What happens when the Greek, Swiss, and South Korean subsidiaries of a Swiss company engage in improper conduct in Greece, Vietnam and South Korea? Why of course, approximately $345 million flows into the U.S. treasury.
Yesterday, Novartis joined the long and growing list of FCPA repeat offenders as the DOJ and SEC announced (see here and here) a combined approximate $347 million enforcement action. (As highlighted in this prior post, in 2016 Swiss pharmaceutical company Novartis coughed up $25 million to resolve a SEC FCPA enforcement action focused on the conduct of its indirect Chinese subsidiaries).
Yesterday’s enforcement action included a DOJ component (in which the company agreed to pay approximately $234 million) and a SEC component (in which the company agreed to pay approximately $113 million).
The DOJ enforcement action included a criminal information against Novartis Hellas S.A.C.I. (Novartis Greece) charging one count of conspiracy to violate the FCPA’s anti-bribery provisions and one count of conspiracy to violate the FCPA’s books and records provisions resolved through a deferred prosecution agreement and a criminal information against Alcon Pte Ltd., a subsidiary of Novartis at the time of the misconduct, charging conspiracy to violate the books and records provisions resolved through a deferred prosecution agreement. Novartis Green agreed to pay a criminal penalty of $225 million and Alcon agreed to pay a criminal penalty of approximately $9 million.
According to the information, Novartis Greece sold and marketed Novartis-branded prescription drugs in Greece and its books, records, and accounts were included in the consolidated financial statements of Novartis AG filed with the SEC.
Under the heading “Overview of the Unlawful Schemes,” the information alleges:
“During the relevant time period …, Novartis Greece, through its employees and agents, knowingly and willfully conspired and agreed to corruptly provide improper benefits and things of value to employees of state-owned and state-controlled hospitals and clinics in Greece (“Greek State HCPs”) and other HCPs in Greece with the intent to obtain an improper advantage and to increase sales of a certain Novartis-branded prescription drug in Greece. Specifically, Novartis Greece sponsored Greek State HCPs to attend international congresses as a means to bribe and corruptly influence the HCPs to increase prescriptions of Lucentis [described as a drug to treat adults with age-related macular degeneration].
During the relevant time period …, Novartis Greece, through its employees and agents, also knowingly and willfully conspired and agreed to cause certain payments to be falsely recorded in Novartis AG’s books, records, and accounts. Specifically, Novartis Greece falsely recorded as legitimate advertising and promotion expenses: (a) corrupt payments related to the international congresses …; and (b) improper payments to HCPs related to an epidemiological study intended to increase sales of certain Novartis-branded prescription drugs. These records were consolidated into Novartis AG’s financial records and used to support Novartis AG’s financial reporting to the SEC. As such, Novartis Greece, through its employees and agents, caused these payments to be falsely recorded in Novartis AG’s books, records, and accounts.
During this time period, Novartis Greece recognized at least $71.48 million in profits, as calculated for the purposes of the U.S. Sentencing Guidelines, from sales of Lucentis in Greece and from sales of Novartis-branded prescription drugs related to the epidemiological study.”
In terms of the medical congresses, the information alleges:
“Between in or about 2012 and in or about 2015, Novartis Greece paid for public and private ophthalmologists in Greece to attend international “medical congresses.” These congresses were organized by various medical associations in the United States and Europe, and typically took place over several days in a destination city in the United States or Europe.
By sponsoring Greek State HCPs to attend congresses, Novartis Greece paid for the costs associated with that Greek State HCP’s attendance, such as airfare, hotel accommodations, and congress registration fees. Novartis Greece typically paid for travel costs associated with congresses through third-party travel agencies. For each individual Greek State HCP, the total cost to Novartis Greece for attendance of an international congress often exceeded $6,000.
Novartis Greece’s policies stated that the purpose for sending HCPs to congresses was to provide scientific or educational information. In reality, however, sales employees at Novartis Greece, including Novartis Hellas Employee 1, sometimes used international congresses to improperly influence and induce Greek State HCPs to increase prescriptions for Lucentis.
