We are nearing the end of this exploration of two major corruption enforcement actions involving the pharmaceutical giant Novartis. One in the US and one for the rest of the world. The later was a Foreign Corrupt Practices Act (FCPA) settlement, announced in late June, the Swiss pharmaceutical company Novartis AG, its Greek subsidiary Novartis Hellas S.A.C.I. (Novartis Greece) and Alcon Pte Ltd., a unit of eye-care company Alcon Inc., agreed to pay about $347 million in fines to resolve claims to settle its long standing FCPA enforcement action. Novartis Greece and Alcon Pte, a former subsidiary of Novartis AG and current subsidiary of Alcon Inc., agreed to pay $233 million in criminal penalties to resolve the Department of Justice (DOJ) investigation into FCPA violations. Novartis AG also agreed to pay $112 million to the US Securities and Exchange Commission (SEC) in a related matter.
However, the FCPA enforcement action paled next to the former as laid out in the Stipulation and Order of Settlement and Dismissal (Stipulation) entered against Novartis Pharmaceuticals Corporation (Novartis US) for its bribery and corruption in the US. According to the DOJ Press Release, Novartis “agreed to pay over $729 million in separate settlements resolving claims that it violated the False Claims Act (FCA). The first settlement pertains to the company’s alleged illegal use of three foundations as conduits to pay the copayments of Medicare patients taking Novartis’s drugs Gilenya and Afinitor. The second settlement resolves claims arising from the company’s alleged payments of kickbacks to doctors.” The settlement was entered into in the US District Court for the Southern District of New York.
As bad as Novartis’ conduct was outside of the US, I can only say it was much worse inside the US. In addition to long running corruption schemes, the company either corrupted or worked with corrupt 503(c) companies to manipulate charitable co-payments for patients using certain Novartis drugs. The total fine and penalty paid for illegal conduct inside the US was over double that paid by Novartis for its conduct outside the US. Novartis settled domestic False Claims Act (FCA) and Anti-Kickback (AKS) violations for $729 million and settled FCPA violations for foreign bribery for $337 million. These cases had much for every compliance practitioner to consider, including the specific illegal conduct of Novartis, the deficiencies in their compliance program, compliance function and Chief Compliance Officer (CCO); the role of the whistleblower, corrupt culture and lessons learned. Over the past few blog posts, I have considered US settlements, as outlined in the Stipulation, Settlement Agreement (Agreement) and Corporate Integrity Agreement (CIA).
The FCPA enforcement action was made worse because Novartis AG is a recidivist, having entered into a resolution in 2016 with the SEC for bribery and corruption in the company’s Chinese business unit. In addition to joining the ignoble class of FCPA recidivist, Novartis AG somehow missed identifying years of bribery and corruption in Greece, Vietnam and Korea while allegedly investigating the corruption conduct in China. It would certainly appear that not only did Novartis AG put sales, sales, and sales above any semblance of compliance; Novartis AG had a culture of corruption baked into the organization so that it would seek out manners in which make corrupt payment to Health Care Providers (HCPs) to start and then continue to prescribe Novartis AG drugs. Indeed, the prescriptions written were the ‘return on investment’ of illegal payments to HCPs. According to the SEC Order, the corrupt payment schemes were in violation of the company’s compliance policies. But more than simply violating the company’s internal compliance policy of the prohibition of paying bribes, the business units routinely side-stepped the company’s compliance oversight process by engaging in the bribery schemes without required authorization. It was a complete, total and utter evisceration of the corporate compliance function by the business unit.
Just as in the FCPA world, Novartis US is a recidivist for corruption in the US. In 2010, it was put under a CIA. It required the expert to conduct a “Year One Compliance Program Effectiveness Review” a year after the 2010 CIA went into effect. The Stipulation stated, “As part of the review, the expert concluded that Novartis had only “partially” met its compliance goals in certain areas. The expert concluded that compliance monitoring had still largely remained “the responsibility of the business [team],” rather than those working in the compliance department”. Rarely in a major multi-national does one see such an under-staffed, continually overwhelmed and seemingly impotent compliance function. It appeared Novartis US had no intention of having anything close to an effective compliance program. Their approach is a sobering reminder of the cost of a company wholly disregarding its obligations to have a compliance program. According to the Stipulation, Novartis only created a compliance department in 1999 and for its initial two years the company’s compliance program “consisted of one employee.”
Thereafter, although Novartis hired additional compliance personnel in later years, it did not employ sufficient staff to investigate potential AKS violations. Yet whatever the meagre size of the compliance department, it did not have “the personnel and resources to adequately monitor that the tens of thousands of speaker and roundtable events that Novartis organized throughout the country each year complied with the AKS.”
This was as basic as it gets. The compliance function was under-resourced to do the most basic job that could have been assigned to it. Even when it came to testing, the corporate compliance policy requirements around its physician speaker program, the company “did not conduct a comprehensive field audit of speaker events until 2008, after approximately 90 percent of the events at issue in this case had already occurred.” Moreover, the audits were likely no more than perfunctory examinations as “sales representatives would typically receive advance notice if their programs were going to be audited.”
As many compliance lessons as there are to be garnered from the FCPA and FCA actions, I find there to be one over-riding lesson. It really all does start with tone at the top. Clearly Novartis top management in both Switzerland and the US had no intention of letting a little compliance get in the way of making money. With this clear message from top management, the company’s compliance function had zero chance of success of preventing, detecting or remediating illegal conduct. It was simply baked into the DNA of the company.
And never forget the cherry on top, Novartis was the company which had Chief Executive and General Counsel approval to hire convicted felon Michael Cohen to lobby the Trump Administration.
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© Thomas R. Fox, 2020