SECYesterday, I used a quotation from the Oscar winning animator, Chuck Jones who described two of his well-known creations, Roadrunner and Wily E. Coyote, by referring to philosopher George Santayana’s description of fanaticism when he articulated these cartoon characters as “redoubling your effort after you’ve forgotten your aim”. That would seem to be an excellent description for the pharmaceutical giant Novartis who recently settled a Foreign Corrupt Practices Act (FCPA) enforcement action for approximately $25MM. Yesterday I reviewed the underlying facts and today, I want to consider what the company did after it discovered the illegal conduct, what its obligations may be going forward and the lessons to be learned for the compliance practitioner.

As noted in the Securities and Exchange Commission (SEC) Cease and Desist Order (the Order), Novartis began its investigation based on an ongoing SEC investigation and “in response to media reports concerning a competitor in August 2013”. Based on this information the company “instituted an expansive review of its relationships in China with travel and event planning vendors.” Novartis actions should be well considered by every Chief Compliance Officer (CCO) and compliance professional going forward. If a competitor gets into FCPA hot water, whether through an investigation or enforcement action, this is clear signal for you to consider your company’s actions in the same area, whether that competition is in products, services or, in the case of Novartis, the same geographic area. Moreover, at this point in the history of FCPA enforcements if you are doing business in China you should take a deep review into your own operations and if you are looking to do business in China, you should put the appropriate anti-corruption protections and compliance internal controls in place.

Novartis’ internal investigation identified not only several weaknesses but also clear violations. The company found (1) “the vast majority of these vendors were retained in connection with events in which HCPs [health care providers] attended.” (2) There were a significant percentage of events that did not comply with existing compliance policies and procedures. The Order noted, “This included events for which no record existed to verify it had occurred, events for which inconsistent records existed, and events that could not be verified from available information.” (3) The company also determined through the internal investigation that its Chinese subsidiaries were using the mechanism of “travel agencies and similar vendors to plan events, funds were generated that were used to provide improper payments and other inducements to HCPs in order to increase sales of Novartis products.” Implicit in this find was that the company had not properly recorded these payments by and through travel agencies in its books and records.

In the Order section entitled, “Undertakings”, the SEC laid out what the company agreed to do on a go forward basis. Over a two-year period, they agreed to “(1) conduct an initial review and submit an initial report, and (2) conduct and prepare at least two follow-up reviews and reports”. This Initial Report is to be presented within six months after the entry of the Order and is to set forth “a complete description of its Foreign Corrupt Practices Act (“FCPA”) and anti-corruption related remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Respondent for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews”. The Follow Up Reports are “to further monitor and assess whether the policies and procedures of Respondent are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws”.

In an interesting limitation and one no doubt in response to HSBC Deferred Prosecution Agreement (DPA), where the US District Judge overseeing the terms of the DPA ruled that “the public has a First Amendment right to see the monitor’s report”. This was over the objections of HSBC, the Department of Justice (DOJ) and the Monitor. The Order reads, “The periodic reviews and reports submitted by Respondent will likely include proprietary, financial, confidential, and competitive business information. Public disclosure of the reports could discourage cooperation, impede pending or potential government investigations and thus undermine the objectives of the reporting requirement. For these reasons, among others, the reports and the contents thereof are intended to remain and shall remain non-public, except (a) pursuant to court order, (b) as agreed by the parties in writing, (c) to the extent that the Commission staff determines in its sole discretion that disclosure would be in furtherance of the Commission’s discharge of its duties and responsibilities, or (d) is otherwise required by law.”

While the both the SEC and Novartis recognize that these reports can (always) be released if compelled by court order, as this enforcement action was resolved in the SEC Administrative Process, there would seem less likelihood that an interested citizen or even John Q. Public would seek release of this information. Further, the reporting agreed to in this Order could arguably have some attorney-client privilege as opposed to an outside third party Monitor as was selected in the HSBC matter, who could not even argue attorney-client privilege.

Even with these key differences, it is interesting to see such language in this Order and it could well be a manner for companies and the government to use going forward to help to keep follow up reports to the government post settlement confidential and away from disgruntled shareholders or their lawyers who might want to use the information in follow-on shareholder litigation. Finally, this could be one more reason companies agree to the SEC Administrative Process, to keep such information out of the public eye.


Remember the quote “redoubling your effort after you’ve forgotten your aim” as this would certainly seem to be an apt way to think about doing business in China, particularly under any type of FCPA analysis. Yet Novartis clearly got the message and moved to investigate, remediate, self-report and then work to make sure such issues do not arise in the future. They are to be commended for their work in this area. It would benefit the CCO and compliance practitioner to review the                                                           solid lessons from the Novartis FCPA enforcement action, especially in these key areas: (1) fraud schemes to develop monies to pay bribes; (2) weaknesses in compliance internal controls; (3) the clear benefits of self-reporting; (4) robust and effective internal investigations; (4) remediation during the pendency of an investigation; and (5) creating a process to test the effectiveness of your compliance program going forward.

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© Thomas R. Fox, 2016