Life Science Compliance Update

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March 24, 2016

Novartis Settles China Foreign Corrupt Practices Complaint

Novartis AG has settled civil charges against the company, for $25 million to the United States Securities and Exchange Commission, for allegedly bribing healthcare professionals in China to boost sales there. According to the SEC, the alleged violations took place from 2009 to 2013. As expected, Novartis settled the charges without admitting or denying them.

The $25 million settlement breaks down into a $2 million penalty and $21.5 million in disgorgement and $1.5 million in interest.

The SEC claims that Novartis' China-based units violated the Securities Exchange Act of 1934 by attempting to mask their bribes by recording them on the corporate books as legitimate travel, entertainment, conference, lecture fees, marketing events, educational seminars, and medical studies expenses. For example, in 2011, sales representatives' allegedly submitting fake receipts totaling $8,100 for employee expense reimbursement requests; that $8,100 was allegedly actually used to entertain and provide various gifts.

Other instances cited by the SEC include efforts by Novartis to hire Chinese travel companies to arrange trips, meals, and accommodations, for healthcare professionals attending educational events. The problem with that was that, according to the SEC, the events tended to be more recreational than they were educational, including an excursion to Niagara Falls.

Settlement Requirements

The settlement was outlined in a cease-and-desist order, which can be found here. Novartis, a Switzerland-based company, is subject to the Securities Exchange Act of 1934 because Novartis issued and maintains a class of publicly traded securities. The order includes a requirement where Novartis will have to report to SEC staff, at least every nine months during a two-year term, the status of its remediation and implementation of compliance measures. During that two-year period, if Novartis discovers credible evidence that has not already been reported to SEC staff related to questionable or corrupt payments, Novartis is to promptly report such conduct.

Novartis is also required to certify, in writing, compliance with the aforementioned reporting requirement. The certification shall be written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. SEC staff may make reasonable requests for further evidence of compliance and Novartis shall provide such requested evidence. No later than sixty days after completion, the certification and supporting materials shall be submitted to the Deputy Unit Chief, FCPA Unit, with a copy to the Office of the Chief Counsel of the Enforcement Division.

SEC and Novartis Statements

According to Novartis, however, the allegations involved in the settlement predated the compliance measures for the most part. Eric Althoff, Novartis spokesman, stated, "we believe these measures, which we review and update on an ongoing basis, address the issues raised by the SEC and reflect a broader initiative by Novartis to align and enhance our compliance standards globally."

The SEC backs up the claim by Novartis, by stating that "Novartis promptly took remedial steps to improve its internal controls at Novartis China," mentioning that Novartis terminated or disciplined employees, suspended vendor relationships and overhauled its anti-corruption policies. Further, the SEC noted that Novartis cooperated with its investigation and also conducted its own "expansive review" into the matter. Other companies including GSK are also facing FCPA complaints for Chinese activities. Novartis shows compliance departments that conducting your own expansive reviews are important especially working in emerging markets.

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