Say an English company has Chinese and Russian subsidiaries which, approximately 6-10 years ago, provided various things of value to physicians in those countries.
The end result?
Why of course $5.5 million to the U.S. Treasury because the English company has American Depositary Shares registered with the SEC.
The above description is not make-believe, but a summary of a Foreign Corrupt Practices Act enforcement action released yesterday by the SEC against AstraZeneca Plc  (a United Kingdom biopharmaceutical company).
In summary fashion, the order states:
“These proceedings arise out of violations of the internal controls and recordkeeping provisions of the FCPA by AZN and its wholly-owned subsidiaries in China and Russia. Through at least 2010, AZN failed to devise and maintain a sufficient system of internal accounting controls relating to the interactions of its China and Russia subsidiaries with government officials, the vast majority of whom were health care providers (“HCPs”), at state-owned and state-controlled entities in China and Russia. Sales and marketing staff, along with multiple levels of management at the two AZN subsidiaries, designed and authorized several schemes to make improper payments of gifts, conference support, travel, cash and other benefits to HCPs to reward or influence their purchases of AZN pharmaceuticals. In addition, employees in the China subsidiary made cash payments to local officials to reduce or avoid fines that were levied against the China subsidiary. AZN falsely recorded all of the improper payments by its China and Russia subsidiaries as bona fide business expenses in its consolidated financial statements.”
AstraZeneca’s (AZN) subsidiaries are described in the SEC’s order as follows.
“AstraZeneca (Wuxi) Trading Co. Limited (“AZ China”) is a wholly-owned subsidiary of AZN and was responsible for AZN’s sales and marketing functions in China during the relevant period.
AstraZeneca UK Limited is a wholly-owned subsidiary of AZN and had a representative office in Russia through which AZN operated in Russia prior to 2007.
OOO AstraZeneca Pharmaceuticals is a wholly-owned subsidiary of AZN through which it has operated in Russia since 2007. (AstraZeneca UK Limited’s representative office in Russia and OOO AstraZeneca Pharmaceuticals are referred to individually or collectively herein as “AZ Russia.”)”
Under the heading “Improper Conduct at AZ China,” the order states:
“From 2007 until 2010, AZ China sales staff made numerous improper payments in cash, gifts and other items to HCPs as incentives to purchase or prescribe AZN pharmaceuticals. Sales and marketing team members, including managers within various business units at AZ China, designed and implemented the improper payment schemes. The HCPs who received the improper incentives worked for various government entities in several regions throughout China.
Between at least 2006 and 2009, certain AZ China sales staff and their managers maintained written charts and schedules that recorded the amount of forecasted or actual payments of maintenance fees, gifts, entertainment and other expenses that AZ China would make per month or year in numerous regions throughout China. In some cases, the payments referenced gifts, entertainment and other expenses to individual physicians, and in other cases, maintenance fees to a particular hospital or medical department, as designated by an individual physician. AZ China sales staff management approved these payments with the expectation that the HCPs would increase purchases of AZN products during the corresponding period, or favorably influence the inclusion of AZN products on formulary or reimbursement drug listings.
In numerous instances, AZ China sales staff submitted, and managerial employees knowingly approved, fake fapiao (tax receipts) for fraudulent reimbursements to generate cash that was used to make improper payments to HCPs.
Other methods were also used, such as establishing bank accounts in doctors’ names as part of an improper payment scheme, or engaging a collusive travel vendor who submitted fake or inflated invoices to generate cash that could be used to funnel money to HCPs.
As a result of the deficient controls, AZ China employees were regularly reimbursed for submitted expenses despite inadequate supporting documentation.
Similarly, AZ China paid speaker fees to HCPs despite AZ China service contracts that were incomplete, containing no meeting date, venue, subject or fees associated with the particular speaker event. In some instances, the related speaker engagement was totally fabricated and never occurred. Additionally, sales and marketing team members were able to bypass formal approval procedures that required validation by a designated signatory in the company’s electronic approval system.
