As reported by the FCPA Blog on Tuesday, infant formula manufacturer Mead Johnson Nutrition Co. entered into a settlement with the SEC, agreeing to pay just over $12 million to resolve allegations that it violated the FCPA’s accounting provisions.
The allegations of misconduct in the case — that Mead Johnson’s majority-owned Chinese subsidiary (Mead China) padded the discounts it provided to distributors as a means of generating off-the-books funds to pay state-employed healthcare professionals in China to push the company’s products and provide intelligence on new or expectant mothers — are similar to allegations made against a range of other companies in the healthcare space over the past few years, including Eli Lilly and Smith & Nephew plc.
There are, however, several noteworthy aspects of the Mead Johnson settlement that are worth exploring.
- The case further highlights the risks associated with conducting business in China, which has been implicated in more FCPA-related dispositions since 2010 than any other country by a significant margin. By my firm’s count, the agencies have brought enforcement actions against 20 companies for FCPA-related misconduct in China over the last five years, compared with 15 for Nigeria, 12 for Indonesia, and eight for Mexico.
- While the resolution represents only the second China-related healthcare action since the GlaxoSmithKline investigation broke open in July 2013, it could presage a stream of China-related enforcement actions in the coming year, as there remain a large number of open investigations involving China in the healthcare space.
- The alleged bribery was committed by Mead China, which was not charged. Mead Johnson, for its part, was prosecuted only by the SEC and charged only with civil accounting violations. In charging Mead Johnson, the SEC did not allege any knowledge or coordination by the U.S. parent or any U.S. person, nor did it allege that any of the underlying misconduct took place in or otherwise involved the United States.
- According to press reports, the DOJ recently informed Mead Johnson that it has closed its parallel investigation into the underlying allegations of bribery. Based on the facts as set forth in the SEC’s order, which do not allege knowledge or intent on the part of the parent and establish no U.S. nexus with respect to the subsidiary’s reported misconduct, the DOJ may well have determined that it lacked jurisdiction to proceed in this matter.
- The SEC’s action against Mead Johnson represents the fifth FCPA disposition this year involving no parallel DOJ enforcement, following the SEC-only actions against the Goodyear Tire & Rubber Co., FLIR Systems Inc., BHP Billiton, and PBSJ Corp.
- Mead Johnson reflects the SEC’s increased reliance on administrative proceedings. Since January 2014, the SEC has entered into 12 corporate actions, ten of which have been administrative proceedings—a substantial increase from prior years when administrative proceedings were the exception rather than the rule.
- Compared against other FCPA-related investigations initiated by the agencies over the last ten years, Mead Johnson’s case was resolved relatively quickly, lasting only around two years from start to finish. Based on a recent analysis by Miller & Chevalier, well over half of known FCPA investigations last more than two years.
The most interesting facet of this case, in my view, is what it suggests about the SEC’s expectations relating to voluntary disclosures and compliance.
According to the SEC’s order, Mead Johnson had anti-corruption policies in place that covered both the FCPA and local law considerations, and when allegations of misconduct surfaced in 2011, the company investigated the underlying allegations and eliminated the discount program at issue as a precautionary measure, even though it found no evidence of improper payments — a move that resulted in the discontinuation of all practices relating to Mead China’s compensation of healthcare professionals by 2013.
In connection with its investigation, however, the company chose not to voluntarily disclose the allegations to U.S. enforcement authorities.
Fast forward two years. The SEC learned of the allegations of improper payments by Mead China in 2013, possibly through a whistleblower, and initiated its own inquiry. When the SEC initially approached Mead Johnson, however, the company, whether by oversight or choice, failed to “promptly disclose” the existence of the 2011 investigation.
Despite this initial lack of forthcomingness, the company went on to provide the SEC with “extensive and thorough” cooperation, initiating a second internal investigation that confirmed the allegations of the improper payments and undertaking a range of significant remediation in response (including significant enhancements to the company’s policies and procedures, a substantial increase in the resources devoted to compliance, and the termination of senior staff at Mead China).
Mead Johnson’s efforts did not immunize the company from liability. In its order, the SEC highlighted the company’s failure to identify evidence of the improper payments during the 2011 investigation and faulted the company for: (a) choosing not to voluntarily disclose the original allegations to the SEC in 2011; and (b) failing to promptly inform the SEC about the prior investigation when approached by the agency in 2013.
The SEC was also likely influenced by the scope of the misconduct, which stretched over a period of five years and involved Mead China employees systematically ignoring company policies and circumventing controls.
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Does this mean a company investigating significant corruption-related allegations must use voluntary disclosure, even if the company has not managed to corroborate the allegations? Not necessarily.
However, if a company has decided against voluntarily disclosing allegations of misconduct — something it has no affirmative obligation to do — it is critical for the company to conduct a thorough and well-documented internal investigation that is clear-eyed about the investigation results and can be defended to the agencies in the event the government ever becomes aware of the allegations.
In fact, a company should anticipate that the agencies may one day make an inquiry, and it should position itself to respond.
In Mead Johnson’s case, the company’s failure to identify evidence of improper payments in 2011 suggests that the initial investigation may have lacked sufficient scope or resources, and the company’s subsequent failure to promptly notify the SEC of that prior investigation when approached by the agency in 2013 suggests that it had not anticipated how to respond.
Investigations that lack sufficient depth, resources, or forethought can pose significant risk because they increase the likelihood that something critical will be overlooked, potentially permitting misconduct to continue unabated. They may also give the appearance that a company is not truly committed to compliance or is more concerned with sweeping misconduct under the rug.
So what exactly went wrong at Mead Johnson, a company that had compliance policies in place, responded to allegations of misconduct, and appears to have been mindful of corruption risk?
The SEC’s order strongly suggests that the company’s compliance program simply failed to keep pace with its meteoric growth in China, which included the expansion of Mead China’s geographical presence from 28 to 241 cities between 2008 and 2013.
The agency expressly recognize that a company’s compliance program should be tailored to the organization’s specific needs, risks, and challenges, and the SEC doesn’t expect smaller companies to devote the resources to compliance that larger companies routinely do. But as a company grows, the SEC does expect the resources it devotes to compliance to grow as well, enabling the company’s compliance program to adapt and evolve to meet the risks and challenges that accompany expansion.