Novartis AG Settles Foreign Corrupt Practice Act Claims With The SEC

Posted On Tuesday, March 29, 2016

Last week, Novartis AG reached settlement with the Securities and Exchange Commission (“SEC”) over alleged bookkeeping and accounting failures of its subsidiaries in China. Per the cease-and-desist order, available here, Novartis agreed to pay approximately $21.5 million in disgorgement, approximately $1.5 million in prejudgment interest, and a $2 million civil penalty, without admitting liability, for concealing improper payments to Chinese health care providers (“HCPs”) and failing to implement and maintain sufficient accounting controls to prevent such improper payments, in violation of the Foreign Corrupt Practices Act (“FCPA”), 15 U.S.C. § 78m(b)(2)(A), (B). 

The improper payments – which, according to the SEC, functioned as bribes to induce HCPs to prescribe, or to reward HCPs for prescribing, Novartis drugs – included cash remuneration for participation in phony studies, the funding of overseas trips with no or limited educational purposes, spa treatments, and cover charges at a strip club. Employees at the Chinese subsidiaries allegedly recorded these illegal payments as legitimate expenses, such as marketing costs and sponsorships. Furthermore, the subsidiaries employed third-party vendors to organize travel and entertainment for HCPs without exercising proper oversight of the vendors or internal controls over the expenditures.

In addition to the monetary settlement, Novartis must submit to monitoring and provide status reports to the SEC on its anti-corruption compliance efforts.   According to the SEC, those efforts are already underway. Beginning in August 2013 and in response to the SEC investigation, Novartis “promptly took remedial steps to improve its internal controls . . . ,” including an overhaul of its anti-corruption policies, the termination and sanctioning of culpable employees, the elimination of relationships with certain vendors, and the enhancement of its training initiatives.  

However, the settlement comes on the heels of similar allegations concerning Novartis’s operations in South Korea. In late February, the Seoul Western District Prosecutor’s Office confiscated accounting records and other documents from Novartis’s office in the capital city. According to the Korea Herald, South Korean law enforcement alleges that Novartis’s South Korean subsidiary paid “rebates” – in the form of cash and other incentives – to local HCPs, possibly to influence prescribing behavior. The cease-and-desist order regarding Novartis’s Chinese operations does not address conduct in South Korea or any other nation.