Analogic: One Ultrasound Sale, Two Prices

In the Analogic FCPA case, the company agreed to give up $7,672,651 in profits to settle Securities and Exchange Commission allegations under the Foreign Corrupt Practices Act over fictitious invoices and distributor-directed payments. Under a separate criminal non-prosecution agreement, its Danish ultrasound subsidiary, BK Medical, admitted that a Russian distributor overpaid inflated equipment invoices and directed where the excess money should go. The sale price had already been agreed. The second invoice created the money for somebody else.

The Justice Department announced the resolutions on June 21, 2016. Analogic was a medical technology manufacturer headquartered in Peabody, Massachusetts, whose accounts incorporated BK Medical’s financial results. The subsidiary sold ultrasound equipment directly and through distributors, including sales to government-owned hospitals. That put medical-device sales, public customers and distributor payments inside the same business relationship.

How the Russian Distributor Used a Second Invoice

The Commission’s settled order described a second invoice created outside BK Medical’s normal invoicing system after the company and its Russian distributor had agreed on the sale. The distributor sent a template with a price the order described as “regularly well in excess of 100% of the original, agreed-upon price.” Customer service staff pasted BK Medical’s logo onto it and added an invoice number and other details. The inflated invoice traveled with the ultrasound equipment to Russia, while the invoice showing the agreed price went to the distributor, often electronically.

The order also described contracts carrying the inflated price, often signed for BK Medical by an administrative assistant on the distributor sales staff. The manufacturer kept copies of some of those contracts and second invoices. Someone inside customer service or sales could therefore see both accounts of the same sale: the price the business had agreed and the price its paperwork presented.

A distributor buys equipment and resells it, so its purchase price and its customer’s price belong to different transactions. According to the order, BK Medical’s sales staff understood the inflated figure to represent what the ultimate customer would pay the distributor. Yet BK Medical put that figure on its own invoice. The manufacturer’s paperwork was being used to carry the distributor’s price back through the manufacturer.

The Overpayment Became a Fund for Outsiders

The Russian distributor wired the inflated amount to BK Medical, according to the Commission’s order. BK Medical booked the actual sale price as revenue and credited the excess to the distributor’s accounts receivable balance. Sometimes that balance showed that the equipment manufacturer owed its customer money. Weeks or months later, the distributor sent instructions telling BK Medical where to wire the excess.

Those instructions often arrived by email or fax with little more than a recipient’s banking details and an amount. The order described recipients ranging from apparent shell companies overseas to individuals in Russia. Sometimes a fictitious invoice for marketing, logistics or other services accompanied the payment instruction, even though the recipient had supplied no such services to BK Medical.

The Securities and Exchange Commission described approvals by both sales and finance personnel. The outgoing transfers nevertheless bypassed accounts payable, where company controls required payments to be processed. BK Medical reduced cash and the distributor’s receivable balance instead. We see a manufacturer acting as its distributor’s payment desk, with the ordinary vendor-payment system left out of the transaction.

The scale makes that choice hard to dismiss as an incidental favor. From December 2001 through early 2011, the SEC order described at least 180 Russian-distributor payments totaling approximately $16.1 million, alongside approximately $21.6 million in equipment-sales revenue from that distributor. BK Medical’s criminal admissions, as reported by the Justice Department, supplied the recipient connection: at least some payments ultimately reached doctors employed by Russian state-owned entities.

The Explanation Was Customer Obligations

The Commission’s order described an extraordinary explanation preserved inside BK Medical. Around 2004, its sales vice president asked the Russian distributor about the payments and then recorded his understanding in a ghostwritten email, written as though the distributor’s contact had sent it to him. The email said stopping the transfers would put up to 90% of the distributor’s BK Medical business at risk. It invoked low official salaries and improving the living standards of people in high positions, then offered this distinction:

We call that a change of vocabulary with the payment left intact. According to the order, the transfers to unknown third parties continued for six more years after that explanation. For an insider, the email connects the question about where the money went with the explanation management chose to accept.

