US pharmaceutical company settles FCPA charges with SEC

On February 28, 2020, Cardinal Health, Inc., a global integrated healthcare company providing health care products and distribution services, agreed to pay over $8.8 million to resolve charges that it violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act.

In November 2010, Cardinal acquired Chinese subsidiaries of an existing pharmaceutical distribution company.  According to the SEC’s order, the acquired entities (Cardinal China) maintained on their financial books marketing accounts used by Cardinal China’s distribution customers to fund operations and marketing activities in China.  The accounts were funded, in part, by excess distribution margins which Cardinal China was contractually obligated to return to its distribution customers, and which Cardinal China paid as directed by employees of the distribution customers.  According to the SEC, Cardinal China terminated most of these marketing accounts due to the FCPA risks presented by these types of arrangements after Cardinal acquired the entities.  However, Cardinal China continued to operate such marketing accounts for a large European dermocosmetic company until 2016.  Cardinal China also retained about 2,400 employees on the dermocosmetic company’s behalf; these employees were mostly beauty assistants and supervisors who worked in retail stores, though there were also sales and marketing employees.  Although these employees had employment contracts with Cardinal China, and Cardinal China administered the payroll for these employees along with other human resources functions, the employees were managed day-to-day by the dermocosmetic company.  

The SEC determined that Cardinal China failed to maintain sufficient internal accounting controls over its marketing employees and marketing accounts, allowing the employees to disguise improper payments by channeling them through third-party vendors and mischaracterizing the payments as “production fees.”  According to the SEC, Cardinal China also failed to obtain sufficient supporting documentation to verify the purposes of the transactions, and Cardinal and Cardinal China did not properly evaluate red flags raised by the marketing accounts.  As stated by the SEC, within a year of the acquisition, Cardinal directed Cardinal China to wind down all of its pharmaceutical marketing accounts because of the FCPA risks involved, but failed to monitor this process to ensure all such accounts were closed.  Moreover, on several occasions Cardinal and Cardinal China were made aware of improper payments made from these accounts; nevertheless, Cardinal failed to assess whether Cardinal China had followed its remediation instructions, and failed to implement stricter controls.

Pursuant to the SEC order, Cardinal will pay a civil penalty of $2.5 million and disgorgement of $5.4 million.  The SEC stated that Cardinal China profited from its provision of distribution, administrative and human resources services to the dermocosmetic company, resulting in “approximately” $5.4 million in unjust enrichment.  Cardinal also has to pay pre-judgment interest of $916,887. 

In reaching the settlement, the SEC took into account the company’s self-disclosure, cooperation and remedial efforts, noting that Cardinal had voluntarily disclosed the results of an internal investigation.  The SEC also credited the remedial measures Cardinal undertook including terminating the marketing accounts and employment contracts with the marketing employees, adding anti-bribery clauses to contracts with third parties, enhancing controls and monitoring by Cardinal China’s legal and compliance officers, and placing strict limitations on the use of the distribution customer’s remaining funds.

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