Cardinal Health resolves China-linked FCPA action

Mar 03, 2020
Company will pay more than $8 million to settle SEC’s charges

Dublin, Ohio-based Cardinal Health has agreed to pay more than $8 million to resolve allegations that it violated FCPA books and records and internal accounting controls provisions in relation to its former unit in China.

‘Cardinal’s foreign subsidiary hired thousands of employees and maintained financial accounts on behalf of a supplier without implementing anti-bribery controls surrounding these high-risk business practices,’ Anita Bandy, an associate director in the SEC’s division of enforcement, says in a statement. ‘The FCPA is designed to prohibit such conduct, which undermined the integrity of Cardinal’s books and records and heightened the risk that improper payments would go undetected.’

The company settled the SEC’s administrative proceeding without admitting or denying wrongdoing.

In a recent report, Gibson Dunn & Crutcher attorneys describe 2019 as ‘by many measures, the most significant year ever in [FCPA] enforcement.’ According to the report, last year saw a record total of more than $2.6 billion in corporate fines, in part as a result of the two largest corporate resolutions in the law’s history.

The FCPA units of the US Department of Justice (DoJ) and the SEC brought a total of 54 enforcement actions, or 73 total cases including ancillary actions, the report states. The 19 actions brought by the SEC in 2019 marked its highest annual total since 2016, it notes.

According to the SEC’s filing on the Cardinal Health proceeding, the company in November 2010 entered the Chinese market by acquiring the local subsidiaries of an established pharmaceutical distribution company and rebranded the acquired entities as ‘Cardinal China.’ Before the acquisition, the pharmaceutical distribution company had long-standing distribution agreements with global manufacturers of prescription medications, medical devices and consumer health products, the SEC says.

In addition to its role as a distributor for the products sold by its business partners, Cardinal China also operated and maintained its own books, financial accounts that certain distribution customers used to fund their operations and marketing efforts in China, according to the regulator.

The SEC describes these accounts as largely consisting of excess distribution margin that Cardinal China generated from distributing customers’ products, and says the unit was obligated to return these funds to the customers under its contractual agreements. Cardinal China authorized and made payments from these marketing accounts as directed by the employees of its distribution customers, the SEC says.

Following the acquisition, Cardinal China terminated most of the marketing accounts in part because of known FCPA-related compliance risks associated with channeling the marketing expenses of third parties through its own books and records, according to the agency. Despite these risks, Cardinal China until 2016 maintained and operated marketing accounts for an unnamed supplier of non-prescription, over-the-counter dermo-cosmetic products for which Cardinal China served as the exclusive product distributor in China, the SEC alleges.

Under an administrative and HR services agreement the unit employed roughly 2,400 employees for the dermo-cosmetic company who reported to that company, and although Cardinal China administratively managed the employees it did not supervise their day-to-day activities, according to the regulator.

Most of these employees were beauty assistants and supervisors, who worked in retail stores with individual consumers, and the other roughly 100 employees worked in sales, marketing, management and back office capacities, the SEC says. It adds that the sales and marketing employees for the dermo-cosmetic company’s products in China regularly drew down funds from the marketing accounts to pay third parties for marketing-related expenses.

Cardinal determined that other marketing accounts should be cancelled due to their significant FCPA-related compliance risks, but it inaccurately assessed the risks of the arrangements with the dermo-cosmetic company as minimal, according to the SEC. The company therefore did not apply its full internal accounting controls to these accounts, or to the conduct of the marketing employees in China, the agency alleges.

Cardinal China regularly authorized and made payments from the marketing accounts at the direction of the dermo-cosmetic company without controls in place sufficient to offer reasonable assurance that the transactions were executed in accordance with management’s general or specific authorization, and failed to accurately record on its books and records payments made from the accounts, the SEC says.

According to the agency, Cardinal China in 2016 found out that marketing employees and the dermo-cosmetic company had ‘hidden the purpose of certain purported marketing payments, which were redirected to healthcare professionals who provided marketing services to the dermo-cosmetic company and to other employees of state-owned retail entities who had influence over purchasing decisions related to the dermo-cosmetic company’s products.’ Having learned about this alleged misconduct, Cardinal and Cardinal China took action to stop the payments, the SEC says.

Cardinal China profited from the distribution, administrative and HR services it provided to the dermo-cosmetic company, and Cardinal was ‘unjustly enriched’ by roughly $5.4 million between March 2013 and December 2016 as a result of its deficient internal accounting controls relating to the marketing accounts, the SEC says.

In determining the settlement, the commission took into account Cardinal’s self-disclosure, co-operation and remedial efforts. The SEC states that from May to June 2016, Cardinal China’s compliance team conducted an audit of the marketing account’s expenses, finding evidence that payments from the marketing accounts did not comply with Cardinal China’s compliance policy requirements.

In June 2016 Cardinal executives in the US received an internal report stating that the marketing employees were using the marketing accounts to channel payments to government officials in China, the agency adds.

In December of that year, Cardinal voluntarily disclosed the results of its own investigation to the SEC and co-operated with its investigation, according to the regulator. It states that Cardinal China undertook significant remedial measures such as: terminating the marketing accounts and its employment contracts with the marketing employees; adding anti-bribery representations and obligations to relevant contracts; and limiting the use of the remaining balance of the dermo-cosmetic company’s funds to low-risk expenses, such as salary payments, with robust controls and monitoring from Cardinal China’s legal and compliance team.

Under the settlement agreement, the company will pay $5.4 million in disgorgement, $916,887 in prejudgment interest and a civil penalty of $2.5 million. Cardinal Health in late 2017 announced that it had signed an agreement to sell Cardinal China.

A Cardinal Health spokesperson says in a statement: ‘In February 2020, Cardinal Health came to an agreement with the [SEC] to settle a matter related to a Chinese pharmaceutical and medical device distribution business it divested in 2018. Cardinal Health voluntarily disclosed to the [DoJ] and SEC possible violations of the internal controls and books and records provisions of the [FCPA] related to a relationship Cardinal Health’s former Chinese distribution business held with a manufacturer of beauty and cosmetic products.

‘The DoJ declined to take any action against Cardinal Health and the SEC entered into a civil, administrative settlement with Cardinal Health, whereby Cardinal Health, without denying or admitting to the SEC’s findings, consented to a settlement in the amount of $8.8 million.’

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