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Novartis Coughs Up $25 Million To Resolve FCPA Enforcement Action Based On Conduct Of Indirect Chinese Subsidiaries


What happens when a Swiss corporation, with over 120,000 employees, has two indirect Chinese subsidiaries and a few employees of those subsidiaries, who concealed their conduct from the parent corporation, allegedly provided various things of value (such as an excursion to Niagara falls, spa and sauna sessions, and cover charges to a strip club) to various Chinese healthcare professionals?

Why of course, $25 million to the U.S. treasury because the Swiss corporation has shares traded on the New York Stock Exchange.

Yesterday, the SEC announced this Foreign Corrupt Practices Act enforcement action against Novartis.

By my count, it is the 22nd FCPA enforcement against a healthcare related company (i.e. pharma, medical device, etc.) premised on the enforcement theory (regardless of whether the action was resolved “merely” through books and records and internal controls issues) that employees of certain foreign health care systems are “foreign officials” under the FCPA and thus occupy a status similar to Presidents and Prime Ministers and other bona fide government officials.

In summary fashion, the administrative order states:

“These proceedings arise out of violations of the books and records and internal accounting controls provisions of the FCPA by Novartis AG (“Novartis”) concerning its pharmaceutical operations in China.

From at least 2009 to 2013, certain employees and agents of Novartis subsidiaries conducting business in China engaged in transactions and provided things of value to foreign officials, principally healthcare professionals (“HCPs”). These payments took varied forms and were intended to influence the HCPs and thereby increase sales of Novartis pharmaceutical products. Employees and managers in the involved subsidiaries attempted to conceal the true nature of the transactions through the use of complicit third parties and by improperly recording the relevant transactions on the books and records of the respective subsidiaries, which were consolidated in the financial reports of Novartis. Examples include improperly recording the payments as legitimate expenses for travel and entertainment, conferences, lecture fees, marketing events, educational seminars, and medical studies. Novartis also failed to devise and maintain an effective system of internal accounting controls or an effective anti-corruption compliance program.

As a result of this conduct, perpetrated by employees and agents of Novartis subsidiaries in China, Novartis violated the FCPA’s books and records and internal controls provisions.”

The conduct at issue concerned Shanghai Novartis Trading Ltd (“Sandoz China”) and Beijing Novartis Pharma Co,Ltd (“Novartis China”) which are described as follows.

“Sandoz China is headquartered in Shanghai, China. Among other things, Sandoz China conducts the sales and marketing activities of Novartis generic pharmaceutical products in China including Sandostatin. Sandoz China is an indirect subsidiary of Novartis.

Novartis China is based in Beijing, China. Among other things, Novartis China conducts the broader operations for Novartis AG in China including the sale and marketing of proprietary pharmaceutical products. Novartis China is an indirect subsidiary of Novartis.”

Under the heading Sandoz China, the order states:

“Between 2009 and 2011, certain employees of Novartis’ subsidiary, Sandoz China, improperly provided things of value to HCPs in China in connection with pharmaceutical sales and involved certain complicit managers. The things of value took varied forms, and included gifts, travel, improper sightseeing or vacations, entertainment, and favors for families of HCPs. These things of value were improperly recorded on the general ledger as legitimate employee expenses, sponsorships, conferences, medical studies, and marketing costs.

Certain sales representatives of Sandoz China reported to their managers the results of their efforts to increase the sales volume of various generic products. High prescribing HCPs were referred to as “key” customers and the volume of their prescriptions was reported to certain senior management at Sandoz China. In order to influence HCPs, certain sales representatives provided HCPs with such things as cash and gifts, which were funded through the submission of false expense reports. This practice was known to certain members of management of Sandoz China, including certain area and district managers and the country sales supervisor. For example, in 2011, two sales representatives submitted fake receipts for approximately $8,100 as part of their employee expense reimbursement requests, which were approved by a regional sales manager. The proceeds were used to entertain and provide gifts to HCPs. In one instance, a sales representative submitted a fake $1,154 receipt to purchase holiday gifts for 25 HCPs when the proceeds were actually used to pay for spa and sauna sessions for HCPs. A regional sales manager approved the purchase.

In connection with this practice, certain employees maintained projections in spreadsheets that directly linked a certain cash value to be provided to HCPs in exchange for a certain number of prescriptions per month. In certain instances, these planned amounts were referred to as”investments,”between several hundred and several thousand dollars annually, and the HCPs were in some instances categorized into and tracked by different tiers, including one tier described as “money worshippers.”

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. For example:

  • In 2009, Sandoz China sponsored twenty Chinese HCPs to attend the American College of Surgeons 95th Annual Clinical Congress in Chicago. While the Clinical Congress was devoted to educational purposes, the HCPs were also provided purely sightseeing or recreational activities, such as an excursion to Niagara Falls. Sandoz China also paid for travel to the U.S. for spouses of the HCPs, $150 in “pocket” or “walking around” money, and cover charges at a strip club. A senior manager of Sandoz China and other Sandoz China employees accompanied the HCPs to Chicago.
  • In 2011, a Chinese travel company submitted several invoices totaling approximately $25,000 ostensibly in connection with lectures by an HCP to other HCPs. The invoices were paid and recorded as legitimate expenses despite the lack of any confirmation: (1) that the lecture was organized by Sandoz China and held in the venue for which an invoice was submitted; and (2) that the lecture was attended by HCPs.

Sandoz China used other methods to provide monies to HCPs. In 2009 and 2010, Sandoz China paid HCPs to collect and analyze patient medical data for the stated purpose of better understanding the use and reaction of a particular Novartis drug among patients. Senior levels of the Sandoz China sales and marketing team were involved in the design and execution of the studies.

In reality, the studies did not provide any legitimate medical data, but rather were used to financially reward HCPs who had prescribed the drug. The studies were not approved by the Novartis Global Clinical Quality Assurance group, as policy required, and the studies did not collect or analyze substantive patient data regarding the drug. Despite the lack of real scientific data, payments of approximately $88,135 per data submission were made to the prescribing HCPs. The payments made to HCPs under these studies totaled approximately $522,000 between 2009 and 2010.”

Under the heading Novartis China, the order states:

“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.”

Based on the above conduct, the order finds that Novartis violated the FCPA’s books and records and internal controls provisions.

Under the heading “Novartis’ Cooperation and Remediation,” the order states:

“In connection with the SEC Staff s investigation and in response to media reports concerning a competitor in August 2013, Novartis instituted an expansive review of its relationships in China with travel and event planning vendors. Novartis’ internal review showed that the vast majority of these vendors were retained in connection with events in which HCPs attended. It also identified a significant percentage of events that did not comply with existing Novartis Corporate policies and procedures. This included events for which no record existed to verify it had occurred, events for which inconsistent records existed, and events that could not be verified from available information. Through this mechanism of using travel agencies and similar vendors to plan events, funds were generated that were used to provide improper payments and other inducements to HCPs in order to increase sales of Novartis products.

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.”

As a condition of settlement, Novartis agreed 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.” In addition, Novartis agreed to “certify, in writing, compliance with the undertaking(s) set forth [in the order]” and the order states: ‘the certification shall identify the undertaking(s), provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance.”

As noted in this SEC release:

“Novartis consented to the order without admitting or denying the findings, and agreed to pay $21.5 million in disgorgement of profits plus $1.5 million in prejudgment interest and a $2 million penalty. Novartis also agreed to provide status reports to the SEC for the next two years on its remediation and implementation of anti-corruption compliance measures.”

Rachel Skaistis (Cravath) represented Novartis.

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