Switzerland pharmaceutical giant Novartis yesterday reached a $25 million settlement with the Securities and Exchange Commission for violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act concerning its operations in China.
According to the SEC’s administrative proceeding, from at least 2009 to 2013, certain employees and agents of Novartis subsidiary, Sandoz China, improperly provided things of value to foreign officials, principally healthcare professionals (HCPs), in exchange for pharmaceutical sales. These payments took varied forms and were intended to influence the HCPs and, thereby, increase sales of Novartis pharmaceutical products.
The SEC further alleged that, between 2011 and 2013, employees and agents of Novartis China made payments to Chinese government officials 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.
“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,” the SEC stated in the administrative proceeding. “Examples include improperly recording the payments as legitimate expenses for travel and entertainment, conferences, lecture fees, marketing events, educational seminars, and medical studies,” the SEC said.
Novartis did not have sufficient internal accounting controls or anti-corruption compliance measures in connection with the use of these vendors, because it:
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.
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 by:
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.
Novartis neither admitted nor denied the SEC’s findings. As part of its resolution, Novartis agreed to provide status reports to the SEC for the next two years on its “remediation and implementation of anti-corruption compliance measures.”