Foreign Corrupt Practices Act enforcement continues to be a key component of the Commission’s enforcement program. Last year, for example, the agency brought just under 20 actions based on the Act. This year the Commission is starting with a somewhat unique action centered on an account maintained by an acquired subsidiary that was used for illicit payments primarily because of lax supervision stemming from a failure to properly evaluate the risks involved. In the Matter of Cardinal Health Inc., Adm. File No. 3-19718 (Feb. 28, 2020).
Cardinal Health is a global, integrated healthcare services and product firm based in Ohio. It specializes in the distribution of pharmaceuticals and other medical products. After entering the Chinese market in late 2010 the firm acquired Chinese subsidiaries – Cardinal China. Those firms had longstanding distribution agreements with certain global manufactures of prescription medications, medical devices and consumer health products. The newly acquired firms distributed product and maintained books for customers from which payments were made at the behest of those clients.
Over a six-year period, beginning in 2010, the subsidiary acted as the exclusive distributor in the Chinese market for a large European dermo cosmetic company. Cardinal China administered the marketing accounts for the firm. Cardinal Health, as part of an HR services agreement with that firm, retained about 2,400 employees for it. Cardinal China profited from the market employees’ successful efforts, including its receipt of certain improper payments, since it administered the payroll and assumed other human resources and administrative functions for the company.
Cardinal Health assessed the risk of the arrangements with the dermo cosmetic firm as minimal. Accordingly, it did not subject the firm to its full internal controls, including those regarding the FCPA. Cardinal China thus executed payments requested by the marketing employees without requiring sufficient supporting documents regarding the purpose of the transactions. Over a four year period from 2013 to 2016 the firm authorized and paid over $250 million from the marketing accounts.
Without the authorization of Cardinal Health’s management, the subsidiary regularly made payments that were improperly redirected to government-employed healthcare providers and employees of Chinese state-owned retailers to promote product. The insufficient internal controls permitted concealment of the payments. Despite ordering the windup of certain marketing accounts in 2011 because of excessive FCPA risk, Cardinal China continued to administer the marketing accounts for several years.
Subsequently, the firm received a series of additional warnings that ultimately resulted in steps to enhance the controls over the accounts in 2016. By that point Cardinal China had directly profited and Cardinal Health had been unjustly enriched by about $5.4 million. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Cardinal Health agreed to pay disgorgement in the amount of $5.4 million along with prejudgment interest of $916,887. The firm will also pay a penalty in the amount of $2.5 million. The Commission considered the fact that Cardinal Health self-reported, cooperated and engaged in remedial actions.