This prior post highlighted the SEC’s recent Foreign Corrupt Practices Act enforcement action against GlaxoSmithKline.
In the action, GSK coughed up $20 million to resolve an administrative action finding that employees and agents of its China-based subsidiary and China-based joint venture provided various things of value to healthcare professionals in China.
This post highlights additional issues to consider from the enforcement action.
By the Numbers
According to FCPAnalytics, the $20 million civil penalty GSK agreed to pay to resolve the matter is the 2nd largest SEC civil penalty in an FCPA enforcement action. In addition, the $20 million settlement is the 5th largest SEC only FCPA enforcement action of all-time (in other words an SEC enforcement action lacking a DOJ component).
According to GSK’s prior disclose:
“The US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ) initiated an industry-wide enquiry in 2010 into whether pharmaceutical companies may have engaged in violations of the US Foreign Corrupt Practices Act (FCPA) relating to the sale of pharmaceuticals, including in Argentina, Brazil, Canada, China, Germany, Italy, Poland, Russia and Saudi Arabia. The Group is one of the companies that has been asked to respond to this enquiry and is cooperating with the SEC and DOJ. The Group has informed the DOJ and SEC about the investigation of its China operations by the Chinese government that was initiated in 2013 and the outcome of that investigation. The Group also has briefed the DOJ and SEC regarding other countries and issues.”
The above disclosure is a bit ambiguous as to when GSK’s scrutiny (as opposed to scrutiny of other pharma companies) began. Nevertheless, from start to finish GSK’s FCPA scrutiny appears to have lasted more than 5 years.
If the SEC wants the public to view its FCPA enforcement program as legitimate, credible, and effective, it must resolve instances of FCPA scrutiny much faster.
Several 2016 FCPA enforcement actions have contained sparse allegations against the issuer resolving the enforcement action and the GSK matter is another example.
Aside from the two conclusory legal allegations:
- (i) GSK violated the books and records provisions because the improper inducements were falsely recorded in GSK’s books and records as legitimate travel and entertainment expenses, marketing expenses, speaker payments, medical association payments, and promotion expenses; and
- (ii) GSK violated the internal controls provisions because with the benefit of hindsight there were things the company could have perhaps done better
the SEC’s order contains no substantive allegations against GSK itself as opposed to its indirect Chinese subsidiary and the China joint venture in which GSK indirectly held an interest.
Certain people seem to be confused about the reasons why FCPA enforcement has generally increased over the past decade.
However, there are several practical (as well as provocative) reasons.
Among the more obvious practical reasons (no doubt it is provocative as well) is that in 2002 the FCPA enforcement agencies came up with the theory that employees (such as physicians, nurses, mid-wives, lab personnel, etc.) of certain foreign health care systems are “foreign officials” under the FCPA and thus occupy a status equal to Presidents, Prime Ministers, and other bona-fide foreign officials that Congress had in mind when passing the FCPA in 1977.
It is one of the more aggressive and dubious FCPA enforcement theories there is. It has never been subjected to judicial scrutiny and perhaps most telling as to its validity and legitimacy, the DOJ has never charged an individual with an FCPA violation based on this theory.
Nevertheless, the theory is frequently used in FCPA enforcement actions and the GSK enforcement action provides yet example in that the conduct at issue focused on various things of value provided to health care providers in China. Sure the enforcement action found “only” FCPA books and records and internal controls violations (presumably because the U.S. nexus needed for the FCPA’s anti-bribery provisions to be triggered against a foreign company were lacking), but make no mistake this enforcement action was all about the alleged “foreign officials.”
According to FCPAnalytics, the number of FCPA enforcement actions based on the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA is approaching 25.
Prior China Enforcement Action
The GSK matter is unusual in that the FCPA enforcement action followed a foreign law enforcement action based on the same core conduct. As highlighted in this post, in September 2014 GSK agreed to pay $490 million to resolve a Chinese law enforcement action.
Usually, FCPA enforcement actions do not also involve foreign law enforcement actions, and even if they do, the foreign law enforcement action usually occurs after the FCPA enforcement action.
FCPA enforcement action resolution documents do not always tell the whole story and for this reason FCPA enforcement suffers from a transparency problem.
In this regard, it was hard not to notice the following paragraph in the “Summary” section of the SEC’s order:
“The deficiencies in GSK’s internal accounting controls and compliance program also led to instances of similar improper conduct in connection with sales in other countries in which GSK operates.”
For the many other countries in which GSK was reportedly under scrutiny, see here, here, here and here.
Chinese Travel Companies
As highlighted in this recent guest post, several FCPA enforcement actions have been based on alleged improper travel involving alleged Chinese officials. Often times, this travel is facilitated through Chinese travel agencies – a well-known corruption risk.
On this issue, the SEC’s Order states:
“Among the ways employees were able to fund payments to HCPs [healthcare professionals] was the use of collusive third party vendors, such as those used to perform planning and travel services for events involving HCPs. Between 2010 and June 2013, GSKCI spent nearly RMB 1.4 billion (USD $225 million) on planning and travel services. Test sampling showed that approximately 44 percent of the sampled invoices were inflated and approximately 12 percent were for events that did not occur.”
See this prior post for mention of Chinese travel companies in the following enforcement actions: SciClone, Novartis, and AstraZeneca.