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 fines and penalty amounts, how the calculation was made and the conduct the company engaged in (or did not engage in) to obtain this result. I also consider the cost of recidivism.
With Novartis, you must begin with its 2016 FCPA settlement with the SEC (resolved with a Cease and Desist Order, the “2016 Order”) for its bribery and corruption in China. A portion of that SEC settlement dealt with conduct which was also reported in this 2020 settlement. The illegal acts reported the 2016 Order include the Investment Scheme, the EXACTLY scheme and the Key Opinion Leaders (KOL) scheme. The bribery schemes all began in 2009, around the same time as the conduct began in Greece by Novartis. One must reasonably ask why the same conduct in China made the subject of the 2016 Order was not uncovered in the internal investigation performed by Novartis after it was put on notice by the SEC staff’s investigation in 2013? This failure or oversight cost Novartis significantly in the 2020 DOJ resolution.
In the 2020 Novartis Deferred Prosecution Agreement (DPA), it specifically noted that the company did not self-disclose the violations of the FCPA in Greece or in China. However, the company did make a comeback in its subsequent cooperation and remediation. Regarding cooperation, the company received full credit for conducting a thorough investigation, production of “extensive documentation” and translations of these documents. Regarding remediation, the company enhanced its compliance regime specifically including sponsorships to international medical congresses and Phase IV studies. The company also continued to enhance its compliance program to the extent that no ongoing monitorship was required under the DPA.
The DOJ summarized all of these factors in its analysis under the FCPA Corporate Enforcement Policy, which reads as follows, “If a company did not voluntarily disclose its misconduct to the Department of Justice (the Department) in accordance with the standards set forth above, but later fully cooperated and timely and appropriately remediated in accordance with the standards set forth above, the company will receive, or the Department will recommend to a sentencing court, up to a 25% reduction off of the low end of the U.S.S.G. ﬁne range.” Novartis was a recidivist. The company did not self-report but did receive a full cooperation and remediation credit of a 25% reduction from “a point above the midpoint of the applicable Sentencing Guidelines fine range.”
That brings us to the calculation under the Sentencing Guidelines. After going through the initial set of base numbers and enhancements, a company can obtain a reduction if the “organization fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility of its criminal conduct.” Here a company can receive a reduction of up to 5 points but Novartis Hellas only received a reduction of 2 points. Unfortunately, there is no description in the DPA as to why only 2 points reduction was given. As the DPA is replete with language of the full and extensive cooperation that only leaves “clearly demonstrated recognition and affirmative acceptance of responsibility of its criminal conduct” as reason for lack of any additional point reduction. Such lack of recognition and lack of affirmative acceptance could relate to the recidivism but based upon the language found in the Alcon DPA, discussed below, I do not believe so.
The range of fines under the final calculation under the Sentencing Guidelines was between a low of $180,000,000 to a high of $360,000,000. This would midpoint at $270,000,000. As the final penalty was $225,000,000 this means the “point above the midpoint” was somewhere between $340,000,000 to $350,000,000. All of this means that Novartis recidivist conduct cost it somewhere in the range of $90,000,000.
Alcon found itself in a situation similar to Novartis Hellas in that it did not self-disclose so received no credit under the FCPA Corporate Enforcement Policy. It did however extensively cooperate and remediate. The cooperation included a thorough investigation, sharing of documents and other work. On the remediation front, in addition to upgrading the entire compliance regime, similar to Novartis Hellas, the company terminated high-level executives and disciplined others and terminated its relationship with the distributor used to pay bribes in Vietnam.
In a key distinction with Novartis Hellas, Alcon received credit for having “no prior criminal history” and agreed to cooperate with the DOJ. In contrast to Novartis Hellas, Alcon “received an aggregate discount of 25% of the bottom of the otherwise-applicable Sentencing Guideline range.” When you look at the language around the Sentencing Guidelines calculation, you see the same language found in the Novartis Hellas DPA, particularly the 2 points reduction given, so once again it is not clear what conduct the DOJ found lacking. However, it is clear that the fine range under the Sentencing Guidelines set a low of $11,900,000 and Alcon received a 25% discount for a total penalty of $8,925,000.
Finally, is the penalty assessed by the SEC against Novartis AG. Here it is much more clear and straight-forward. After noting the total penalty assess by the DOJ at $233,925,000; the Order required disgorgement of $92,300,000 and prejudgment interest of $20,500,000 for a total amount of $112,800,000.
Please join me tomorrow when I consider the lessons learned from the Novartis FCPA resolution and how the use of data analytics must be used going forward in any best practices compliance program.
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