America, were making corrupt payments to healthcare professionals to secure sales of Biomet products. Nevertheless, Biomet allegedly did not implement internal accounting controls to prevent future corrupt payments in Mexico, among other places.

From in or around 2010 to in or around 2013, despite Biomet's alleged knowledge of red flags and issues concerning due diligence, and its obligations under the 2012 Deferred Prosecution Agreement ("DPA") with the U.S. Department of Justice ("DOJ"), Biomet's employees allegedly failed to implement due diligence procedures or payment authorization controls to ensure that payments were made in accordance with Biomet's policies at Biomet 3i Mexico S.A. de C.V. ("3i Mexico"). 3i Mexico was owned by JERDS Luxembourg Holdings S.ar.l. ("JERDS"), a wholly-owned subsidiary of Implant Innovations Holdings, LLC ("IIH"). IIH is a wholly-owned subsidiary of Biomet and owned several subsidiaries, including BIomet 3i, LLC ("Biomet 3i").

Consequently, 3i Mexico allegedly used Texas-based Mexico Customs Broker and its sub-agents to bribe Mexican customs officials to smuggle unregistered and improperly-labeled dental products into Mexico. As part of the scheme, 3i Mexico allegedly shipped certain Biomet 3i products to an address in Texas provided by Mexico Customs Broker for the Broker to transport back across the border to Mexico. The Broker would then allegedly bring the products compliant with the Mexican labeling law back across the Mexican border, but allegedly would have the sub-agent bring the non-compliant products back across the Mexico border illegally by bribing Mexican customs officials. 

Between in or around 2010 and 2013, 3i Mexico allegedly paid approximately USD 980,774 to the customs broker's sub-agents allegedly knowing that at least part of this amount would be passed on to customs officials, and allegedly falsified corporate records to disguise the bribe payments. As a result, 3i Mexico and Biomet's subsidiary in Mexico earned approximately USD 2,652,100 in profits from sales of products in Mexico that were shipped through Texas.


Approximate Alleged Payments to Foreign Officials: USD 980,774

Business Advantage Allegedly Obtained: To smuggle unregistered and improperly-labeled dental products into Mexico. Approximately USD 2,652,100 in profits were earned from sales of products in Mexico that were shipped through Texas.

ENFORCEMENT RESULTS

Agencies: United States: Department of Justice, United States: Securities and Exchange Commission
Results: Civil Injunction, Compliance Monitor, Criminal Fine, Deferred Prosecution Agreement, Disgorgement
Year Resolved: 2012
Compliance Monitor: 3 years with 1 year extension
Ongoing: No
Details:

DOJ & SEC (2012)

On 26 March 2012, the U.S. Securities and Exchange Commission ("SEC") filed a complaint against Biomet, alleging that the company, along with four of its subsidiaries, paid bribes to public physicians employed by hospitals in Argentina, Brazil and China, between 2000 and 2008. The complaint specifies that Biomet violated both Section 301 of the Securities Exchange Act of 1934 by making illicit payments to foreign government officials in order to obtain or retain business, as well as Sections 13(b)(2)(A) and (B)of the Act in that it failed to have an adequate internal control system to detect and prevent the payments, and that the company recorded the payments improperly in its accounting books and records.

Biomet agreed to disgorge USD 5.4 million in the settlement of this complaint.

On the same day, 26 March 2012, the company entered into a three-year Deferred Prosecution Agreement with the DOJ, agreeing to pay a USD 17.28 million criminal penalty, to implement rigorous internal controls, and retain a compliance monitor for 18 months. In the DPA, it is noted that Biomet's fine was reduced by 20% below the lowest possible fine; the DPA attributes the reduction to "Biomet's extensive internal investigation, the nature and extent of Biomet's cooperation in this matter, Biomet's cooperation in the Department's investigation of other companies pursuant to 8C4.1, and Biomet's extraordinary remediation."

In April 2014, pursuant to the terms of the DPA Biomet disclosed the alleged improprieties regarding its operations in Brazil and Mexico to and discussed these matters with the independent compliance monitor and the DOJ and SEC.

On 2 July 2014, the SEC issued a subpoena to Biomet requiring that Biomet produce certain documents relating to such matters.

On 13 March 2015, the DOJ informed Biomet that the DPA and the independent compliance monitor’s appointment have been extended for an additional year, set to expire on 26 March 2016.



Agencies: United States: Department of Justice
Results: Compliance Monitor, Criminal Fine, Deferred Prosecution Agreement, Disgorgement, Non-Prosecution Agreement
Year Resolved: 2017
Compliance Monitor: Three years
Ongoing: No
Details:

DOJ (2017)

In April 2014, pursuant to the terms of the DPA Biomet disclosed the alleged improprieties regarding its operations in Brazil and Mexico to and discussed these matters with the independent compliance monitor and the DOJ and SEC.

On 2 July 2014, the SEC issued a subpoena to Biomet requiring that Biomet produce certain documents relating to such matters.

On 13 March 2015, the DOJ informed Biomet that the DPA and the independent compliance monitor’s appointment have been extended for an additional year, set to expire on 26 March 2016. In addition, the DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA. The DOJ could, among other things, revoke the DPA or prosecute Biomet and/or the involved employees and executives.