As part of the scheme, Novartis Greece maintained internal documentation noting that HCPs with the highest potential and highest propensity to prescribe Lucentis would receive “investments,” such as sponsorships to atended international congresses, while HCP’s with lower potential and less propensity to prescribe Lucentis would receive no such “investments.”
In terms of a U.S. nexus, the information alleges that in late 2013 employees of Novartis Greece “traveled to the United States and, while located in the United States, facilitated the attendance of Greek HCP 1 [an employee of a Greek State-Owned Clinic] and others at the U.S. Academy’s congress in New Orleans, Louisiana.”
According to the information:
“Novartis Greece, through its employees and agents, falsely recorded the corrupt payments associated with congress sponsorships as legitimate advertising and promotion expenses in Novartis Greece’s internal accounting records. By recording these payments as advertising and promotion expenses, Novartis Greece concealed their true and corrupt nature. These false records were consolidated into Novartis AG’s financial records and used to support Novartis AG’s financial reporting to the SEC. As such, Novartis Greece, through its employees and agents, knowingly and willfully conspired and agreed with others to cause the corrupt payments to be falsely recorded as legitimate expenses in Novartis AG’s books, records, and accounts.”
In terms of the “clinical trial scheme,” the information alleges that Novartis Greece “made improper payments to HCPs related to an epidemiological study intended to increase sales of certain Novartis-branded prescription drugs.” According to the information, Novartis Greece “falsely recorded these payments … as advertising and promotion expenses in Novartis Greece’s internal accounting records.”
The criminal charges against Novartis Greece were resolved through a three-year DPA. The DPA sets forth the following “Relevant Considerations”
“a. the Company did not receive voluntary disclosure credit pursuant to the FCPA Corporate Enforcement Policy in the Department of Justice Manual 9-47.120, or pursuant to the United States Sentencing Guidelines (“U.S.S.G.” or “Sentencing Guidelines”), because it did not voluntarily self-disclose to the Fraud Section and the Office the conduct described in the attached Statement of Facts;
b. the Company received full credit for its cooperation and Novartis AG’s cooperation with the Fraud Section’s and the Office’s investigation, including conducting a thorough internal investigation; making regular factual presentations to the Fraud Section and the Office; producing extensive documentation, including documents located outside of the United States, after taking steps that the Company and its affiliates determined complied with applicable foreign data privacy, confidentiality, and discovery laws; and providing translations of foreign language documents;
c. the Company and Novartis AG engaged in remedial measures, including implementing revised and enhanced policies and procedures relating to, among other things, accounting, anti-corruption, gifts, travel, and entertainment, both globally and at the country level; enhancing controls relating to sponsorships to international medical congresses and Phase IV studies; and working with outside counsel to conduct an extensive internal investigation of the Company’s operations in Greece;
d. the Company and Novartis AG have committed to continuing to enhance their compliance programs and internal controls, including ensuring that their compliance programs satisfy the minimum elements set forth in Attachment C to the Agreement (the “Corporate Compliance Program”);
e. based on the Company’s and Novartis AG’s remediation and the state of their compliance programs, and the Company’s and Novartis AG’s agreement to report to the Fraud Section and the Office as set forth in the Reporting Requirements, the Fraud Section and the Office determined that an independent compliance monitor is unnecessary;
f. Novartis AG, the Company’s parent company, has resolved with the United States Securities and Exchange Commission (the “SEC”) through a cease-and-desist proceeding relating to the conduct described in the attached Statement of Facts and other conduct, and has agreed to pay $92,300,000 in disgorgement and prejudgment interest of $20,500,000;
g. the nature and seriousness of the offense conduct, as described in the Statement of Facts, including payments made in connection with the sponsorship of health care providers (“HCPs”) employed by public institutions in Greece to attend international congresses as a means to bribe and corruptly influence the HCPs to increase prescriptions of a Novartis branded drug and the falsification of books, records, and accounts to conceal payments related to improper benefits and things of value and other improper payments to HCPs, as well as the duration of the misconduct and the involvement of high-level sales and business unit employees at the Company;
h. Novartis AG’s March 2016 resolution of FCPA accounting allegations relating to similar conduct in China with the SEC;
i. the Company has agreed to continue to cooperate with the Fraud Section and the Office in any ongoing investigation …;
j. Accordingly, after considering (a) through (i) above, the Company received full cooperation and remediation credit, but because Novartis AG was involved in similar conduct for which it reached a resolution with the SEC in March 2016, the 25 percent reduction for cooperation and remediation was deducted from a point above the midpoint of the applicable Sentencing Guidelines fine range.”
