Novartis’ FCPA Settlement and New Compliance Guidance

In late June, the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced that Novartis AG and Alcon Pte Ltd, a former subsidiary of the Swiss drug maker, agreed to pay a combined $347 million to resolve allegations that the companies engaged in corrupt conspiracies to bribe public hospitals and clinics in Greece, Vietnam, and South Korea. This settlement was the result of an investigation jointly performed by the DOJ and SEC into alleged criminal and civil violations of the Foreign Corrupt Practices Act (“FCPA”), and takes place against the backdrop of updated FCPA compliance guidance recently issued by DOJ.

The corrupt scheme by Novartis’ Greek subsidiary, Novartis Hellas S.A.C.I., to bribe employees of Greek state-owned and state-controlled hospitals and clinics involved sponsoring travel to international medical conferences, including events held in the U.S. Novartis paid health care providers (“HCP”) they deemed “key opinion leaders” over $5,000 each time the HCP attended an international medical conference. In exchange, HCPs were to prescribe a Novartis drug used to treat macular degeneration and, from time to time, Novartis personnel would remind HCPs of their obligation to prescribe the Novartis drug. Internally, Novartis documents described the arrangement as a return on investment, and some HCPs had their “inducements” adjusted according to prescription volumes, according to the DOJ. The Greek subsidiary also admitted to paying bribes between 2009 and 2010 to HCPs in connection with an epidemiological study aimed at increasing the sales of certain Novartis-branded drugs. In attempting to hide the corrupt schemes, the Greek subsidiary also caused Novartis to record false books and records.

Alcon Vietnam bribed HCPs to increase sales of Alcon’s intraocular lenses, a scheme that started prior to Alcon’s merger with Novartis and continued after that merger. Alcon employees in Vietnam paid bribes through a third-party distributor to employees of state-owned and state-controlled hospitals and clinics. The third-party distributor was reimbursed for up to 50% of the cost of the corrupt payments, which were recorded as consulting, marketing, and human resource expenses, among other things.

In South Korea, the local Novartis unit paid over $16.3 million to third-party medical journals, some of which was improperly passed to HCPs as honoraria payments. In 2017, the Korean Ministry of Health and Welfare and the Korean Ministry of Food and Drug Safety fined Novartis Korea $50.3 million, and in 2020 another $35,000, for offenses stemming from this conduct.

Novartis’ Greek subsidiary agreed to pay a criminal penalty of $225 million, while Novartis itself agreed to pay more than $112 million in disgorgement and interest, representing the amount of illicit profits. In addition, the Greek subsidiary entered a three-year deferred prosecution agreement with the DOJ. Alcon admitted that it conspired to violate the FCPA by creating false books and records to hide alleged bribery schemes and other misconduct, according to the DOJ and the SEC, paid a separate criminal penalty of $8.9 million and also entered into a deferred prosecution agreement. In addition to paying the fines and penalties, both companies have agreed to enhance their compliance programs and file update reports on their efforts.

This settlement comes as the DOJ has recently updated its guidance for corporate compliance programs. These new guidelines place more responsibility on middle management to address bribery and corruption risk through the proper collection and analysis of data. The revised guidance also asks prosecutors to evaluate whether a compliance program is adequately resourced and empowered to function effectively—beyond the previous version’s directive to merely determine whether a program had been implemented effectively. The increased focus on middle management appears to align with a growing expectation that top level executives aren’t the only ones responsible for a compliance program’s success.

Based on this settlement, and the revised compliance guidance, life sciences companies should:

• Review and, if necessary, amend their FCPA compliance policy and program to empower middle management, and to ensure compliance with other aspects of the new DOJ guidance;
• Adequately resource their FCPA compliance policy and program to ensure effective, and efficient, functioning;
• Ensure that that the FCPA compliance policy and program adequately controls travel and entertainment payments and reimbursements in a manner that reduces risk of corrupt abuse;
• Train relevant personnel on who constitutes a “foreign official” under the FCPA;
• Conduct proper, and thorough FCPA due diligence in a merger or acquisition transaction, understanding that purchasers can inherit the FCPA risk of pre-transaction malfeasance by a target company;
• Enhance books and records controls to ensure that corrupt payments are not improperly recorded; and
• Actively screen, and periodically review, third parties for compliance with the company’s FCPA compliance program and policies.

If you need to update your FCPA compliance policy, contact Michael E. Burke.