[This post is part of a periodic series regarding “old” FCPA enforcement actions]
This recent post  discussed how from a compliance take-away standpoint the large, egregious, no reasonable minds could differ there was bribery, enforcement actions are the least important and least instructive.
Rather, the most instructive and thus important enforcement actions tend to be those that take the Foreign Corrupt Practices Act in a new direction, involve unique interpretations of law (not subjected to any judicial scrutiny of course) and thus pose new compliance challenges for business organizations. The SEC’s 2004 enforcement action against Schering-Plough, based on a bona-fide charitable contribution, certainly fits this mold.
In the enforcement action, the SEC alleged in this complaint  in summary fashion as follows:
“This matter involves … Schering-Plough Corporation’s … violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act. Between February 1999 and March 2002, Schering-Plough Poland [described as a branch office of Schering-Plough Central East AG, a wholly-owned Swiss subsidiary of Schering-Plough that is headquartered in Lucerne Switzerland] paid 315,800 zlotys (PLN) (approximately $76,000) to a charitable foundation to induce the foundation’s president, who was also a Polish government official, to induce the purchase of Schering-Plough’s pharmaceutical products. None of the payments to the charity was accurately reflected in Schering-Plough’s books and records. Additionally, Schering-Plough’s system of internal accounting controls was inadequate to prevent or detect the improper payments.”
For starters, the FCPA’s internal controls do not require issuers to “prevent or detect” improper payments. Rather the statutory standard is “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” certain financial objectives are met. Furthermore, the FCPA specifically defines the terms “reasonable assurances” and “reasonable detail” to “mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
This salient rule of law point aside, the SEC alleged:
“The Silesian Health Fund was a government body that, among other things, provided monies for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health funds resources. In Fcbruary 1999, shortly after the Director assumed his position of leadership in the Silesian Health Fund, S-P Poland made the first of a series of payments to the Foundation.”
The Foundation was described as the Chudow Castle Foundation “a charitable organization that was established in 1995 to restore castles and other historic sites in the Silesian region of Poland. The founder and President of the Foundation was the Director of the Silesian Health Fund, one of sixteen regional health authorities in Poland.”
Thereafter, the SEC alleged:
“In early 2000, the Director solicited S-P Poland’s oncology unit manager (the “Manager”) to make additional payments to the Foundation. Between March 2000 and March 2002, the Manager arranged for twelve additional payments from S-P Poland to the Foundation. Some of these payments were structured so that they were at or below the Manager’s approval limit, apparently for the purpose of concealing the nature of the payments. Moreover, the Manager provided false medical justifications for most of the payments on the documents that he submitted to the company’s finance department.
S-P Poland made more money to the Foundation than any other recipient of promotional donations. During 2000 and 2001, the payments to the Foundation constituted approximately 40% and 20%, respectively, of S-P Poland’s total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and several payments in 2001 highly unusual.
All of the payments to the Foundation were classified by S-P Poland in its books and records as donations. However, while the payments in fact were made to a bona fide charity, there were made to influence the Director with respect to the purchase of Schering-Plough’s products. In fact, the Manager did not view the payments to the Foundation as charitable, but as ‘dues’ that were required to be paid for assistance from the Director.
During the period in which the payments were being made to the Foundation, S-P Poland’s sales of Intron A and Temodal, two of its oncology products, increased disproportionately compared with sales of those products in other regions of Poland. By 2002, 53% of the Intron A and 40% of the Temodal sold in Poland were in Silesia.”
As to internal controls, the SEC alleged:
“Prior to March 2002, Schering-Plough’s policies and procedures for detecting possible FCPA violations by its foreign subsidiaries were inadequate in that they did not require employees to conduct any due diligence prior to making promotional or charitable donations to determine whether any government officials were affiliated with proposed recipients. For this reason, the Director of the Silesian Health Fund’s relationship to the Foundation was never considered by S-P Poland as a potential FCPA issue.
S-P Poland’s internal policies provided that promotional donations generally were supposed to be made to healthcare institutions and relate to the practice of medicine. Although the Foundation represented to S-P Poland that its by-laws permitted the Foundation to engage in healthcare related programs, the Commission alleges that the Manager knew that the Foundation did not, in fact, engage in such programs.
The company should have been alerted to the fact that there were FCPA issues relating to S-P Poland’s payments to the Foundation, because: (i) the Foundation is not a healthcare related entity, yet still received payments; (ii) of the magnitude of the payments to the Foundation in relation to the company’s budget for such donations; (iii) of the apparent structuring of certain payments by the Manager, which allowed him to exceed his authorization limits; and (iv) the Director was the founder and President of Foundation and also a Polish government official with the ability to influence the purchase of S-P Poland’s products by hospitals within the Silesian Health Fund.”
Based on the above, the SEC charged Schering-Plough with violating the FCPA’s books and records and internal controls provisions. As noted in this release , without admitting or denying the SEC’s allegations, Schering-Plough consented to pay a $500,000 civil penalty. As further noted in the release, in a related administrative action  Schering-Plough “also was ordered to comply with its undertakings to retain an independent consultant to review the company’s policies and procedures regarding compliance with the Foreign Corrupt Practices Act and to implement any changes recommended by the consultant.” In the administrative action, the SEC specifically noted: “the payments to the Foundation were made without the knowledge or approval of any Schering-Plough employee in the United States.”
As to the origins of the action, in a release Schering-Plough stated: “In November 2003, the SEC issued a formal order with Schering-Plough to investigate whether Polish subsidiaries of several pharmaceutical companies were complying with provisions of the U.S. Foreign Corrupt Practices Act.”
The Schering-Plough enforcement action was noting short of remarkable given the SEC’s own allegations/findings. Recall:
- The enforcement action was based on the conduct of one individual – a unit manager at a branch office of a foreign subsidiary;
- The individual structured his conduct to evade certain internal controls and otherwise provided false information on documents submitted to the company’s finance department;
- The donations were made to a bona fide charitable organization;
- The aggregate donation amount (approximately $76,000) was not material (during the relevant time period Schering-Plough’s net income was over $2 billion per year).
- The donations were recorded as “donations” on the company’s books and records; and
- The donations were made without the knowledge or approval of any Schering-Plough employee in the U.S.
Dubious as it was, the Schering-Plough enforcement action was notable in that it is believed to be the first FCPA enforcement action based exclusively on a charitable donation.
As stated in this 2004 law firm release :
“The case is significant in suggesting that payments to a bona fide charity could violate the FCPA if made to influence the actions of a government official. Although the SEC did not state that these payments were bribes within the meaning of the FCPA, in charging FCPA accounting violations for these payments, the SEC strongly signaled that it believes that charitable donations could violate the FCPA if made at the direction of a government employee to induce official action.”
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