The DPA sets forth an advisory guidelines range of $180 – $360 million and the company agreed to pay $225 million. As a condition of settlement, Novartis AG agreed that it will report to the Fraud Section and the Office annually during the Term regarding remediation and implementation of the compliance measures described in the DPA.
According to the information, Alcon (an eye care company) was incorporated in Switzerland with headquarters in Fort Worth Texas and merged with Novartis in April 2011 and its books, records and accounts were included in the consolidated financial statements of Novartis AG filed with the SEC. In April 2019, Novartis AG “spun off” Alcon. According to the information, Alcon Pte Ltd was an affiliate of the Alcon Division with headquarters in Singapore and, among other functions, provided financial services and managerial oversight for the Alcon’s Division’s operations in Asia, including for two representative offices in Vietnam.
The information alleges that “among other lines of the Alcon Division’s eye care business, the Alcon Vietnam Representative Offices, through the Distributor Company [a limited liability company incorporated in Vietnam], sold surgical equipment and devices such as lasers and intraocular lenses (“IOLs”) to end-customers in Vietnam, including to state-owned and state-controlled hospitals and clinics in Vietnam.”
Under the heading “Overview of the Conspiracy” the information alleges:
“Beginning in or about 2007, the Alcon Vietnam Representative Offices and the Distributor Company engaged in a scheme to bribe Vietnam State HCPs [doctors and nurses] in order to increase sales of IOLs. Participants in the scheme referred to it as the “consultancy program.”
Under the guise of the consultancy program, the Distributor Company made corrupt payments to HCPs, including Vietnam State HCPs, in connection with sales of Alcon Division IOLs by the Distributor Company. The Distributor Company made the payments directly to HCPs, including to Vietnam State HCPs. The Alcon Vietnam Representative Offices, with the approval of employees of Alcon Pte Ltd, reimbursed the Distributor Company for up to 50 percent of the costs associated with the improper payments to HCPs.
The scheme continued after the Alcon Division merged with Novartis AG in or about April 2011. Thereafter, between in or about April 2011 and in or about June 2014, Alcon Pte Ltd, through its executives, employees, and agents, knowingly and willfully conspired and agreed with others to cause Novartis AG to maintain false accounting records, by, among other things, falsely recording partial reimbursements to the Distributor Company for improper payments made to Vietnam State HCPs in Alcon Pte Ltd’s internal financial records, which were consolidated into Novartis AG’s financial records, and by transmitting false Sarbanes-Oxley sub-certification letters to Novartis AG. These false sub-certification letters were subsequently maintained in the books, records, and accounts of Novartis AG.
In total, from in or about 2011 through in or about 2014, as a result of the improper payments to Vietnam State HCPs, Alcon Pte Ltd. realized approximately $8,500,000 in profits.”
According to the information:
“Alcon Pte Ltd, through its executives, employees, and agents, knowingly and willfully conspired and agreed with others to falsely record in Alcon Pte Ltd’s internal financial records partial reimbursement of the improper payments that the Distributor Company made to HCPs, including to Vietnam State HCPs, pursuant to the consultancy program. By recording reimbursements for these payments as legitimate expenses, such as consulting expenses, marketing expenses, human resource expenses, administration costs, and/or margin reconciliation costs, Alcon Pte Ltd, through its executives, employees, and agents, concealed the true nature of these payments and caused Novartis AG to maintain false financial records.
