SEC Settles FCPA Charges Tied to Payments to Health Care Professionals

The SEC filed another settled action in which payments to health care professionals at state owned entities in China were alleged to be violations of the Foreign Corrupt Practices Act. Although the company furnished extensive cooperation, it paid disgorgement, prejudgment interest and a penalty to resolve books and records and internal control violations. In the Matter of Mead Johnson Nutrition Company, Adm. Proc. File No. 3-16704 (July 28, 2015).

Mead Johnson is a global manufacturer and marketer of infant formula and child nutrition products. The firm has subsidiaries which operate in various parts of the world. Subsidiary Mead Johnson China operates in the PRC where the firm began doing business in the1990s. By 2013 the company had operations in 241 cities in China.

Part of Mead Johnson’s marketing from 2008 through 2013 was through the medical sector which included health care facilities and health care professionals. The firm’s China subsidiary used third-party distributors to market, sell and distribute products in the country. Distributors were provided a discount for company products that was allocated for funding certain marketing and sales efforts of the China subsidiary and other purposes. Those funds, called a Distributor Allowance, belonged to the distributor. Yet Mead Johnson retained certain control over the funds and the books and records.

Mead Johnson China’s sales personnel marketed through medical channels and health care facilities. Health care professionals at the facilities were encouraged to recommend the company products. Incentives to make that recommendation and collect certain information were provided in the form of cash payments and other things, contrary to company policy. The payments were made from the Distributor Allowance funds. The firm failed to devise and maintain adequate systems of internal controls over the operations of its China subsidiary to ensure that the sales expenditures through its distributors were not used for unauthorized or improper purposes.

In 2011 the firm received information about possible violations of the FCPA. An internal investigation failed to discover any violation. The firm did halt the Distributor Allowance funds to ensure the money was not being used for an improper purpose. All practices regarding compensation to health care professionals were halted by 2013. The firm did not self-report the allegation in 2011 or promptly disclose the existence of it in response to a subsequent SEC inquiry into the matter, according to the Order.

A second investigation, commenced in 2013, discovered the violations. The company thereafter cooperated with the SEC and undertook significant remedial measures. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).

To resolve the matter the company consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the company will pay disgorgement of $7,770,000, prejudgment interest and a civil monetary penalty of $3 million.

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