I’m not defending what Novartis did or trying to find an excuse for the company. It violated the FCPA, and (along with a former subsidiary) paid nearly $347 million in penalties and disgorgement to resolve the offenses. But, there are reasons to ask why the Swiss pharma giant didn’t do a better job of keeping its illegal behavior secret.
When I say Novartis didn’t conceal its bribery, here’s what I mean.
Nearly everything Novartis did that violated the FCPA happened in the open. In most FCPA enforcement actions, there’s evidence of executives, intermediaries, and foreign officials trying to cover their tracks. Fake invoices, slush funds, shell companies, nominee bank accounts, coded messages, personal email accounts, and so on. With Novartis, apparently none of that happened.
In contrast, Novartis recorded payments to doctors employed at government hospitals, sometimes as speaking honoraria, consulting fees, sponsorships to attend medical conferences and congresses, and the like. The payments were illegal under local laws and the FCPA, so recording them as legitimate expenses, as Novartis did, was inaccurate, and violated the FCPA’s internal controls and accounting provisions. If the payments had been legal, however, would the company’s description of them be acceptable under GAAP?
More evidence that Novartis didn’t conceal the payments: Managers in Vietnam, South Korea, and Greece openly discussed ground rules for paying doctors, internally and with distributors. Novartis managers had follow-up discussions about how to reimburse the distributors and other third parties. These looked like openly administered programs, not secret schemes.
OK, then. If the folks at Novartis’ subsidiaries in Vietnam, Greece, and South Korea didn’t try to conceal their FCPA violations, or at least didn’t try very hard, why not? Here are a few possible reasons:
It’s impossible to hide bribes to thousands of doctors. According to the feds, in South Korea between 2011 and 2016, the Novartis unit paid about $7 million to 2,032 doctors, to fund their attendance at international conferences. In Vietnam, it looks like hundreds of doctors, maybe more, received some form of compensation, and in Greece, the company paid at least scores more doctors. This isn’t a case where big bribes secretly went to a few politicians. There are no allegations that Novartis paid anyone except doctors or other healthcare providers at state-connected hospitals and clinics.
Paying doctors was standard operating procedure for Big Pharma. “Pay-to-prescribe” practices were so prevalent in the pharmaceutical industry that the head of the SEC enforcement division gave a speech about it in 2015. Andrew Ceresney talked about some earlier FCPA enforcement actions against pharmas, including Pfizer and Eli Lilly (both in 2012).
Later, SciClone Pharmaceuticals and GSK paid $13 million and $20 million respectively to resolve FCPA offenses in China caused by long-running pay-to-prescribe schemes. And in August 2016, Novartis itself paid the SEC $25 million to resolve China FCPA offenses for pay-to-prescribe practices.
In cases that didn’t involve the FCPA, other pharmas — Abbott, Amgen, AstraZeneca, and Merck among them — together paid billions in U.S. penalties for illegally promoting their drugs.
My point: During at least part of the time when Novartis was paying doctors to prescribe its products (mainly from 2011 through mid-2016), so was most of Big Pharma. Did that pervasiveness induce a false notion of acceptability?
Did managers at Novartis think the payments violated the FCPA? I’m speculating now. But consider this: Was pay-to-prescribe so common that some at Novartis (or many?) mistook it for a legal practice? Maybe in 2011 at HQ in Basel, they didn’t yet understand that doctors at state-connected hospitals are “foreign officials” under the FCPA (despite earlier FCPA actions against Syncor International in 2002, and Diagnostic Products Corporation and Micrus Corporation, both in 2005). Or perhaps no one at Novartis believed open payments to doctors for common professional activities — attending conferences, giving talks, running drug trials, publishing professional papers — could be considered “corrupt” and form the basis for FCPA offenses.
I’m not coming to any conclusions. But it seems possible that, before August 2016, Novartis either didn’t fully grasp its exposure under the FCPA for pay-to-prescribe programs, or was in denial about it.
More enforcement news: A week after Novartis settled its FCPA case, the DOJ announced that the company will pay about $630 million to resolve violations of the federal anti-kickback law. In the United States, Novartis paid doctors thousands of honoraria for supposedly delivering lectures at educational events. But many of the programs were “nothing more than social events held at expensive restaurants,” the DOJ said. “Indeed, some of the so-called speaker events never even took place; the speaker was simply paid a fee in order to induce the speaker to prescribe Novartis drugs.” The sham speakers program operated in the U.S. from 2002 to 2011.
A final note: Paying doctors to prescribe your drugs is a bad practice. It creates conflicts of interest for the doctors, and no doubt can distort their decisions about treatment. I’m not defending any choices Novartis made. And I’m in favor of enforcement against companies running pay-to-prescribe schemes.
Still, Novartis’ FCPA resolution raises questions about “corporate mens rea,” if there is such a thing, and those questions are OK to ask. Not as a way to defend what Novartis did. But to better understand how corporate FCPA violations can happen, and maybe learn something about FCPA compliance and enforcement.
Your comments are always welcome.