Pharm Giant Settles Charges for $14 Million

In an order released last week by the U.S. Securities and Exchange Commission (SEC), Bristol-Myers Squibb Company (BMS) agreed to settle charges that its China-based joint venture committed a number of acts in violation of the Foreign Corrupt Practices Act (FCPA), including that its personnel paid bribes in the form of cash, gifts, conference sponsorships, speaking fees, and other benefits, in exchange for the sale of its pharmaceuticals at state-run hospitals in China. BMS then falsely recorded these illegal exchanges as legitimate business expenses in its books. BMS agreed to settle the charges by disgorging nearly $11.5 million, in addition to a civil penalty of $2.75 million.

The SEC’s order cited three specific areas of concern in BMS’s handling of the compliance environment in China that should serve as an object lesson to any company engaged in business in any of the world’s known “bribery hotspots.”

Failure to Respond to “Red Flags”

As early as 2009, both internal and external audits initiated by BMS China revealed numerous irregularities in the invoices and receipts for travel and expenses submitted by sales personnel, including fake and altered purchase orders, invoices and receipts. Some BMS personnel even admitted that they had submitted false reimbursement claims and used the funds to secure or increase sales of prescriptions to health care providers, noting that it was an “open secret” that health care providers in China rely on bribes to maintain their livelihood. The results of the internal and external reviews were provided to management of BMS China as well as regional compliance managers, who, despite all the accumulated evidence, did not initiate any further internal investigation of the activities.

Compliance and Controls Environment 

BMS China implemented a formal FCPA compliance program in 2006 and proceeded to conduct compliance assessments and audits that included a review of internal controls relating to anti-bribery risks. The reviews indicated weaknesses and deficiencies in the processes surrounding a number of activities, including the selection and compensation of speakers, consulting arrangements, and other activities involving health care providers. These substantial gaps in internal controls were duly reported to the Audit Committee and senior management at BMS. The SEC order noted that, “In connection with each audit, the audit team cited a lack of effective controls and documentation relating to interactions with

[health care providers] and the monitoring of potentially inappropriate payments to [health care providers].” The identified controls deficiencies were not timely remediated and compliance resources were minimal, with BMS having no dedicated, permanent compliance officer for BMS China until 2010. BMS China employees also failed to participate to any significant degree in required anti-corruption training.

Internal Documents Reveal Improper Benefits Provided to Health Care Providers

BMS further failed to act upon a number of internal BMS documents, including emails, that clearly revealed that sales representatives in China, with the full knowledge of district and regional sales managers, “used funds derived from travel and expense claims to make cash payments to [health care providers] and to provide gifts, meals, entertainment, and travel to [health care providers] in order to induce them to prescribe products sold and marketed by BMS China.”

The BMS order reveals several takeaways for companies seeking to minimize their exposure to FCPA allegations. A robust anti-corruption compliance program is an absolute must in avoiding the type of situations revealed in the case of BMS China. The program must include appropriate procedures, anti-bribery policies, employee training, and follow-up. Compliance gaps must be identified and remediated as soon as possible – and “red flags” must never be ignored.

For further information or assistance in putting in place an effective corporate compliance program, please contact any of the following FisherBroyles attorneys.

Brian E. Dickerson

Nicole Hughes Waid