False Certifications Reached the Parent

The books-and-records problem reached Analogic through the subsidiary’s invoices, contracts, entries and assurances. In its criminal resolution, BK Medical admitted creating and keeping fictitious invoices while representing that it followed Analogic’s accounting policies and signing Sarbanes-Oxley subcertifications. The Justice Department reported that BK Medical admitted causing Analogic’s books, records and accounts to be false.

The Commission’s order separately traced the former finance officer’s role. It described approximately 150 payments he approved during his employment at BK Medical. Some approvals were his initials on fictitious invoices for services never performed. The order said he knew the transfers bypassed required controls, while his quarterly certifications told Analogic those controls were being followed. The Commission required him to pay a separate $20,000 civil penalty for his conduct.

His financial-statement certifications also said material transactions had been properly recorded, although he did not know the payments’ business purpose. According to the order, checklists intended to identify unusual transactions omitted the payment arrangements too. That is what makes the subsidiary’s reporting to its parent so useful to an insider’s account: the same officer’s payment approvals and quarterly assurances told different stories.

The parent had received a broader warning as well. The Securities and Exchange Commission said a senior Analogic executive identified the heightened risk of selling finished equipment to government-owned hospitals in 2008 and recommended both training and a process for checking distributors. Sales and finance staff received training, but the recommended distributor-validation process was never implemented. A training session left the payment arrangement untouched.

The Same Arrangement in Five Other Countries

The Commission’s order identified similar arrangements with distributors in Ghana, Israel, Kazakhstan, Ukraine and Vietnam. They broadly followed the Russian structure, although the use of fictitious documents varied by distributor. The order described at least 80 payments through those other arrangements, totaling approximately $3.8 million.

The payment trail also crossed borders within the Russian business. The order said approximately half of the payments went to banks in Latvia, while recipients included apparent offshore shell companies. A distributor’s sales territory, a recipient’s location and the destination bank could therefore point to different countries in the same transaction.

A Distributor Can Hide the Cost of the Payment

The pricing question has a close parallel in Fresenius Medical Care. In its settled order concerning Fresenius, the Securities and Exchange Commission described a West African supplier absorbing phony commission payments to doctors. Fresenius’s finance director justified the lost revenue on that basis. Moving the cost to the supplier reduced the expenses visible in Fresenius’s books and helped conceal the payments to hospital officials, according to the order.

The 2022 Journal of Forensic and Investigative Accounting study Fresenius Medical Care: A Case Study on the FCPA describes managers and employees circumventing controls despite flagged transactions and existing policies. In Analogic’s case, the SEC described sales and finance approvals operating alongside payments that bypassed the required accounting system.

These arrangements give commercial knowledge a practical use. An employee who knows the agreed selling price, the distributor’s margin or the services actually supplied can explain what an invoice leaves out. In the Analogic admissions, the subsidiary had no legitimate business relationship with the third-party recipients and had conducted no due diligence on them. The customer relationship supplied the reason to send money, while the recipient relationship supplied no legitimate business explanation.

What an Insider Can Explain

The Analogic documents show why a sales or finance employee’s knowledge can connect records that tell only part of the story separately. The agreed price, the second invoice, the overpayment and the outgoing wire describe successive decisions. The quarterly certification then describes what management told the parent about those decisions. Our whistleblower experts work with you to connect your knowledge of the transaction to the payments and the people who approved them.

A customer service employee may recognize the request to create an invoice outside the usual system. A finance employee may recognize a customer credit used to pay somebody else, or assurances signed while those payments continued. Those are specific business facts around which we assess a foreign-bribery whistleblower matter.

If your information also concerns false claims on U.S. government money, we assess that separately from the foreign payments. An FCPA tip to the SEC can earn 10% to 30% of sanctions over $1 million; where a government contract is involved, a False Claims Act case can pay 15% to 30% of what the government recovers.

You Know Why the Invoice Changed

If you know why an equipment invoice changed after the price was agreed, speak with our whistleblower experts about the payments behind it. We build the account with you and bring in foreign-bribery whistleblower lawyers who understand medical-device distribution and a subsidiary’s reporting to its parent. We stay beside you as the transaction you know becomes a case the government can understand.