‘CONFIDENTIAL, OR ETM Lele ltt) PTB Clty aae ye Celts aCe) rae aa ra Bee een a Concur CAP ee CONTENTS " HISTORY OF INVESTIGATION = FINDINGS: 2 BOOKS AND RECORDS AND FINANCIAL CONTROL ISSUES © QUESTIONABLE PAYMENTS = REMEDIAL MEASURES = RESOLUTION OF U.S. GOVERNMENT INVESTIGATIONS * THIRD COUNTRY RISK io ‘BIORADO0002402.ppt-1HISTORY OF INVESTIGATION ele me ist lete January — April 2010 = Directed by company counsel ® Investigation triggered by internal discovery of questionable payments in sales in Vietnam and at DiaMed Thailand ® SE Asia payments confirmed in February 2010 "= Limited review of sales in Russia, China, Mexico, Hungary, and Korea in March — April 2010 s if tial problems in Russia salesRc fo cole Me lately = Authorized by BoD in May 2010; investigation under direction of Audit Committee = S8J engaged Protiviti to provide forensic accounting support " $8) disclosed investigation to DOJ and SEC on May 3, 2010 = Company reported investigation in May 4, 2010 10-Q Toe) Tow ciate latel) = Period of investigation: 2005 - Q1 2010, based on 5-year statute of limitations = Geographical: identified markets most likely to be problematic based on: existing information; corruption risk in market; size of company’s sales in market ® Initial focus on: Emerging Markets division; SE Asia; Russia; China; Brazil, Mexico; expanded to: N. Africa, ME, India, Korea ‘BIORAD0002402.ppt-3CONFIDENTIAL, Cow Cosel ilar) = Protiviti conducted detailed examination of the company’s books and records at: France (Emerging Markets records); Russia; Singapore; Vietnam; Thailand; China; Hong Kong; Mexico (including LA); Brazil; India; and Korea = Purposes: identify payments or patterns of payment that might be problematic; review adequacy of FCPA financial controls oR ror le ald = S8J conducted searches of company emails from servers at Hercules, Marnes, SE Asia, and China = Based on results of forensic accounting reports and email searches, S8J interviewed 75 company employees in Hercules, Singapore, Vietnam, Thailand, Marnes, Russia, Hungary (Emerging Markets), China, Hong Kong, Korea, India, Brazil, Switzerland, and UK ‘BIORAD00002402.ppt-4Cooperation with US Government = S&J has met with DOJ and SEC investigators five times since June 2010 to report on findings = Provided USG investigators approximately 40,000 pages of documents relating to investigation, including accounting records and emails. = Summarized employee interviews for USG investigators. eta) = S8J has cooperated with E&Y, Bio-Rad SNC's ‘statutory auditors in France, concerning the implications of the U.S. investigation for Bio- Rad SNC’s compliance with French law = S8J consulted with French criminal counsel " E&Y made limited report to French Pprocurators in December 2010 — no follow-up from French authorities. BIORAD00002402.ppt-5FINDINGS: BOOKS AND RECORDS AND FINANCIAL CONTROL ISSUES Pitot eMC is Raita g = Company's decision making is highly decentralized; ‘many functions left to the discretion of local or regional management. = Whatever the commercial merits of this structure, it poses challenges for a US:listed company to meet its FCPA compliance obligations. ® Significant lack of transparency in Emerging Markets Division — the part of the company dealing with highest risk markets. ‘BIORAD00002402.ppt-6‘CONFIDENTIAL, Lack of Adequate Compliance Let eT) Prior to investigation, company’s Ethics Code prohibited bribery but company lacked a ‘comprehensive compliance program: no written FCPA/anticorruption compliance policy; no FCPA/anticorruption compliance training for company personnel; inadequate due diligence; inadequate controls over TRE. ‘Controls over third party distributors and agents lacking: written agreements often inadequate or missing altogether; limited due diligence; limited ‘ongoing controls or oversight. Insufficient Resources al and audit staff and resources not adequate for a company of this size and geographic scope = Coordination re legal/compliance issues lacking between legal offices in Hercules and Marnes * Little effective legal supervision of Emerging Markets and Asia-Pacific divisions © Unlike Marnes, no legal resources dedicated to Asia Pacific BIORAD00002402.ppt-7Books and Records = Accounting systems among different company units often incompatible = Widespread consensus that BAAN system is inadequate for many purposes = Training and supervision for accounting functions inadequate for FCPA purposes = Protiviti had great difficulty identifying and reconciling basic records for many transactions in several countries. FCPA Financial Controls = Generally inadequate for agent and distributor payments in EM and AP. © Little awareness of relationship risk © Discretion left to local managers a_EM largely unsupervised = No review of high Russian commissions — despite major OPEX in large Russian sales = High distributor margins and agent commissions (50%-+) on LSG sales in Asia BIORAD00002402.ppt-8CONFIDENTIAL, PTET sn = Lack of documentation and controls for a series of Russian agents who were paid Euros 15.1M in commissions over five years "= No due diligence records on any of the agents; no evidence of actual offices; no registrations of agents