Furthermore, as part of the conspiracy, Alcon Pte Ltd Executive 1, who participated in the scheme and knew of the corrupt payments to Vietnam State HCPs, signed and transmitted two false Sarbanes-Oxley sub-certification letters dated July 4, 2014, and October 7, 2014, to the Alcon Division’s Chief Executive Officer and Chief Financial Officer. These false sub-certification letters were subsequently maintained in the books, records, and accounts of Novartis AG.”
The criminal charge against Alcon Pte Ltd. was resolved through a three-year DPA. The DPA generally sets forth the same “Relevant Considerations” highlighted above in terms of the Novartis Greece DPA. In addition, the Alcon Pte Ltd. DPA notes that high-level executives of the Company were terminated and certain other employees were disciplined. In addition, the Company terminated its relationship with the third-party distributor company involved in the improper conduct.
The DPA sets forth an advisory guidelines range of $11.9 – $23.8 million and the final criminal penalty amount was $8.925 million.
In the DOJ’s release, Assistant Attorney General Brian Benczkowski stated:
“Novartis AG’s subsidiaries profited from bribes that induced medical professionals, hospitals, and clinics to prescribe Novartis-branded pharmaceuticals and use Alcon surgical products, and they falsified their books and records to conceal those bribes. The resolutions announced today reflect the paramount importance of effective compliance programs and the department’s commitment to holding companies accountable when they fall short.”
U.S. Attorney Craig Caprenito (D.N.J.) stated:
“The agreement we’re announcing today shows that there will be a heavy price paid by companies that violate our laws, whether at home or overseas. Just as importantly, it includes a framework for compliance reforms that should ensure that these companies conduct their business legally moving forward.”
Douglas Korneski (Special Agent in Charge of the FBI’s Newark Office) stated:
“The FBI is committed to fighting any corrupt acts that adversely impact our economy, our citizenry, or our way of life. I say this to every company doing business on the stock exchange – if you think you can ignore the rules or make up your own, if your business model includes bribery or a quid pro quo, you can count the days until we show up on your company’s doorstep. We will protect our citizens, our economy, our way of life, and bring to justice anyone who breaks the law.”
This administrative order concerns the same core conduct alleged in the DOJ action, plus conduct in South Korea. In summary fashion, the order finds:
“These proceedings arise out of improper activities by subsidiaries and affiliates of Novartis AG, a global pharmaceutical and healthcare company headquartered in Basel, Switzerland, to increase the use of products in several geographic markets between 2012 and 2016.
In Korea, Vietnam, and Greece, Novartis or Alcon local subsidiaries and affiliates engaged in schemes to make improper payments or to provide benefits to public and private healthcare providers (“HCPs”) in exchange for prescribing or using Novartis or Alcon products. These schemes varied in method and amount but were known among certain managers of the local subsidiaries or affiliates. Within Novartis’ former Alcon Asia business, internal accounting controls weaknesses associated with Equipment Financing Arrangements (“EFAs”) in China from 2013 to 2015 resulted in forged contracts, missing surgical equipment, as well as a significant EFA accounts receivable balance associated with poor performing EFAs, for which Alcon China recorded large bad-debt provisions.
False books and records were maintained in connection with the various schemes, and Novartis also lacked sufficient internal accounting controls with respect to certain aspects of the operations of these subsidiaries and affiliates. As a result, Novartis violated the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act and was unjustly enriched by approximately $92.3 million.”
