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AGA Medical Resolves China-Related FCPA Charges

Privately-held AGA Medical Corporation will pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations. It paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. The Minnesota-based firm makes products used to treat congenital heart defects.

AGA was charged with two counts of violating and conspiring to violate the FCPA, 15 U.S.C. § 78dd-2(a)(1) and 18 U.S.C. § 371. Between 1997 and 2005, the company, one of its officers and other employees authorized corrupt payments to the doctors through AGA’s Chinese distributor. In exchange, the doctors directed their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. Also, from 2000 through 2002, AGA applied for several Chinese patents. A high-ranking AGA officer agreed to pay bribes through the distributor to officials in the China State Intellectual Property Office to have the patents approved.

AGA’s three-year deferred prosecution agreement requires appointment of a compliance monitor. Similar to the provisions seen recently with Willbros Group Inc., AGA will pick the monitor and the DOJ will approve or reject its choice: “AGA agrees to engage an independent corporate monitor (‘the Monitor’) within sixty (60) calendar days of signing this Agreement. Within thirty (30) calendar days after the signing of this Agreement, and after consultation with the Department, AGA will propose to the Department a candidate to serve as the Monitor. The Department retains the right, in its sole discretion, to accept or reject any Monitor proposed by AGA pursuant to the Agreement. In the event the Department rejects a proposed monitor, AGA shall propose another candidate within ten (10) calendar days after receiving notice of the rejection. This process shall continue until a Monitor acceptable to all parties is chosen.”

The deferred prosecution agreement also contains a now-customary successor liability clause, whereby anyone who acquires AGA’s business will also be bound by the compliance obligations in the agreement: “AGA agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger or transfer, it shall include in any contract for sale, merger or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement.”

AGA self-disclosed the violations to the Department of Justice. Emails it provided between some of its U.S.-based officers and employees and the Chinese distributor left no doubt that illegal activity had occurred. Here are some excerpts from the distributor’s messages:

This week I have maken [sic] an appointment with one key person in China knowledge and Patent Protection Bureau, Any action in China I must pay money to do.

I am still in agreement with our prior discussions and will cover her fee as long as we can get the [sic] patent issued in a timely manner.

Please inform [Officer A] don’t give up the application for the first three patents in China. I will contact with the officials of China patent bureau again after Chinese new year. Maybe money will help us.

My company also need to provide 20% kickback for physicians and sometimes 10% discount to hospitals.

The physicians suggest the patient to use which device according [to] the patient’s family economic ability and the kickback.

View the DOJ’s June 3, 2008 news release here.

View the criminal complaint against AGA Medical Corporation here and the deferred prosecution agreement here (courtesy of the Corporate Crime Reporter).

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  1. Reference is made that “estimated costs associated with monitoring and stepped-up compliance obligations will be ‘in the range of $1 million to $2 million.'” Is this cost for the two-year monitor or an additional annual cost to the company’s FCPA Program to be maintained?

  2. It was Faro, in the next post, that referred to the $1 million to $2 million. Here’s what they said in their release:

    “Also, as previously disclosed, resolution of the matter includes continuing obligations for compliance with the FCPA, including a monitoring requirement for two years, which began on June 3, 2008. The total cost associated with the monitoring obligation is currently estimated to be to be in the range of $1 million to $2 million, as disclosed in the Company’s most recent earnings release and conference call. However, the actual costs incurred may vary from this preliminary estimate.”

  3. This will be a good step towards progress, hope the FCPA Program will be maintaned..

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