On this week in 1975, Bob Dylan’s 15th studio album, Blood on the Tracks, reached the Number 1 album slot on the Billboard charts. This was in spite of no song rising above the 31st slot on the single charts. It came out in the final semester of my senior year in high school so its personal nature was very poignant to me. Two interesting facts were that Phil Ramone was an engineer on the recording sessions and Buddy Cage played steel guitar (shout out to Chris Bauer). While I probably enjoyed it because I found it to be the most accessible Dylan album to that point, the critics most generally praised it as well, finding it to be his most reflective. Indeed his son Jakob has been quoted as saying, “When I’m listening to Blood On The Tracks, that’s about my parents.”
Last week we had a second Foreign Corrupt Practices Enforcement Action (FCPA) from the Securities and Exchange Commission (SEC). This one involved the California based entity SciClone Pharmaceuticals, Inc. (SCLN) which was assessed a penalty of $2.5MM, profit disgorgement of $9.42MM and prejudgment interest of $900K for a total penalty of $12.8MM to settle SEC charges that it violated the FCPA when employees in China pumped up sales for five years by making improper payments to professionals employed at state health institutions. The penalty was for the conduct of its Chinese subsidiary, SciClone Pharmaceuticals International Ltd.
Many of the allegations reached back over 10 years, to 2005, when the Chinese subsidiary created a special VIP program for high volume customers called health care professionals (HCPs). According to the SEC Cease and Desist Order, this special program provided “weekend trips, vacations, gifts, expensive meals, foreign language classes and entertainment” to selected VIPs. It was described internally as “luring them with the promise of profit.” Clearly not the tone a Chief Compliance Officer (CCO) would want to see from his or her top salespersons. Oops, SCLN did not have a Chinese compliance officer at the time of the incidents in question because it did not have a compliance function at the company, so I guess that tone issue never came up.
Clearly the VIP program went beyond the pale as it provided for vacations for both the VIPs and their family members. But this program also had less egregious activities such as golf tournaments followed by beer drinking. However, the subsidiary’s conduct became more nefarious in 2007 when it hired “well-connected regulatory affairs specialist (Specialist) to facilitate” the application of certain licenses the company needed to distribute a new product in China.
This Specialist originally intended to send two foreign officials who were responsible for approving this license to Greece for an academic conference related to this new medical product. However visas could not be obtained in time so “the Specialist instead provided them at least $8,600 in lavish gifts.” In addition to the foregoing, the company sent many other Chinese government officials to in the US, Japan and the Chinese resort island of Hainan where “significant sightseeing was involved” in addition to an educational component.
The company even managed to fall prey to the well known Chinese bribery conduit of travel agencies by failing to conduct any due diligence on a number of travel vendors who were used to funnel bribes and improper gifts and trips involving improper sightseeing and tourist expenditures. Then again this may have been intentional given the overall posture of the subsidiary and its parent. Nevertheless it was another compliance program failure.
Finally, as part of SCLN’s internal investigation, after the discovery of all of the above, an “internal review of promotion expenses of employees from 2011 to early 2013. This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings. A portion of the funds generated through the reimbursements were used as part of the sales practices described above that continued through at least 2012.”
Noting the foregoing conduct, the SEC Order held that SCLN did not have the appropriate internal controls in place for any type of FCPA compliance program. Both the subsidiary and parent engaged in false accounting entries by “recording the payments to health care providers as sales, marketing, and promotional expenses.” So SCLN violated both prongs of the Accounting Provisions of the FCPA , those being the accounting and internal controls provisions.
However, SCLN did make a come back which led to the relatively low fine and penalty. As noted in the Order, the company took steps, “to improve its internal accounting controls and to create a dedicated compliance function. These include the following: (1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anti-corruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone’s policies; and (8) creating an internal audit department and compliance department.”
Mike Volkov has called the SCLN enforcement action, “A Textbook Case of FCPA Violations for Gifts, Meals, Entertainment and Travel”. I would add that it is the textbook case for CCOs and compliance practitioners to study for lessons learned. The first thing is to review your own compliance program to see if any of these anomalies that SCLN engaged in appear in your Chinese operations or any other high risk areas. Beyond these general reviews, I would suggest a more detailed transaction monitoring and data analytics approach, which would involve:
- Tracking not only the expenses paid for gifts, travel and entertainment by employees but tying this information back to the foreign government officials who received these benefits;
- Look to any third parties who may have been involved in any of the foregoing, such as the ubiquitous Chinese travel agencies or the more iniquitous ‘Specialist’ who might be involved in facilitating license approvals;
- Consider the positions which were lavished with such gifts, entertainment or travel. Did any of these persons make any approvals or decisions which allowed your company to obtain or retain business immediately before or after such treatment?
Finally, consider the thoughts of Scott Lane, Executive Chairman of the Red Flag Group, where he described the line of sight a compliance practitioner needed. Lane described the data points that a CCO or compliance practitioner should have visibility into going forward. By looking down a straight line at all of this information derived from the SCLN enforcement matter, the compliance function can identify measures to improve any high risk issues before they move to FCPA violations. While gifts, travel and entertainment expenses might be on your company’s radar for compliance department pre-approval, if they are spent on one or two government officials who may influence deal making authority regarding your company’s business it may well merit a more detailed analysis.
The SciClone strategy was called “luring them with the promise of profits”; not the tone a CCO would want to see.Click to tweet
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© Thomas R. Fox, 2016