Novartis FCPA Enforcement Action: Internal Controls

Thomas Fox - Compliance Evangelist

Compliance Evangelist

This week I am reviewing the Foreign Corrupt Practices Act (FCPA) enforcement action involving 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., which agreed to pay some $347 million in fines to resolve claims. 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 has also agreed to pay $112 million to the US Securities and Exchange Commission (SEC) in a related matter. Today I want to consider the internal controls aspect to this enforcement action.


The bribery schemes used by Novartis in Greece were three types. The Investment Scheme paid healthcare providers (HCPs) travel and associated fees to attend international medical congresses. The Key Opinion Leaders (KOL) scheme paid influencers in the healthcare profession bribes so they would write more prescriptions of the Novartis product Lucentis. The EXACTLY scheme paid HCPs to falsely, wrongly, and uselessly, fill out data about a clinical study in exchange for bribe payments for Novartis products prescribed. In Korea, a scheme was similar to the Investment Scheme where “Novartis Korea sales managers and employees organized the sponsorship of HCPs to international medical conferences as an inducement for HCPs to increase their prescriptions of Novartis products.” In yet another scheme in Korea, similar to the EXACTLY scheme, the company’s neuroscience business unit devised a local non-interventional clinical study with 17 pre-selected HCPs to improve relationships with those HCPs.


The bribery schemes by Alcon in Asia included the Consultancy Scheme where a distributor was engaged to make bribery payments to HCPs in Vietnam. In Korea, a variety of bribery schemes were used. One of the schemes to make improper payments to HCPs was disguised as payments made for ostensible medical journal activities organized by a third-party vendor. The payments were made to the medical journals who forwarded the payments to the HCPs.

In a scheme in China, the company placed surgical equipment in hospitals with little or no money down. There was no proper evaluation of the equipment cost, accounting for revenue paid or write offs for the equipment. The Order noted, “Nearly half of the 844 pieces of equipment in question had been placed pursuant to contracts that lacked a formal hospital “chop” but had been  validated by the hospital; the remaining pieces of equipment either could not be located, had been moved to other hospitals, or were obtained pursuant to forged or unverified  contracts.”

The question under the FCPA and for the SEC was the failure, circumvention, override and disregard of internal controls. While payment for travel to and attendance at medical conferences may well be high risk, it can be managed with robust internal controls and compliance oversight. Yet both failed at Novartis. According to the Information, Novartis Hellas employees “falsely recorded the corrupt payments associated with congress sponsorships as legitimate advertising and promotion expenses in NOVARTIS HELLAS’s internal accounting records” for both the Investment Scheme and the KOL scheme.

The internal controls worked somewhat better for the EXACTLY scheme, at least initially. Novartis internal audit initially flagged the study as lacking in “transparency outside of the Medical Affairs function in the planning, design, and execution of clinical studies in Greece”. Moreover, there were “weaknesses in process and control design in execution did not ensure that the studies were of a non-promotional nature.” Finally, there were “numerous control deficiencies surrounding Phase IV studies conducted in Greece, including (1) unsupported medical or scientific rationale to perform the studies; and (2) indications the studies were promotional and designed to achieve commercial advantage. Internal audit also found controls weaknesses in the collection of data and publication of study results.” Novartis Hellas agreed to a remediation plan, and to improve the Finance Department’s oversight of clinical studies but apparently there was no follow up.

Additionally, when it came to payment under the original EXACTLY scheme, “control weaknesses that made it difficult to ensure that HCPs were paid the correct amounts for their participation in the clinical studies.  For example, in the EXACTLY study, approximately four times as many HCP names were submitted to the local health authority than actually received payments.  Additionally, some payments were made to HCPs using a vendor named “dummy vendor.”  The bottom line was that the EXACTLY scheme was a “black box” into which it lacked visibility.

Lastly, Novartis Hellas also lacked sufficient controls around grants provided to HCPs. One example is that grants were provided without complete due diligence of the recipient, without clear details regarding the use of the funds, and in circumstances where there was an improper connection to sales strategies. In response to the internal audit review, Novartis Greece agreed to improve internal controls over the grant approval and governance processes. Yet once again there appears to have been no follow up to ensure compliance.

For Alcon in Vietnam there was clear circumvention of internal controls by mis-labeling payments made to the corrupt distributor for payment to the HCPs as credit notes. Additionally, there were “payments through other, inflated reimbursable costs, such as marketing, human resources, or margin reconciliation costs.” There were also payments made to the distributor which were also mis-characterized as “consultancy fees” which were used to pay bribes to HCPs.

In China, the bribery scheme was provisioning of equipment to HCPs. To facilitate these long-term business relationships, the company created “Equipment Financing Arrangements” (EFAs) where HCPs would allegedly make payments for the proffered equipment. However, as the SEC Order noted, the company “lacked adequate internal accounting controls to ensure the appropriate accounting treatment for the arrangements and to appropriately record the transactions in its books and records.” Eventually the company had to write off the equipment provided under the EFAs to the tune of a $50 million loss.

Please join me tomorrow when I consider the fines and penalties under the FCPA Corporate Enforcement Policy.


SEC Press Release

SEC Cease and Order

Alcon Pte Ltd DPA

Alcon Pte Ltd Criminal Information

Novartis Hellas S.A.C.I. DPA

Novartis Hellas S.A.C.I. Criminal Information

DOJ Press Release

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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