If history is any guide, September is likely to be an active month for Foreign Corrupt Practices Act enforcement as the SEC’s fiscal year ends.
Sure enough, yesterday the SEC announced  an enforcement action against Paris-based pharmaceutical company Sanofi. The conduct at issue focused on employees and agents of the company’s subsidiaries in Kazakstan and various Middle Eastern countries providing things of value to “foreign officials, including healthcare professionals, in order to improperly influence them and increase sales of Sanofi products.”
In doing so, the enforcement action once again raises the policy issue of the U.S. bringing an enforcement action against a foreign company (domiciled in a country also party to the OECD Convention) for its interaction with non-U.S. officials. (See here  for a prior post).
In summary fashion, the SEC’s order  states:
“The funds used for the illicit payments were generated through fake expenses for purportedly legitimate travel and entertainment expense, clinical trial and consulting fees, product samples, round table meeting expenses, distributor discounts, and credit notes to distributors which were improperly recorded as legitimate expenses in Sanofi’s books and records. Throughout this period, Sanofi failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program with regard to Kazakhstan, Levant [which includes the countries Jordan, Lebanon, Syria, and the region of Palestine), and the Gulf [which includes the countries of Bahrain, Kuwait, Qatar, Yemen, Oman, and the United Arab Emirates].
Deficiencies in the internal accounting controls and compliance program of Sanofi also led to similar improper conduct in connection with sales in other countries in which Sanofi operates.”
As to Kazakhstan, the order states:
“Between 2007 and 2011, senior managers of Sanofi KZ [a Kazakh company which engaged distributors to facilitate the sale and distribution of pharmaceutical products with its own sales and marketing staff to promote Sanofi pharmaceutical products] engaged in a scheme to bribe foreign officials to corruptly influence the award of tenders at public institutions. The funds paid to foreign officials were derived from discounts and credit notes extended to several distributors who colluded with senior managers to kick back funds to Sanofi employees in Kazakhstan which were then used to pay Kazakh officials.
The scheme took several stages to execute. First, senior managers of Sanofi KZ identified to a distributor a public tender for pharmaceuticals that could be filled by Sanofi products. Second, the distributor submitted a bid for the public tender and, when awarded, notified Sanofi of its need to purchase products to fulfill the tender. Third, the sale price between Sanofi and the distributor included a pre-determined discount or credit note from the sale price between the distributor and the public institution. Fourth, from the amount of the discount or credit note, Sanofi and the distributor were able to designate a portion as the funds which were used to bribe Kazakh officials. Fifth, once the funds which were used to bribe Kazakh officials were earmarked, the distributor kicked back those funds to Sanofi employees who then delivered the illicit proceeds to Kazakh officials. The scheme typically involved providing a 20-30 percent discount to the distributors, a portion of which was then used as the funds from which bribes were paid to Kazakh officials. The funds kicked back to Sanofi employees were tracked in internal spreadsheets and referred to as “marzipans.”
At the time, Sanofi had no standardized commercial policy for distributor discounts and did not review the discounts provided by local management. During the relevant period, tender sales increased by over 200 percent and included top selling products of Sanofi. The distributors involved in the conduct were some of the largest distributors by sales in Kazakhstan. As a result of the improper conduct in Kazakhstan, Sanofi derived profits equivalent to approximately USD 11,580,099.”
As to Levant, the order states:
“From 2011 to 2013, employees and agents of Sanofi Levant [a Lebanon company which engaged distributors to facilitate the sale and distribution of pharmaceutical products with its own sales and marketing staff to promote Sanofi pharmaceutical products] participated in a series of schemes to pay foreign officials to boost sales of Sanofi products through increased prescriptions. The schemes included sponsorships, gifts, donations, product samples, consulting agreements, peer-to-peer meetings, clinical studies, and grants. The schemes were executed across the various business lines in Levant and included the top selling products of Sanofi in the region. Some of the schemes involved the participation by senior managers of Sanofi Levant. The instances of improper conduct were not isolated and spanned across government agencies as well as private institutions.
An example of the corrupt conduct is a 2012 request by an HCP of a large public hospital in Jordan for 24 vials of Taxotere as product samples. At the time, corporate policy for product samples required a medical justification. Taxotere is a product used to treat cancer and is one of the most expensive products sold in Levant. The oncology manager requested a justification from the sales representative and was told
[HCP] is a KOL [key opinion leader] Doctor, our Consumption in [hospital] is 124 vials, But we Don’t Give Dr.s in Institution Pt.Support [in public hospital product samples for patients]. But He Asked as a Favor.
