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Issues To Consider From The Novartis Enforcement Action


This prior post went in-depth into the recent $25 million Foreign Corrupt Practices Act enforcement action against Novartis.

This post continues the analysis by highlighting various issues to consider.

Origin and Timeline

Below is how Novartis has described the origin of its FCPA scrutiny in public filings.

“After reports of Chinese government investigations of competitors for alleged improper use of certain China-based travel agencies to reward healthcare providers, Novartis commenced an internal investigation in 2013 concerning its local affiliates’ relationships with China-based travel agencies (and other vendors). Novartis is communicating with the US Securities and Exchange Commission (SEC) about this internal investigation.”

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.

For instance, in the recent SciClone enforcement action, the SEC found:

“Local Chinese travel companies were routinely hired to provide services (such as arranging transportation, accommodations, and meals for HCPs) in connection with what were ostensibly legitimate conferences, seminars, and other events. In addition to a lack of due diligence for these third party vendors … there was a lack of controls over the events to ensure they had an appropriate business purpose and that the events actually occurred.”

Similarly, in the Novartis enforcement action, the SEC found:

“As part of its normal business operations, Sandoz China hired local Chinese travel companies to arrange transportation, accommodations, and meals for HCPs in connection with education events. However, in many instances, the actual trips did not include an educational purpose or the scientific/educational components were minimal in comparison to the sightseeing or recreational activities, and were instead a method of influencing the HCPs. The related expenses were approved and paid with little or no supporting documentation.”


Between 2011 and 2013, employees and agents of Novartis China made payments to government officials in China in connection with pharmaceutical sales. The payments were made through event planning and travel companies retained by Novartis China ostensibly to arrange transportation, accommodations and meals for HCPs in connection with educational conferences and other business activities. Through the use of these complicit vendors, HCPs were provided with improper inducements to prescribe or recommend Novartis products. The subsidiary recorded these payments as legitimate selling and marketing costs in its books.

Novartis China retained numerous third-party travel and event planning vendors to organize and manage marketing for HCPs events, both locally within China, and outside China. The range of services varied but in some cases vendors arranged the venue, food, entertainment, flights, hotels, and transit depending upon the location of the event and number of participants. In the past several years, Novartis China has hosted thousands of such events, and the pharmaceutical business unit within Novartis China was the largest consumer of these services.

Despite the widespread use of third-party travel and event planning vendors in China, Novartis did not have sufficient internal accounting controls or anticorruption compliance measures in connection with the use of these vendors. Among other things, Novartis failed to conduct sufficient training of its sales staff and managers to prevent and detect inappropriate payments made to and/or through these vendors, failed to conduct proper due diligence in connection with these vendors and failed to ensure sufficient and appropriate support for the selling and marketing expenses submitted by these vendors.”

No-Charged Bribery Disgorgement

The Novartis action was yet another SEC FCPA enforcement action that did not charge or find violations of the FCPA’s anti-bribery provisions, yet the bulk of the $25 million settlement amount was disgorgement.

As highlighted in this previous post, so-called no-charged bribery disgorgement is troubling.

Among others, Paul Berger (here) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Further, like many, many other FCPA enforcement actions, the Novartis action assumes causation. In other words, it assumes that the only reason Chinese “foreign officials” purchased Novartis product was because the alleged officials received various things of value such as an excursion to Niagara falls, spa and sauna sessions, and cover charges to a strip club.

Such assumed causation, very much relevant to disgorgement issues, would seem speculative at best.

A Government Required Transfer of Shareholder Wealth to FCPA Inc?

Per the SEC’s own allegations, Novartis (a company with approximately 120,000 employees) violated the FCPA’s book and records and internal controls provisions because a few employees at two indirect Chinese subsidiaries concealed their conduct from the parent company and provided various things of value to alleged Chinese “foreign officials.”

In its order, the SEC complimented Novartis for its pre-enforcement action remedial measures and stated:

“As a result of its internal review over relationships with local Chinese third party travel and event planning vendors, Novartis identified weaknesses in its internal controls over third party relationships at Novartis China. Novartis promptly took remedial steps to improve its internal controls at Novartis China including overhauling its anti-corruption policies and procedures, terminating and/or imposing other disciplinary sanctions against culpable employees, suspending vendor relationships and payments, doubling its training initiatives, re-organized its compliance function to include enhanced oversight by regional and headquarter compliance personnel, and eliminated the use of vendors to support external meetings.”

Against this backdrop, was it truly necessary – as a condition of settlement – for Novartis to report to the SEC  “periodically, at no less than nine-month intervals during a two-year term, the status of its remediation and implementation of compliance measures.”

Or is this yet another example, post-enforcement action, of a government required transfer of shareholder wealth to FCPA Inc? (See herehere, here and here for prior posts).

Other Scrutiny

The FCPA enforcement action involved alleged conduct only in China. However, Novartis is under scrutiny in other countries as well. For instance, as highlighted in this recent post, “South Korean authorities raided Novartis offices in search of evidence the company provided bribes to local doctors.”

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