On its SEC Form 8-K filed on 25 March 2016, Biomet announced that the DPA will not expire on 26 March 2016. The SEC and DOJ have agreed to continue to investigate the matters in Brazil and Mexico in March 2016.  At the conclusion of the extended DPA period, the independent monitor was unable to certify that Zimmer Biomet's compliance program satisfied the requirement of the 2012 DPA. On April 15, 2016, the SEC and DOJ notified Biomet that the company has breached the terms of its DPA based on conducts in Mexico and Brazil that came to light after the deal was reached.  In addition, Biomet failed to maintain a compliance program as required by the agreement.  

On 6 June 2016, the DOJ filed a status report in federal court in Washington, D.C. indicating that Biomet breached the agreement through activity in Brazil and Mexico that it disclosed in 2014, and by failing maintain a corporate compliance program. As a result of the finding, Biomet could face criminal prosecution but the DOJ announced that Biomet had pledged its cooperation and was in discussions to resolve the matter without going to trial. 

On 8 December 2016, In a filing submitted to Washington, D.C. federal court, US prosecutors indicated that the parties have made substantial progress in their discussions and will reach a settlement in the next four weeks. 

On its Form 10-Q filed with the SEC on 8 August 2016, Biomet disclosed that the company has accrued additional liabilities probable to be incurred in relation to these investigations. The determination of a breach can lead to revocation of DPA or prosecution of Biomet and involved employees and executives.

On 12 January 2017, Zimmer Biomet Holdings Inc. ("Zimmer Biomet") entered into a three-year DPA in connection with an one-count superseding criminal information charging the company with violating the internal controls provisions of the FCPA. As part of the agreement, Zimmer Biomet agreed to pay a criminal penalty in the amount of USD 17,460,300, disgorgement in the amount of USD 5,820,100 and prejudgment interest in the amount of USD 702,705. Zimmer Biomet also agreed to retain an independence corporate compliance monitor for three years. Zimmer Biomet acknowledges responsibility for Biomet's violations.

On the same day, 12 January 2017, JERDS Luxembourg Holding S.ár.l. ("JERDS"), an indirect subsidiary of Zimmer BIomet, agreed to plead guilty to a one-count criminal information charging JERD with causing Biomet to violate the books and records provisions of the FCPA through the actions of its wholly-owned Mexican subsidiary, 3i Mexico.



Agencies: United States: Securities and Exchange Commission
Results: Cease-and-Desist Order, Civil Penalty, Disgorgement
Year Resolved: 2017
Compliance Monitor:
Ongoing: No
Details:

SEC (2017)

In April 2014, pursuant to the terms of the DPA Biomet disclosed the alleged improprieties regarding its operations in Brazil and Mexico to and discussed these matters with the independent compliance monitor and the DOJ and SEC.

On 2 July 2014, the SEC issued a subpoena to Biomet requiring that Biomet produce certain documents relating to such matters.

On 13 March 2015, the DOJ informed Biomet that the DPA and the independent compliance monitor’s appointment have been extended for an additional year, set to expire on 26 March 2016. In addition, the DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA. The DOJ could, among other things, revoke the DPA or prosecute Biomet and/or the involved employees and executives.

On its SEC Form 8-K filed on 25 March 2016, Biomet announced that the DPA will not expire on 26 March 2016. The SEC and DOJ have agreed to continue to investigate the matters in Brazil and Mexico in March 2016.  At the conclusion of the extended DPA period, the independent monitor was unable to certify that Zimmer Biomet's compliance program satisfied the requirement of the 2012 DPA. On April 15, 2016, the SEC and DOJ notified Biomet that the company has breached the terms of its DPA based on conducts in Mexico and Brazil that came to light after the deal was reached.  In addition, Biomet failed to maintain a compliance program as required by the agreement.  

On 6 June 2016, the DOJ filed a status report in federal court in Washington, D.C. indicating that Biomet breached the agreement through activity in Brazil and Mexico that it disclosed in 2014, and by failing maintain a corporate compliance program. As a result of the finding, Biomet could face criminal prosecution but the DOJ announced that Biomet had pledged its cooperation and was in discussions to resolve the matter without going to trial. 

On 8 December 2016, In a filing submitted to Washington, D.C. federal court, US prosecutors indicated that the parties have made substantial progress in their discussions and will reach a settlement in the next four weeks. 

On its Form 10-Q filed with the SEC on 8 August 2016, Biomet disclosed that the company has accrued additional liabilities probable to be incurred in relation to these investigations. The determination of a breach can lead to revocation of DPA or prosecution of Biomet and involved employees and executives.

On 12 January 2017, the SEC filed a cease-and-desist order against Biomet charging that the company violated anti-bribery provisions, books and records provisions and internal controls provisions of the FCPA. Pursuant to the order, Biomet will pay disgorgement of USD 5,820,100, prejudgment interest of USD 702,705, and a civil penalty of USD 6,500,000, for total payment of USD 13,022,805.



ENTITIES/INDIVIDUALS INVOLVED

DETAILS OF HOW CONDUCT WAS DISCOVERED

Discovery Method: Voluntary Disclosure
Details:

Internal investigation and voluntary disclosure.


Country:

Discovery Method: Internal Investigation
Details:

Internal investigation and voluntary disclosure.


Country:

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