The oncology manager then approved the request. Medical Affairs was not involved in reviewing or approving the request and no justification was provided regarding the medical use or appropriateness. The quantity provided as samples was nearly 20 percent of the hospital’s purchases. The HCP requesting the samples was a tender committee member at the hospital.
The same HCP requesting samples of Taxotere in 2012 was also provided with consulting, speaking, and clinical trial fees over a period of years despite the lack of documentation of other support to demonstrate the services had been provided. Sanofi paid to the HCP the equivalent in local currency of USD 28,900 in consulting fees and, USD 5500 in speaking fees. Sanofi also paid to the HCP USD 125,997 in clinical trial fees. The consulting fees were purportedly related to hosting events and training for HCPs in Iraq. No supporting documentation was found for any of the purported consultancy services. While the clinical trial fees were approved by Medical Affairs, the HCP has never provided reports of findings or observations. The HCP, who provided the ostensible speaking, consulting, and clinical trial services to Sanofi, requested that the consulting and clinical trial fees be paid by check to an unrelated individual. Sanofi accommodated the request to pay the unrelated individual without explanation or justification.
The practice of engaging as consultants influential HCPs who provided vague services was also performed with HCPs in the private sector. As an example, Sanofi Levant retained as a consultant the services of a prominent pharmacist in Lebanon for several years through 2013. The pharmacist received annual payments denominated in United States dollars of no less than USD 42,000 and in a five-year period received a total of USD 237,300. The consulting services required included preparing training programs and conducting speaking events however, evidence of the receipt of those services is sparse or nonexistent. Sanofi failed to require sufficient documentation of the performance of services before making payments to its consultants.
As a result of the improper conduct in Levant, Sanofi derived profits equivalent to approximately USD 4,200,000.”
As to the Gulf, the order states:
“In the countries comprising Sanofi Gulf [a company organized in the United Arab Emirates which engaged 31 distributors across the relevant countries to facilitate the sale of Sanofi pharmaceutical products and which maintained its own sales and marketing staff to promote Sanofi pharmaceutical products], sales managers and medical representatives in the Primary Care business unit engaged in a long-standing scheme to submit false travel and entertainment reimbursement claims, pool the illicit proceeds of the false schemes, and distribute the illicit proceeds to HCPs in the private sector in order to increase prescriptions of Sanofi products.
The false travel and entertainment claims were made in connection with fake round table meetings with HCPs and facilitated by fake receipts issued by collusive vendors known to facilitate such activity. The scheme was quite simple and involved local sales managers. Medical representatives were instructed by their sales managers to submit a doctored receipt for a round table meeting that never occurred. Medical representatives then submitted a doctored receipt for reimbursement as a legitimate travel and entertainment expense. The sales managers approved the travel and entertainment expense submission and the medical representatives were reimbursed. Medical representatives gave the sales managers the illicit proceeds from the fraudulent reimbursement and then pooled the illicit proceeds together into a slush fund to pay HCPs. Managers tracked the incoming pool of illicit proceeds from medical representatives and the disposition of illicit proceeds to HCPs who were paid to increase prescriptions of Sanofi products.
The Primary Care business unit was responsible for several high sales volume products in the Gulf. The scheme employed by sales managers and medical representatives was executed from at least 2012 to 2015. One medical representative estimated that 70 percent of the travel and entertainment expense submissions of the Primary Care business unit were related to the scheme. From 2012 to 2015, Sanofi Gulf spent the equivalent of approximately USD 4 million for round table meetings with HCPs, although only a portion was used in the scheme.
In a 2015 internal audit of commercial operations in the Gulf, one of the findings concerned the lack of monitoring of outsourced distributor promotional activities. An example of a specific risk identified in the report included: “Interactions with HCPs organized by the outsourced sales force are not compliant with Sanofi guidelines. Selection of HCPs, attendance list and detailed hospitality costs were neither documented nor reviewed by Sanofi.” Similar control weaknesses and failures in documentation of round table meetings conducted by distributors on behalf of Sanofi were found. Another finding identified the many internal control lapses, including the use of cash to make payment to HCPs, surrounding round table meetings conducted by Sanofi itself and lack of documentation and approvals related to attendance of round table meetings. A full audit of the commercial operations in the Gulf had not been conducted since 2007, eight years earlier.
As a result of the improper conduct in the Gulf, Sanofi derived profits equivalent to approximately USD 1,751,567.”
