Orthofix International: The Discount, the Doctor, and the Fake Invoice

In the Orthofix International FCPA case, the company agreed to pay more than $6 million in disgorgement and penalties to settle charges over improper payments to government-employed doctors in Brazil. The Securities and Exchange Commission described a medical device sales operation that used high discounts, commercial representatives, distributors and fake invoices to induce doctors to use its products. Someone inside that operation could recognize the transaction from the sales paperwork long before seeing where the money ended up.

The Commission announced the settlement on January 18, 2017. It said the Texas-based medical device company agreed to admit wrongdoing over the Brazilian payments and improper revenue accounting.

What Happened in Brazil?

According to the Commission’s account of its Foreign Corrupt Practices Act order, Orthofix’s Brazilian subsidiary used high discounts and payments through third-party commercial representatives and distributors to influence doctors working for government-owned hospitals. The aim was to get those doctors using Orthofix products. Fake invoices made the payments look like payment for services.

The hospital’s product choice and the doctor’s personal benefit were connected through the sales channel. That is what makes this a medical device bribery case an insider can recognize: the people selling and paying for the product may see different parts of the same arrangement. A representative knows the customer relationship, while an accounting employee sees the invoice offered to justify the payment.

What strikes us is how ordinary the disguise was: discounts and invoices for services. Those sales terms covered payments intended to influence a government doctor’s product choice.

Why a Distributor Discount Matters

A supplier-approved discount can enlarge a distributor’s margin. The commercial question behind a discount used to fund improper payments is where the extra money goes and what it buys.

In the 2015 speech FCPA, Disclosure, and Internal Controls Issues Arising in the Pharmaceutical Industry, the SEC’s enforcement director described distributors using their margin to create cash funds for bribes. His remarks connected that payment route to the false appearance of an ordinary expense:

That is the accounting disguise in Orthofix’s case: the Commission described fake invoices for services masking payments to influence government-employed doctors. The speech also explains why public health care buyers matter: doctors and administrators at public hospitals can influence which products the institution purchases, including medical devices. The discount, the intermediary and the doctor’s decision belong in the same account of the sale.

The Accounting Matter Was Separate

The separate revenue-accounting case concerned sales booked before the payment conditions justified recognizing them. The Securities and Exchange Commission said Orthofix recorded some revenue as soon as products shipped, despite contingencies requiring other events before the company could receive payment. In other instances, it immediately recorded revenue after giving customers significant extensions of time to pay.

Those accounting failures materially misstated certain financial statements from at least 2011 through the first quarter of 2013. Orthofix agreed to an $8.25 million penalty to resolve the accounting violations.

For someone in sales operations or finance, the revealing comparison is between the customer agreement and the revenue entry. The Commission’s account puts the shipment date, conditions for payment and extended payment terms at the center of that comparison. A sale could appear in reported revenue while its payment terms told a more complicated story.

The Controls Missed the Payments

The Commission said Orthofix lacked adequate internal controls across its subsidiaries and failed to detect and prevent the Brazilian payments. For an insider, the connection between the payment records and the controls is practical. A review needs to reach what a discount funded and whether invoiced services were performed. In the conduct the Commission described, the sales documents carried the disguise.

The Same Disguise in Other Medical Device Cases

Under its criminal deferred prosecution agreement, Olympus Latin America admitted recording payments to a Mexican agent as public-bid administrative and advisory services that were neither performed nor required. The invoice described work. Nobody did it.

Under its criminal non-prosecution agreement, Fresenius Medical Care admitted a Saudi payment route in which employees cashed checks and returned the cash for payments to government doctors. The cash payments were recorded as project marketing expenses or collection commissions. Here too, the description in the accounts concealed the purpose of the money.

The 2022 Journal of Forensic and Investigative Accounting paper Fresenius Medical Care: A Case Study on the FCPA describes a business supplying dialysis products to patients, treatment centers, hospitals and independent distributors. Its healthcare analysis places corruption risks in procurement, payment systems and the supply chain. For someone who knows the device sale, that means looking beyond the expense label to who benefited from the payment and which hospital decision they could influence.

What the Sales and Accounting Records Can Show

The evidence connecting a sale to an improper payment can sit with different people inside the business. Discount approvals and customer prices explain the available margin. Representative agreements and invoices describe the claimed service. Payment records and communications can connect those documents to the person who benefited and the business decision the payment sought to influence.

An insider may also know why a claimed service makes no commercial sense, or how the customer’s actual payment terms differ from the revenue entry. Those are concrete business facts we can work through with you. We connect what you know about the transaction to the records, the decision-makers and the government business at issue.

Whistleblower Rewards Depend on the Conduct

Foreign-bribery information can support an SEC whistleblower award. We work with you to assess whether your information qualifies.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is a separate law from the Foreign Corrupt Practices Act involved in the Brazilian doctor-payment matter. We help identify the whistleblower route that fits the conduct you know.

You Know What the Invoice Leaves Out

If you know which doctor a discount funded, what an intermediary actually did, or why the accounts differ from the sale, speak to one of our Whistleblower Experts about what the invoice leaves out. We build the case with you, bring in FCPA whistleblower lawyers who understand medical device distribution and accounting, and remain your partners through the pursuit of a recovery.