In March, the Swiss pharmaceutical company Novartis settled an FCPA enforcement action brought by the SEC for $25 million. As noted in the Cease and Desist Order,

“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.”

Now the company has announced that Korean prosecutors have launched a criminal investigation into the company’s actions in South Korea, alleging that “Novartis Korea utilized medical journals to provide inappropriate economic benefits to healthcare professionals.” If these allegations are correct, they raise some very troubling questions about this FCPA settlement.

One of the key issues in any FCPA investigation is whether there is a systemic failure of internal controls. The violations that led to the SEC enforcement action were a creative set of techniques to hide and obstruficate the true purpose and intent of payments to physicians. Basically, the company tried to hide illegal payments inside legal actions such as speaker honoraria, legitimate travel, and expenses, and even inside clinical studies. However these Korean allegations point to another scheme: to pay for articles never published or to overpay the market rate for articles.

These new allegations also open the company up to questions about the robustness of the original internal investigation. Which, of course could lead to the always dreaded question in any FCPA investigation: Where else should we look, and what will we find when we do?

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