Regarding the conduct in Greece, the order finds in pertinent part:
“From the perspective of Novartis Greece’s Finance Department, clinical studies were a “black box,” in that the Finance Department lacked visibility into clinical study budgets and due to a lack of internal accounting controls there was no proper reconciliation between budget and actual spend. Moreover, in some instances, because of deficiencies in Novartis Greece’s internal accounting and supplier management controls, Novartis Greece used “dummy vendors” to try to track which HCPs were paid for which studies and to monitor payments relative to the approved budget. Some HCPs received approximately 60 euros (then approximately $83 USD) per patient clinical form and some received as much as 38,000 euros (then approximately $52,820 USD) for completing clinical forms. A follow-up Internal Audit review in 2013 concluded that Novartis Greece addressed many of the deficiencies identified in the 2012 review. Over the next several years, Novartis Greece reduced the number of local Phase IV studies it performed and eventually stopped conducting them altogether.
As described in a 2013 Novartis Internal Audit review, Novartis Greece also lacked sufficient controls around grants provided to HCPs, and they were sometimes provided without complete due diligence of the recipient, without clear details regarding the use of the funds, and in circumstances where there was an improper connection to sales strategies. In response to the internal audit review, Novartis Greece agreed to improve internal controls over the grant approval and governance processes.”
Regarding the conduct in Vietnam, the order notes that “in light of local law, Alcon Vietnam conducted all sales and marketing activities of Alcon surgical equipment … and consumables … through a Vietnamese distributor.”
Under the heading “Conduct Relevant to Korea,” the order finds:
“Between 2011 and August, 2016, Novartis Korea employees made corrupt payments to HCPs to increase prescriptions and sales of Novartis products over that of its competitors. These payments were made through one of several means, and each of which was improperly recorded in Novartis’ consolidated books and records. One scheme to make improper payments to HCPs was disguised as payments made for ostensible medical journal activities organized by a third party vendor. Under local law, pharmaceutical companies are prohibited from making any type of payment directly to HCPs for the purpose of promoting sales. One intent of the local restriction was to discourage pharmaceutical companies from concentrating more on marketing and promotional activities towards HCPs rather than on competition based on product quality through research and development.
In an effort to circumvent local law, certain employees of Novartis Korea made the improper payments to HCPs via certain third-party medical journals that forwarded the payments to the HCPs for participating in roundtable meetings organized by the medical journal. Novartis Korea sales personnel selected HCPs to participate in editorial and roundtable meetings, at some of which Novartis Korea sales representatives marketed Novartis products, and some meetings were followed by recreational activities with the HCPs.
HCPs who participated in the round-table meetings received honoraria in amounts ranging from $268 to $447 USD per event, and the amount of fees paid to HCPs averaged $2550 USD per journal. The honoraria came from advertising fees Novartis Korea paid to the medical journals and were improperly recorded in the books and records as such. Novartis Korea paid the medical journals over $16.3 million between 2011 and 2015, some of which was improperly passed on to HCPs as honoraria. As these events were conducted through a vendor, they were not subjected to compliance review as otherwise required by Novartis’ policies.
For the conduct described above, the Korean Ministry of Health and Welfare and the Korean Ministry of Food and Drug Safety imposed in 2017 civil administrative fines totaling approximately $50.3 million USD on Novartis Korea and suspended sales and reimbursements of certain Novartis products for 3-6 months. In 2020, criminal proceedings by the South Korean authorities against Novartis Korea and several former Novartis Korea employees found Novartis Korea and one of its former sales staff guilty for the same conduct, and Novartis Korea was fined approximately $35,000 USD.
In another scheme, Novartis Korea sales managers and employees organized the sponsorship of HCPs to international medical conferences as an inducement for HCPs to increase their prescriptions of Novartis products. Between 2011 and August 2016, Novartis Korea provided funding for 2,032 HCPs to attend 381 international conferences at a combined cost of approximately $7 million. Of those conferences, 645 HCPs attended 112 conferences in the United States at a cost of approximately $2.5 million. The types of conferences varied across therapeutic area, including oncology, cardiometabolic, neuroscience, and ophthalmology. As a result of internal accounting controls weaknesses, certain of these ostensibly legitimate congress sponsorship fees were used to improperly influence HCPs. In connection with some congresses, Novartis Korea employees took into account the prescription sales activities of certain HCPs when targeting them for sponsorships in an effort to encourage the HCPs to increase their prescriptions.