Based on the above, the SEC’s order finds that Sanofi violated: (i) the books and records provisions “by falsely recording improper payments made by employees and agents as legitimate selling and marketing expenses, whose results were then consolidated and reported by Sanofi on its consolidated financial statements;” and (ii) the internal controls provisions “by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials.”
As noted in the SEC’s release, without admitting or denying the findings, Sanofi agreed to a cease-and-desist order and to pay $17.5 million in disgorgement, $2.7 million in prejudgment interest, and a civil penalty of $5 million. In the release, SEC FCPA Unit Chief Charles Cain stated:
“Bribery in connection with pharmaceutical sales remains as a significant problem despite numerous prior enforcement actions involving the industry and life sciences more generally. While bribery risk can impact any industry, this matter illustrates that more work needs to be done to address the particular risks posed in the pharmaceutical industry.”
Under the heading “Remedial Efforts,” the SEC’s order states:
“During the course of the investigation, Respondent provided regular briefings regarding the facts developed in its internal investigation in Kazakhstan, Levant, and the Gulf, and with respect to other countries. Respondent timely conveyed the facts it learned in the course of its investigation, including facts that the Commission would not have been able to readily and independently discover, produced and highlighted particularly relevant documents, promptly responded to additional requests by the Commission staff, and provided translations of documents as needed.
Respondent also provided information regarding its remedial efforts, enhancements to its compliance program and implementation of initiatives. Prior to the Commission’s investigation, Respondent had begun independently enhancing its compliance program by, among other things, developing a centralized compliance program, revamping its internal controls and procedures over HCP expenditures, increasing the number of its compliance officers globally, enhancing the operation of local compliance committees, and placing compliance personnel in high-risk local markets. Additionally, it enhanced its (1) policies governing interactions with HCPs and government officials, gifts, travel, meetings, congresses, contributions, and ISTs; (2) anti-corruption training, audits, and due diligence procedures for third-party agents; and (3) monitoring for certain Sanofi-sponsored events for HCPs. Respondent also reports that it has terminated 121 employees, including senior local business managers, accepted resignations from another 14 employees, and disciplined 49 employees.”
The SEC’s order notes that it is “not imposing a civil penalty in excess of $5 million based upon [Sanofi’s] cooperation in a Commission investigation or related enforcement action.”
As a condition of settlement, Sanofi also agreed to “report on the status of its remediation and implementation of compliance for a period of at least two years.” As stated in the order:
“During this two-year period, Respondent shall conduct and prepare self reviews, as well as related follow-up, and submit written reports of the results, as set forth in the Compliance Program Review Plan (“Plan”) submitted with its Offer of Settlement and report to the Commission staff as outlined below:
[Sanofi]] shall submit to the Commission staff a written report within six (6) months of the entry of this Order setting forth a complete description of its Foreign Corrupt Practices Act (“FCPA”) and anti-corruption related remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of [Company] for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews (the “Initial Self Report”). […]
[Sanofi] shall undertake two (2) follow up reviews (the “Follow up Self Reports”), incorporating any comments provided by the Commission staff on the previous report(s), and following up on matters identified in earlier reports, to further monitor and assess whether the policies and procedures of [Company] are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws.”
Sanofi issued this release  which states:
“The settlement relates to an investigation by the SEC and U. S. Department of Justice (DOJ) of certain local activities outside the United States and France, namely, in Kazakhstan, Jordan, Lebanon, Bahrain, Kuwait, Qatar, Yemen, Oman, the United Arab Emirates and the Palestinian territory during the period 2006 to 2015. As part of the settlement, the company neither admits nor denies it engaged in any wrongdoing.
Under the terms of the settlement, Sanofi has consented to pay $25,206,145 and has also agreed to a 2-year period of self-reporting on the effectiveness of its enhanced internal controls and anti-bribery and corruption compliance program. In announcing the settlement, the SEC highlighted Sanofi’s full cooperation with the investigation as well as its strengthened compliance actions.
As disclosed on March 7, 2018, in the company’s annual report (SEC Form 20-F and French “Document de Référence”), the DOJ has also completed its related investigation and has declined to pursue any action.”
In the release, Olivier Brandicourt (Sanofi’s Chief Executive Officer) stated:
“Sanofi requires all our employees to act with integrity and to follow the highest standards of conduct. We have worked diligently to strengthen our compliance program worldwide and we are pleased the DOJ and SEC recognized these efforts and our close cooperation We will continue to strengthen internal controls, anti-bribery and corruption compliance programs, and our oversight and training of teams worldwide. Conducting our activities in an ethical way is something that our company takes very seriously.”
On the day of the enforcement action, Sanofi’s ADR’s closed down 1%.
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