The Securities and Exchange Commission’s (“SEC”) most recent Foreign Corrupt Practices Act (“FCPA”) settlement highlights three areas common to FCPA enforcement: health care companies, third-party payments, and business conducted in China.
On July 28, 2015, the Securities and Exchange Commission (“SEC”) announced a settlement with U.S.-based Mead Johnson Nutrition Company (“Mead Johnson”) requiring the company to pay more than $12 million for alleged improper payments made by its Chinese subsidiary between 2008 and 2013. The SEC’s Order alleges that Mead Johnson Nutrition (China) Co., Ltd. (“Mead Johnson China”) made more than $2 million in improper payments to health-care professionals at Chinese state-owned hospitals, which resulted in profits to the company of over $7.7 million.
Mead Johnson China used third-party distribution agents to market and sell infant formula products to state-owned hospitals. As part of the company’s marketing efforts, the third-party distributors made cash payments to hospital health-care professionals for recommending Mead Johnson’s products to new and expectant mothers. To facilitate these payments, Mead Johnson China employees authorized “distributor allowance” funds for the third-party distributors and then instructed them on how those funds were to be spent.
Though Mead Johnson China employees maintained records of the distributor allowances and third party payments to health care professionals, the company failed to accurately record these payments in its financial books and records. These financial results were then consolidated into the financial statements of its parent company, Mead Johnson.
Through the order resolving the SEC’s administrative proceeding, Mead Johnson did not admit or deny the SEC’s factual findings. As part of the $12 million settlement, Mead Johnson agreed to pay $7.8 million in disgorgement of profits, $1.26 million in prejudgment interest, and $3 million in civil penalties.
- Parent companies are responsible for the actions of subsidiaries. The SEC did not allege that Mead Johnson had knowledge of or participated in the specific conduct of its Chinese subsidiary. Nonetheless, as a U.S. public company, Mead Johnson was responsible for the inaccuracies reflected in its own books and records as a result of its subsidiary’s financial results. The SEC also found that Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s funding of marketing/sales activities and use of third-party distributors did not violate the company’s policies or the FCPA.
- The uncertainty of FCPA allegations lingers for years. This settlement comes four years after the company originally learned of the allegations. Mead Johnson conducted an internal investigation in 2011 that failed to find evidence of improper payments. A second internal investigation beginning in 2013 uncovered the third-party practices, which led to significant remediation, including termination of senior staff, updated accounting and business conduct controls, and enhancing the compliance division. After self-disclosing the conduct in 2013 to the government, it still took two years for Mead Johnson to resolve the matter with the SEC. There is no indication as to whether the Department of Justice intends to pursue its own enforcement against the company or any associated individuals.
- The SEC’s strategic decisions. Like many of its investigations, the SEC opted to resolve this matter through an administrative settlement, thereby avoiding any adjudication by or involvement of a federal court. Though the SEC’s use of these administrative proceedings has received increased scrutiny in recent years, it allows settlements where the respondent company or individual neither admits nor denies the SEC’s factual findings – a practice that some federal judges have criticized and refused to allow in court settlements.