as required by law = No records of any sort on the agents in files of Bio-Rad Russia Tere (Pe = Typical practice in LSG sales out of HK into China and Korea: a End-user paid BR end-user price; BR paid agent commission = End-user price - NDP In delivery, agent bundled local products with BR-supplied products; BR lumped reimbursement for local products into “commission” a Accounting for commission/reimbursement totally confused on books ‘BIORAD00002402,ppt-9India Books and Records = Impossible to reconcile specific sales with commissions paid to agents on sales = 250+ agents; only a handful of agent agreements = Products supplied to customers FOC with no explanatory documentation ® $1M+ in ancillary computer equipment given ‘to customers with no records tying equipment to sales FINDINGS: QUESTIONABLE PAYMENTS(CONFIDENTIAL ‘BIORADO0002402.ppt-11Southeast Asia Payments = Vietnam and Cambodia: 2 Kickbacks in gov't sales by Vietnam rep office — 70% of Vietnam sales 2 AP management aware of and facilitated these practices for years * DiaMed Thailand: a Kickbacks endemic in DM Thailand gov't sales a AP management discovered early 2008; Payments continued until March 2010 Vietnam and Cambodia = 2005-2009 Vietnam and Cambodia sales: $52.9M ® Sales involving improper payments to gov't doctors or hospital administrators: ~$37M = Amount of improper payments: $2.7M = Two IFI contracts possibly secured through improper means (World Bank-Bird Flu) = Evidence unclear but suggests Vietnam rep office may have circumvented order from Hercules in 2010 to stop all payments ‘BIORADO0002402.ppt-12BUT TC lar} = Diamed Thailand: annual sales ~$2.7M 2008- 2009 = DM Thai paid agent NeoMedic a 13% commission; possible 9% pass-through a 2008 = $255K commissions 2 2009 = $296K commissions = DM Thai initially ignored Hercules order to stop payments; order reissued; local mgt quit ® No pattern of kickbacks at BR ThailandChina: Numerous Red Flags; No Finding of Improper Payments = Several “red flags”: 2. China medical products market has history of widespread corruption a Very high, unexplained commissions on BR’S LSG sales into China (often 40%+) = 2008 LSG marketing report suggests some knowledge of corruption risks in China sales " Nevertheless, no evidence of improper payments has been found to date. ‘BIORAD00002402.ppt-14CONFIDENTIAL, Korea: Improper Influence Pee OCH lM ale Rem lc] = “Consulting” fees and lavish gifts to two Korean CDG customers arguably improper a Hard to link to specific sales = Like China, significant red flags in LSG sales: High risk market; record of corruption Very high commissions on LSG sales out of ‘HK; little or no review in HK or Korea of level or risk of agent/distributor commissions. ‘No evidence of improper payments found. ‘BIORAD00002402.ppt-15 15POC Eee Culley = Books and records and financial control issues in India especially severe; Protiviti had great difficulty identifying many relevant records = Improper payments limited: a Series of consulting payments to officer/director of privately owned PSI Blood Bank on BR sales to blood bank a Improper kickback to official at Indian Red Cross -- minor amount; at official’s demandPOCOE Raa tte) 117 commission payments paid by BR SNC over Euro 67.8 M sales can be associated with Euro 12.6 M commissions 4 Euro 2.5 M of commissions cannot be associated with specific sales transactions. Se as ‘commissions remain unclear. ‘BIORAD00002402ppt-17 17CONFIDENTIAL N Africa: Questionable Payments = Morocco: Payments to senior employee of leading BR customer Gendarmerie Royale 2. Gross 5-year sales of $1.25M; payments of $153K u Early payments wired to customer employee; later cash payments via BR Morocco employee = Tunisia: Sales to University of Tunis via distributor ‘owned by university official 2 BR Tunisia employee was former employee of university official and managed relationship 4 Total sales to distributor: $375K Middle East: A Handful of Coe Yar eS ® Isolated evidence of small payments: Oman: Expense-sharing arrangement with distributor; distributor's expenses appear to have included payment to officer of customer Iraq: Spanish distributor apparently paid kickback on sale of BR products Iran: Emerging Markets paid enhanced ‘commission to Iranian agent who justified payment because of “under the table” costs BIORAD00002402.ppt-18 18Tet UC) = Potential irregularities in Brazil sales identified in 2010 determined to be minor = Forensic review identified no problems in Mexico or LSA iChat = Romania, Bulgaria, Serbia; all supervised out of Budapest and Marnes = Numerous irregularities — e.g., commissions in excess of contractual terms; commissions paid offshore "= Limited evidence of any improper payments ‘CONFIDENTIAL, BIORAD00002402.ppt-19ieee me tala = Numerous sponsorships for officials at customer hospitals to attend professional conferences domestically and internationally = EM TRE budget of 250k/yr, mostly sponsorships ® Difficult to distinguish justified from unjustified (ips because company had few controls and generally poor documentation = Unjustified sponsorships that can be identified often overlap markets with questionable payments, notably, Russia ‘BIORADO0002402.ppt-20Pte crm alts beak = Board authorized Audit Committee to undertake full, worldwide investigation once it was determined that questionable payments might not be limited to small SE Asia markets. "= Scale and expense of investigation evidence of company’s commitment to remediating any problems. peri ee ula elated = Immediately upon identifying respective payment problems: 2 Bio-Rad sent orders to A-P HQ, VN rep office, and DiaMed Thailand to discontinue payments Bio-Rad ordered payments from BR France to Russian agent stopped Moroccan employee fired a Tunisia distributor terminated BIORAD00002402.ppt-21 2aBae ® Sanjiv Suri = Isabelle Trevidic = Francois Capit = Evgeny Bobrovnik = Noureddine Rida = Mohammed Refai Plame Meets g ocd = New procedures adopted early in investigation: ©. Distributor/agent vetting a Enhanced contractual safeguards = Interim FCPA/anti-corruption guidelines adopted in October 2010 = Comprehensive FCPA policy and procedures adopted January 2011el Wl) = 17 FCPA training sessions: ‘$80 conducted training of all managers in Si and VN in February 2010 a ‘580 conducted training in UK in July 2010 for controllers in main EU jurisdictions Sales managers worldwide at Hercules late July 2010 100 controllers worldwide had full-day training ‘session at Hercules September 27, 2010 ‘Groups covering higher-risk sales areas have been Cee mle rele melee Way = When investigation began: 2 Company was already reorganizing Emerging Markets division to make it more transparent and responsive to HQ control; and Integration of company’s accounting system was also under way CONFIDENTIAL ‘BIORAD00002402 ppt-23CONFIDENTIAL, Financial Controls = Management-led effort to remediate material weaknesses, including engagement of PwC to conduct internal controls study = Reorganization of worldwide finance function to have finance officers report to CFO. = Sept 14 began procedures to make available to company detailed Protiviti financial and accounting reviews of various jurisdictions. PCE a eM Cr Cnr = Company engaged in identifying compliance officer, appropriate staffing and resources ® Additional training © Focused training in particular jurisdictions? © Long-term training plans company-wide ™ Status of distributor/agent review © Due diligence Model contract revisions a New contracts being put in place ‘BIORADO0002402.ppt-24 24RESOLUTION OF U.S. GOVERNMENT INVESTIGATIONS em cited tll "= SEC has jurisdiction over FPA books and records and financial Controis, and anti-bribery violations: Chil penalties and disgorgement of profits possible ‘company’s books and records and internal controls, = Some connection to the United States required for anti-bribery charges; could apply to Russia and arguably other areasples PO oier ideal = DOJ has jurisdiction over violations of FCPA’s civil and. ‘criminal anti-bribery provisions 4 Criminal resolutions most common 2 US jurisdictional connection required * Russia difficult to dispute as to US jurisdiction 4 Planned or approved by EM out of Hercules 4 Written approval of some payments by Controller 4. Sufficiency of evidence will still be an issue * Necessary US jurisdictional link less clear for Vietnam, Thailand, other countries. SEC RESOLUTION = Nearly all corporate FCPA charges are settled ™ Principal options for SEC civil charges a Administrative order issued by SEC 2 Settlement filed in court — company pays fine plus court order not to violate again 4. Deferred prosecution agreement * Company admits wrongdoing; charges dropped if no new violation after X years * Only recently adopted from DOJ — not clear how SEC will apply ‘BIORAD00002402.ppt-26DOJ RESOLUTION = Principal options for DOJ criminal charges: 2 Guilty plea: formal record of conviction © Deferred prosecution agreement * Admit to wrongdoing, list of adverse facts » Charges dropped if no recurrence in, typically, three years 4 Non-prosecution agreement ia 7B iy = DOJ bases criminal penalties on complex calculation taking into account: number and amount of payments, resulting profits, size of company, degree of cooperation with DOJ "= SEC seeks “disgorgement” of profits realized from payments; can also levy civil penalties = In practice, DOJ and SEC can coordinate a total penalty — process is heavily negotiated 4 SEC acting more independently in recent past BIORAD00002402.ppt-27 27PENALTIES (CONT'D) = S8J and Latham will consult with company on relevant data for potential penalty negotiations — profitability will be key issue. ® Many FCPA settlements also include an outside monitor for, typically, three years 4 Gov't has backed away from this recently, but monitor remains a possibility 4 Lack of historic compliance policy unhelpful 4s Company's track record and future remediation plans will be very important THIRD COUNTRY RISKSUS Investigation May Generate Investigations Elsewhere = Publicity from any US settlement will inevitably come to attention of law enforcement authorities in any country named in settlement E.g, France, Russia, Vietnam, Thailand = E&Y has already notified French procurators of possible issues there = USG may also seek to cooperate with authorities in other countries BIORAD00002402.ppt-29