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Commission Payments To Chinese Lab Personnel And Doctors Leads To Enforcement Action


[This post is part of a periodic series regarding “old” FCPA enforcement actions]

In 2005,  the DOJ and SEC brought a coordinated enforcement action against Diagnostic Products Corp. (DPC – a California-based company which provided immunodiagnostic systems and immunochemistry kits) and its wholly-owned subsidiary DPC (Tianjin) Co. Ltd. (See here and here).

The conduct at issue focused on DPC Tianjin making cash commission payments to laboratory personnel and doctors employed by hospitals owned by the Chinese government to obtain and retain certain business involving the sale of immunodiagnostic systems, immunochemistry kits, and other medical equipment.

The overall settlement amount was approximately $4.8 million (a $2 million criminal fine and approximately $2.8 million in disgorgement and prejudgment interest paid to the SEC).


In this criminal information, DPC Tianjin was charged with violating the FCPA’s anti-bribery provisions.

The information alleges:

“At least as early as late 1991 and continuing through on or about December 12, 2002, DPC Tianjin made cash commission payments to laboratory personnel and doctors employed” by the Chinese government.

DPC Tianjin entered into sales agreements and purchase orders with certain of these hospitals … for immunodiagnostic systems, immunochemistry kits, and other medical equipment. The practice of entering into such agreements was authorized by the General Manager of DPC Tianjin.

Although DPC Tianjin was a major provider in China of immunodiagnostic systems, immunochemistry kits, and other medical equipment, there were other manufacturers and suppliers in China with whom DPC Tianjin competed. In order to obtain and retain business with these hospitals … DPC Tianjin, acting through its officers and agents, entered into sales agreements with people employed by the hospitals – usually the laboratory heads or assistants – whereby these employees would receive commissions … […] The commission payments were generally 3-5%, but sometimes as high as 20%, of the gross sales generated by the contract. The responsible officers of DPC Tianjin understood that the hospitals would not have entered into or maintained their business … if such commission payments had not been made.

The General Manager of DPC Tianjin authorized hand deliveries of the commission payments, in cash, as well as by mail and wire transfers.

From in or about late 1991, through on or about December 12, 2002, DPC Tianjin made commission payments totaling approximately $1,623,326 to laboratory department heads and assistants in several hospitals in China.


DPC Tianjin recorded the commission payments on its books and records as ‘selling expenses.’ DPC regularly incorporated DPC Tianjin’s selling expenses amount into its consolidated financial statements which then were included in filings to the SEC.”

DPC Tianjin resolved the criminal charge through this plea agreement in which it agreed to pay a $2 million criminal fine. The plea agreement states:

“The plea underlying this Agreement reflects the voluntary disclosure of the relevant conduct made by DPC, DPC Tianjin’s parent company, to the DOJ; DPC’s agreement to disgorgement and prejudgment interest in the amount of $2,788,622 in connection with a Cease and Desist Order to be entered into between the SEC and DPC.”

As a condition of settlement, DPC Tianjin was required to engage a compliance monitor for a three year period.


Based on the same core conduct described above, the SEC brought this administrative action against DPC. In summary fashion, the SEC’s order finds:

“From 1991 through 2002, DPC through DPC Tianjin routinely made improper commission payments totaling approximately $1.6 million to doctors and laboratory employees who controlled purchasing decisions at these state-owned hospitals. The commissions represented a certain percentage of sales to the hospitals (typically 3% to 10%), and DPC Tianjin determined the percentages based on the prevailing rate in the customer’s region, the sales amount, and the prior relationship with the customer. In most cases the payments were made in cash and delivered by DPC Tianjin’s sales employees by mail or wire transfer. During the relevant period, DPC Tianjin’s then management knew about, approved, and administered the payment of these commissions.

From 1991 through 2002, DPC Tianjin improperly recorded the payments as legitimate sales expenses in its books and records.

In late October 2002, DPC Tianjin’s auditors raised certain Chinese tax issues related to the commission payments. In November 2002, DPC Tianjin’s then senior manager discussed the payments and the tax issues in a monthly report to current DPC management, which led to DPC’s discovery of these payments. In January 2003, DPC instructed DPC Tianjin management to stop all commission payments. DPC also took remedial measures, revised its code of ethics and compliance procedures, and established a compliance program with respect to the FCPA.”

Based on the above, the order finds that DPC violated the FCPA’s anti-bribery, books and records and internal controls provisions. Without admitting or denying the SEC’s findings, DPC agreed to pay disgorgement of $2,038,727 and judgment interest of $749,895.

In 2006, Siemens and Diagnostic Products Corporation (DPC) entered into a merger agreement under which Siemens acquired DPC for approximately $1.86 billion. (See here).

The DPC enforcement action, as well as others involving conduct in China, are mentioned in this 2005 Washington Post article titled “Common in China, Kickbacks Create Trouble for U.S. Companies at Home.” The article begins:

“For multinational companies grappling with stagnant sales, China has become a magnet for investment and a huge potential market beckoning with growth. Yet the lure of China profits combined with pervasive local corruption is tempting foreign companies and managers and bringing them into conflict with U.S. anti-bribery laws.

In interviews, China-based executives, sales agents and distributors for nine U.S. multinational companies acknowledged that their firms routinely win sales by paying what could be considered bribes or kickbacks — often in the form of extravagant entertainment and travel expenses — to purchasing agents at government offices and state-owned businesses.

The sources, who spoke on condition of anonymity for fear of jeopardizing their businesses, said such payments are usually funneled through distribution companies or public-relations firms to minimize the chance of prosecution by the Justice Department and the Securities and Exchange Commission, which enforce the U.S. Foreign Corrupt Practices Act.”

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