Smith & Nephew Settles U.S. Bribery Allegations

British medical device maker Smith & Nephew plc is paying $22.2 million to settle allegations that its subsidiaries paid bribes to win business in Greece.

In court papers filed Feb. 6, the U.S. Department of Justice and U.S. Securities and Exchange Commission (SEC) accused Smith & Nephew of charging a Greek distributor full price for its products, then paying to shell companies the amount of discounts usually given.

The money sent to the shell companies was used to bribe publicly employed Greek healthcare providers, according to court documents.Between 1998 and 2008, Smith & Nephew’s U.S. and German subsidiaries authorized about $9.4 million in payments to induce the purchase of its medical devices, lawmakers said.

The SEC’s complaint contends that Smith &Nephew subsidiaries created a “slush fund” that make illicit payments to public doctors employed by government hospitals or agencies in Greece. On paper, it appeared as though Smith & Nephew’s subsidiaries were paying for marketing services, but no services actually were performed. The scheme basically created off-shore funds that were not subject to Greek taxes to pay bribes to public doctors to purchase Smith & Nephew products.

“Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition,” Kara Novaco Brockmeyer, chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit, said in a prepared statement. “The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”

The SEC’s complaint was filed in U.S. District Court in Washington, D.C. It provided an overview of Smith &Nephew’s corporate structure as well as a brief history of the alleged misconduct, stating that the firm’s U.S.-based subsidiary, Smith &Nephew Inc., and its German subsidiary, Smith &Nephew Orthopaedics GmbH, have sold products inGreece since the 1970s through Greek distributors. Greece has a national healthcare system in which most hospitals are publicly-owned and operated; doctors working at those hospitals are government employees and “foreign officials” as defined in the Foreign Corrupt Practices Act (FCPA).

The SEC claims the alleged misconduct began in 1997, when Smith & Nephew’s subsidiaries developed a scheme to make payments to three United Kingdom-based shell entities controlled by the distributor. Those funds were used by the distributor to pay bribes to Greek doctors on behalf of the Smith & Nephew subsidiaries.

Smith & Nephew failed to stop the bribery once employees became aware of the payments. In one e-mail exchange between employees at the U.S. subsidiary and a distributor over the amount of the commissions, the distributor stated, “… In case it is not clear to you, please understand that I am paying cash incentives right after each surgery…” Smith & Nephew Inc., however, did not reduce commissions.

Smith & Nephew agreed to settle the SEC’s charges by paying more than $5.4 million in disgorgement and prejudgment interest. Its subsidiary Smith & Nephew Inc. agreed to pay a $16.8 million fine as part of a deferred prosecution agreement with the Department of Justice. The company also agreed to boost internal controls as well as allow an independent compliance monitor to review its FCPA compliance program for 18 months.

The SEC’s investigation was conducted by Tracy L. Price of the Enforcement Division’s FCPA Unit along with Brent S. Mitchell and Reid A. Muoio.