Novartis Korea incorrectly recorded the improper payments on its books and records as legitimate advertising and promotional fees. Novartis Korea failed to have in place a control system reasonably designed to ensure that its sales staff were not using sponsorships as improper inducements. Novartis Korea also failed to have adequate internal accounting controls over its payments for these trips. In June 2017, Novartis Korea was charged and fined approximately $446,000 by the Korea Fair Trade Commission with unfair trade practices for the conduct described above.
In yet a third scheme, Novartis Korea employees in the neuroscience business unit devised a local non-interventional clinical study with 17 pre-selected HCPs to improve relationships with those HCPs. The study was organized in May 2013 through a local medical journal with Novartis Korea providing the list of HCPs to participate and the $100,000 funding necessary to complete the study. Novartis Korea recorded the funding to complete the study as advertising expenses and failed to have the study reviewed and approved by medical affairs as required by internal procedures.
Over the relevant time period, Novartis was unjustly enriched by over $13.8 million from the improper conduct in Korea.”
Based on the above, the SEC found that Novartis violated the FCPA’s books and records and internal controls provisions. As noted in the SEC release:
“Novartis consented to the entry of an order requiring the company to cease and desist from committing violations of the books and records and internal accounting controls provisions of the FCPA. Novartis agreed to pay disgorgement of $92.3 million and $20.5 million in prejudgment interest and to comply with a three-year undertaking to self-report on the status of its remediation and implementation of compliance measures.”
Under the heading “Cooperation and Remediation,” the order states:
“In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. Novartis’ cooperation included providing translations of certain relevant documents, making current or former employees available to the Commission staff, and timely providing facts developed during the course of its own internal investigation. Novartis’ remediation included the termination of select personnel and third-party entities involved in the misconduct and certain additions to and strengthening of its internal accounting controls. Novartis also retained a dedicated chief compliance officer, improved its due diligence and business justification process for third parties, and enhanced training provided to employees.”
As a condition of settlement, Novartis is to report to the SEC periodically “during a three-year term, the status of its remediation and implementation of compliance measures, particularly as to the areas of due diligence on prospective and existing third-party consultants and vendors, FCPA training and the testing of relevant controls including the collection and analysis of compliance data.”
In the SEC release, Charles Cain (Chief of the SEC’s FCPA Unit) stated: “”Poor control environments are fertile soil for malfeasance. As illustrated by Novartis’ misconduct, weaknesses in one part of the business can often serve as a harbinger of larger unaddressed problems.”
In this release titled “Novartis Resolves Legacy FCPA Investigations” the company stated in pertinent part:
“[The] resolutions contain no allegations relating to any bribery of Greek politicians, which is consistent with what Novartis found in its own internal investigation. With today’s agreements, all outstanding FCPA investigations into Novartis are now closed.
As recognized by the DOJ and SEC, Novartis and its subsidiaries, current and former, fully cooperated with these investigations and have already implemented appropriate remedial measures.
Shannon Thyme Klinger, Group General Counsel of Novartis, said: “We are pleased that all outstanding FCPA investigations into the company are now closed. Today’s settlements represent another milestone in our commitment to resolving legacy compliance issues and ensuring that Novartis truly lives its values. We have implemented and continue to implement initiatives to ensure we operate with the same high ethical values wherever we do business, and we remain focused on building trust with society.”
Since the time periods at issue in these legacy investigations, Novartis has made significant changes to enhance its approach to ethics, risk, and compliance. The Company has strengthened its governance by adopting principles-based compliance policies, reinforced its speak-up culture so associates can more effectively raise concerns about potential misconduct, and combined its risk management and compliance functions to enable more effective risk management and mitigation efforts.”
Morrison & Foerster attorneys Charles Duross (former DOJ FCPA Unit Chief), James Koukios and Demme Doufekias represented Novartis.
Yesterday’s Novartis’s stock closed up .9%.
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