Stericycle’s Rapid Expansion Globally and the lack of due diligence and a Compliance Program cost $90 million in FCPA Violation Fines
Global markets remain exclusive to the biggest companies. But, advances in technology, communication, transportation, and as well as international markets, clients, professionals, resources, and customers are opening up global markets to smaller companies. Potential benefits are hidden behind the inherent risk. In the past, businesses were inclined to consider profits over the long run, and then use the profits to invest in R&D and improve existing items, develop new products, as well as the introduction of new services. The new gains in market share may be evidence of the expansion through M&A to increase the size of its portfolio and to enter new markets without regard to the risk involved. What should companies take to safeguard their newly acquired commercial concerns? A thorough Due Diligence Background Check process can reduce the risk.
It’s been seen when it comes to WPP plc whose rapid expansion by acquiring more than 2200 subsidiaries made it the biggest advertising firm in the world and yet, without any due diligence or systems for compliance on these purchases, a host of issues came up. The 2021 incident resulted in the imposition of fines of over $19 million in violation of the anti-bribery law, book, and records, as well as the internal accounting controls under the Foreign Corrupt Practices Act (FCPA).
This year, another major corporation that has international assets medical waste disposal company Stericycle was charged with violating FCPA antibribery, the books and records provision, and agreed to be paid approximately $84 million to the Securities and Exchange Commission (SEC) and The Department of Justice (DOJ) in addition to $17 million to regulatory authorities within Brazil. Both cases involved investment into thorough due diligence before any M&A process and regularly within these procedures could have saved firms millions, and innumerable amounts in business losses, legal and commercial within these countries, and additional financial fallout.
Stericycle
Stericycle, Inc. was formed by the company in Lake County, IL. In 1989. They specialize in the collection and disposing of any waste that they are regulated as well as providing associated services. Their controlled waste services comprise medical waste, sharps, pharmaceuticals, and other hazardous materials. They also provide communications services for healthcare professionals as well as patients. They also, with the purchase from Shred-it the year 2015 offer the disposal of data storage devices like documents and hard drives.
The business has a presence across 21 countries. It has around 640 places around the globe, with approximately 20 percent of its revenues being generated from international business. Stericycle has been under scrutiny by the government in 2017 over potential bribery-related violations. The company cooperated with the DOJ and also conducted its own internal investigation, too.
In April 2022, the FCPA stated that they reached an agreement along with Stericycle for “resolving parallel investigations by authorities in the United States and Brazil into the bribery of foreign officials in Brazil, Mexico, and Argentina.”
The court contract states:
“From approximately between 2011 and 2016 Stericycle using its agents and employees knewly and unknowingly collaborated with other people to bribe and offer around $10.5 million as bribes in the interest of foreign officials from Brazil, Mexico, and Argentina to gain and keep business as well as other benefits for and for Stericycle. Stericycle was able to earn $21.5 million of profits through the scheme, which was corrupt and also via its fraudulently procured and kept contract with the government.”
“Stericycle first stepped into the Latin America market in 1997 It quickly expanded its presence throughout Latin America through the acquisition of local companies in Argentina, Brazil, and Mexico. Prior local business owners were still in charge of the business in every country. Every country was run by an executive team which reported to the, among other things one former Stericycle executive in charge of all aspects of Latin America (the “LatAm Executive”). This LatAm Executive reported directly to Stericycle executive management at Stericycle’s Corporate headquarters.”
What actions did the firm use to get started vetting their new affiliates? Did they conduct a due diligence investigation or had some concrete compliance policies put in place? There was nothing in place to tackle the issues, and neither did they put any measures in place until the accusations of illegal behavior were exposed several years later.
Stericycle was pushing to accelerate expansion in Latin America starting around 2010. The company purchased local waste disposal companies and left the owners of the business at the helm, apparently not vetting the new companies or with consideration of how they conducted business through these subsidiaries. Executive teams from the highly-risk Latin America countries of Argentina, Mexico, and Brazil were accountable to the chief executive of the entire region of Latin America, a Mexican citizen, who had made the move to Miami, FL to run business from Miami, FL.
Stericycle has signed a 3-year delayed prosecution agreement as well as an agreement for a monitorship of two years with independent monitoring of compliance. The payment of $52 million to the criminal was accompanied by a discount of 25% due to the firm’s cooperation in the probe. By the DoJ’s FCPA Corporate Enforcement Policy which allows for up to 50 discounts to be available to businesses that cooperate fully and disclose the matter in a prompt and voluntarily, however, Stericycle was not able to accomplish this. Furthermore, Stericycle will also pay $28.2 million disgorgement as well as fees to the SEC. In addition, as a component of a separate resolution for Latin America of around $17 million, there’s an option to offset the cost of making prompt instalments for Brazil’s government. Brazilian government.
The firm was provided with an extensive list of corrective actions. A 2022 press release, it was stated:
It also was fully cooperative with the DOJ, SEC, and Brazilian authorities. It also took the necessary steps to set up a solid worldwide anti-corruption compliance system with the aim of improving its policies and procedures for compliance and internal controls throughout every country where it operates. The remedial steps taken by Stericycle were recognized by the DOJ as well as the SEC as well as the Brazilian authorities involved in these settlements.”
“Since 2017 Stericycle changed its directors’ board as well as its leadership team. It has added several new members to its board directors as well as new and senior executives with experience to its leadership team, which includes Cindy J. Miller, who was appointed the chief operating officer and president in 2018 as well as chief executive officer in the year 2019. In addition, the company established an entirely newly-created Operations, Safety and Environmental Committee to improve oversight of the board and has hired compliance staff, including a highly experienced chief ethics officer and compliance officer that reports directly to Miller as well as the chairman of the Audit Committee.