In addition, in connection with inquiries by local Chinese government officials in 2008, AZ China employees made payments in cash to the local officials to get reductions or dismissals of proposed financial sanctions against the subsidiary.”
Under the heading “Improper Conduct at AZ Russia,” the order states:
“From at least 2005 until 2010, AZ Russia employees provided improper incentives to government-employed HCPs in connection with sales of AZN pharmaceutical products.
As was done by AZ China employees, AZ Russia employees created and maintained charts tracking the names of HCPs, the regions in which they practiced, their level of influence in making purchasing decisions for the respective entities where they worked and the manner in which they could be motivated to purchase AZN products through gifts, conference support and other means.
Employees at several levels of AZ Russia management directed or condoned their subordinates’ practices of providing improper benefits to government-employed HCPs, which occurred in multiple regions where AZ Russia operates.”
Based on the above findings, the SEC found that AZN violated the FCPA books and records and internal controls provisions.
As to books and records, the order states:
“AZN violated [the books and records provisions] when its subsidiaries mischaracterized improper payments as legitimate expenses in AZN’s books and records.”
As to internal controls, the order states:
“AZN violated [the internal controls provisions] by failing to devise and maintain a sufficient system of internal accounting controls relating to employee reimbursements, third-party vendors, speaker fees, conferences, gifts, travel and entertainment. AZN did not adequately enforce its corporate policy against making improper payments to government officials with respect to its subsidiaries in Russia and China. Although the company had a written policy that prohibited these unauthorized transactions, AZN did not employ reasonable controls to detect and prevent such improper payments. AZN failed to ensure that its Russia and China subsidiaries maintained accurate and complete recording of financial transactions referencing payments to government officials. These records never appropriately described the transactions, and were always inaccurate or incomplete, when the purpose of the payment involved an improper incentive to the government official. The company also did not employ reasonable measures to ensure that sponsorship activities involving government officials in China were appropriately approved through the company’s established electronic system by a predesignated official in the country. Additionally, AZN did not provide adequate FCPA training to its sales and marketing employees in China and Russia who had routine interactions with government officials in the healthcare industry that posed a high risk for bribery and corruption. Furthermore, AZN did not employ reasonable due diligence and monitoring of third-party contractors engaged by its China and Russia subsidiaries, such as travel vendors who provided false invoices to the subsidiaries’ employees that facilitated the unauthorized use of corporate funds to improperly incentivize HCPs.”
Without admitting or denying the SEC’s findings, AZN agreed to pay $5.5 million (disgorgement of $4,325,000, which represents profits gained as a result of the conduct described, prejudgment interest of $822,000, and a civil money penalty of $375,000). As to the later, the order states:
“AZN acknowledges that the Commission is not imposing a civil penalty in excess of $375,000 based upon its cooperation in a Commission investigation and related enforcement action.”
Under the heading, “Cooperation and Remedial Efforts,” the order states:
“AZN did not self-report its violations; nevertheless, the company provided significant cooperation to the Commission during the entire course of its investigation. AZN immediately took a cooperative posture and ensured that it consistently provided complete information in a timely manner. AZN voluntarily and timely disclosed information obtained during its own internal investigation, provided translations of key documents, and disclosed facts that the Commission would not have been able to readily and independently discover. AZN also kept the staff regularly informed of its ongoing remedial efforts throughout the course of the investigation.
AZN had begun independently remediating deficiencies in its compliance program prior to the Commission’s investigation. The company incorporated information developed in the course of the Commission’s investigation to further enhance its controls and compliance program. AZN made significant increases to both capital and human resources available to compliance at the corporate level and in the local markets. It has developed a centralized compliance program, revamped its internal controls and procedures, and placed key compliance personnel in high-risk local markets. Among the other improvements made are enhancements to AZN’s policies governing interactions with HCPs and government officials, gifts, travel and entertainment, third-party engagements, meetings, congresses, and contributions. AZN also enhanced its anti-corruption training and audits. Additionally, AZN has taken various steps with regard to involved employees, including targeted training, reassignment to lower-risk areas of responsibility, voluntary separations, and dismissals.”