Yesterday, the Securities and Exchange Commission (SEC) announced that Bristol-Myers Squibb agreed to settle charges that its joint venture in China made cash payments and provided other benefits to health care providers at state-owned and state-controlled hospitals in exchange for prescription sales. The company agreed to pay $14 million to settle the SEC’s finding that it violated the Foreign Corrupt Practices Act (FCPA) and “reaped more than $11 million in profits from its misconduct,” according to the agency.
The SEC Press Release reports that Bristol-Myers Squibb “lacked effective internal controls over interactions with health care providers at BMS China, its majority-owned joint venture.” The government alleged that between 2009 and 2014, BMS China sales representatives provided health care providers in China with cash, jewelry and other gifts, meals, travel, entertainment, and sponsorships for conferences and meetings in order to secure business. “BMS China inaccurately recorded the spending as legitimate business expenses in its books and records, which were then consolidated into the books and records of Bristol-Myers Squibb,” the government noted.
The agency went into more detail over specific FCPA violations, noting that Bristol-Myers Squibb:
- Failed to respond effectively to red flags indicating that sales personnel provided bribes and other benefits to generate sales from health care providers in China.
- Did not investigate claims by certain terminated employees of BMS China that faked invoices, receipts, and purchase orders were widely used to fund improper payments to health care providers.
- Was slow to remediate gaps in internal controls over interactions with health care providers and monitor potential inappropriate payments to them that were identified repeatedly in annual internal audits of BMS China between 2009 and 2013.
“Bristol-Myers Squibb’s failure to institute an effective internal controls system and to respond promptly to indications of significant compliance gaps at its Chinese joint venture enabled a widespread practice of providing corrupt inducements in exchange for prescription sales to continue for years,” said Kara Brockmeyer, Chief of the Enforcement Division’s FCPA Unit.
The SEC’s order finds that Bristol-Myers Squibb violated the FCPA’s internal controls and recordkeeping provisions. Without admitting or denying the findings, Bristol-Myers Squibb consented to the order and agreed to return $11.4 million of profits plus prejudgment interest of $500,000 and pay a civil penalty of $2.75 million.
Bristol-Myers Squibb also agreed to report to the SEC for a two-year period on the status of its remediation and implementation of FCPA and anti-corruption compliance measures.
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Back in March, Andrew Ceresney, Director of Enforcement at the SEC outlined many ways in which his agency seeks out violations of the Foreign Corrupt Practices Act. He noted that many pharmaceutical operate in “high risk countries prone to corruption.” Ceresney stressed that compliance programs must focus on third party and distributor due diligence. Using distributors “creates the risk that the distributor will use their margin or spread to create a slush fund of cash that will be used to pay bribes to foreign officials,” he stated. “Because of this added layer of cash flow, companies frequently improperly account for bribes as legitimate expenses.” To properly control for this, companies must ensure that payments to third-parties are legitimate business expenses and “thoroughly vet third-party agents.”
The life science industry is vulnerable to bribery allegations overseas because pharma reps have “regular contact with doctors, pharmacists, and administrators from public hospitals in foreign countries,” Ceresney added. “These people often are classified as foreign officials for purposes of the FCPA, and they often decide what products public hospitals or pharmacies will purchase.”
It appears as though BMS fell into this trap, though they are not alone as other pharmaceutical companies have recently paid out to settle FCPA allegations. The SEC’s case against Pfizer in 2012 in which employees in China allegedly rewarded “high-prescribing doctors” in the Chinese government with entertainment functions included allegations that the company created various “point programs” where doctors could accumulate points based on the number of Pfizer prescriptions, and redeem them for medical books, tea sets, cell phones, and reading glasses. Pfizer and several subsidiaries agreed to pay approximately $60 million to resolve allegation by both DOJ and SEC.
Eli Lilly similarly faced scrutiny because of allegations that the company’s Poland subsidiary paid $39,000 to a small foundation started by the head of a regional government health authority. That official placed Eli Lilly’s drugs on the government reimbursement list in exchange. Eli Lilly ended up paying $29 million to settle.
We will continue to cover both SEC’s scrutiny of promotion activity overseas, as well as international enforcement activity by foreign countries.