Building a Culture of Compliance-Remedial Measures and Global Enhancements
U.S. authorities credited Stericycle for cooperating with the investigation as well as for actions that the new management of the business took to improve the compliance of its internal checks. According to Stericycle’s delayed agreements with the prosecution, these actions comprise:
- improving its corporate governance through selecting new executive leadership as well as board members
- improving its compliance functions by bringing on additional employees and a highly experienced chief ethical and compliance officer.
- changing its conduct code and internal checks about the fight against corruption as well as retention and management of commercial agents, others, as well as the provision of gifts, entertainment, and travel;
- improving its internal reporting as well as its investigations and risk assessment procedures;
- updating its compliance-related training, as well as communication;
- firing employees who were involved in the behavior; and
- The company is selling its subsidiaries from Argentina as well as Mexico.”
The final requirement to divest of its assets in Argentina as well as Mexico is an unusual one. The situation highlights the actions Stericycle was forced to adopt following FCPA infractions. This could all be prevented or lessened with due diligence.
The Costs of Disregarding Due Diligence
The most notable thing to note of the SEC Order is this:
“As Stericycle grew in Latin America via acquisitions, procedures, and accounting systems were generally decentralized, with no uniformity or proper control, leading to weaknesses in internal control. In addition, Stericycle had no centralized compliance unit and did not follow its FCPA guidelines before 2016.”
Due diligence is one of the pillars of a solid compliance plan. M&A transactions as well as key appointments of executives should include due diligence that is conducted regarding the executive and the business. Human aspects of the equation get overlooked when we focus on the financial and legal aspects. This is a crucial process that informs lawyers of their due diligence regarding the risk factors that impact those at the top level.
Due diligence investigations are intended to discover hidden or unreported details that are not accessible in standard background checks. Due diligence investigations look into the connections between executives and foreign officials and criminal records as well as legal and financial issues Civil litigation connections with other businesses and organizations, issues with reputation as well as shell companies’ involvement. the evidence for fraud and other indicators of the laundering of money and financial fraud as well as conflicts of interests, the use of alcohol, drugs and trafficking, and anti-competitive behavior. many other concerns. Open Source Intelligence (OSINT) investigations are a valuable source of data, in addition to public information.
This investigation should be viewed as a matter of the environment and culture of leaders and organizations. What is socially and even legally appropriate in one locale could pose a legal dilemma in other locations. Due diligence in the country may be necessary in some instances to obtain “on-the-ground” intelligence. If operating within a foreign area, businesses are nevertheless accountable to follow the FCPA and any other applicable laws when they conduct management or finance activity in the USA.
Due diligence on the whole is an essential element for every M&A process, in addition to the standard financial, operational, and legal due diligence. The information you gather will help determine the people you do business with and stop “bad actors” willing to engage in fraud, bribery, or other crimes from being involved in the business.
Due diligence investigation would have assisted Stericycle in avoiding FCPA as well as DOJ actions if they had utilized them before the acquisition of properties within Argentina, Mexico, and Brazil.
It is also not a one-and-done procedure. Due diligence investigation of executives should be carried out regularly (typically every 1 to 3 years) depending on its overall risk-taking. Additionally, circumstances change and, with them, the possibility of corruption is still present.
Fraud, shell corporations corruption, bribery, and fraud are just a few of the threats that thorough due diligence will help firms to avoid. Three-quarters of the global vendors such as consultants, agents, or distributors are affected by corruption. The costs of failing to implement a comprehensive compliance plan and doing thorough due diligence can be shocking. Certain cases can be backed by exact figures such as fines imposed by the SEC as well as the DOJ as well as others that could result in reputational damage, the client loss, or even imprisonment, for instance, in the case of “Pharma-Bro” Martin Shkreli.
In the majority of cases, when buying new companies via M&A There is the possibility of an uneasy relationship between the company’s beliefs and cultures. In most cases, employees of a company that has been acquired will carry on business in the same way. In the past what was “business as usual” in country one, could be illegal in the country you are located.
It is essential to build an environment of integrity that is built starting from the top and clearly defines what’s required in terms of compliance with your business’s policies and guidelines for ethical conduct.
FCPA violations are costing more and the new sanctions are under consideration. JDSUPRA states that the improvement of a monitoring system may appear surprising, given the effort of Stericycle:
Monaco stated that “there isn’t a presumption of default against monitors from corporations. A decision on whether to monitor will depend on the circumstances and facts of every case.” This marks quite a departure from the Trump administration’s policy that favored monitors.
The report also states that the enforcing of DAG Monaco and the imposition of monitorships “[w]here a corporation’s compliance program and controls are untested, ineffective, inadequately resourced, or not fully implemented at the time of a resolution,” it could result in “significant on-going costs” for monitoring of companies.
The Need for Robust Due Diligence
This approach also emphasizes the necessity of thorough due diligence, including a deep dive due diligence of corporate executives before pursuing any M&A process.
Financial and legal due diligence must always be complemented through due diligence audits to identify serious risk which may remain hidden or unreported.
It is best to make investments early to help your business’s successful strategy. This can be done by creating a regular due diligence and compliance plan to keep “bad actors” from entering the company in the first place or to identify them once they’ve already entered your company.
In the event of ignoring the importance of efficient due diligence investigation could result in reputational damages, stock price drops, and shareholder lawsuits as well as a loss in profits, huge penalties from regulators, and losing freedoms for top executives if punishments include jail time. In the current climate of FCPA violations reaching record levels and an increase in legal actions to enforce the law, like mentoring and divesting of organizations in an agreement to settle It is now more essential than ever before to actively include due diligence investigation in your business’s plan of action for growth and protection of your board and the profits of your business.
