Cardinal Health (“Cardinal”) agreed to pay the SEC $8.8 million for FCPA violations in China relating to its internal controls and books and records.  (SEC Order Here).  Cardinal acknowledged facts relating to internal controls deficiencies and its handling of marketing accounts that it supervised for its distributors.  In particular, while Cardinal mitigated its corruption risks by terminating many of these accounts, Cardinal inaccurately assessed the risk of a specific marketing account that posed significant corruption risks.

Cardinal agreed to pay a total of approximately $8.8 million consisting of $5.4 million for disgorgement; $916,887 for prejudgment interest, and $2.5 million for a civil money penalty.

In December 2016, Cardinal voluntarily disclosed the conduct to the SEC, and subsequently cooperated with the investigation.  Cardinal identified suspicious payments during an audit of the marketing account expenses, and Cardinal executives in the United States received a report that marketing employees were using marketing account to channel payments to government officials in China.

Cardinal entered the China market in 2010 by acquiring the Chinese subsidiaries of a pharmaceutical distribution company, which had longstanding distribution agreements  with a number of global manufacturers of prescription medications, medical devices and consumer health products.  As part of its operations, Cardinal maintained certain financial accounts that certain distribution customers used to fund their operations and marketing efforts in China.  These accounts were funded by excess margin that Cardinal generated from distributing customers’ products.  Cardinal was obligated to return these funds to customers under their contracts.  Cardinal authorized and made payments from these marketing accounts as directed by the employees of its distribution customers.

After acquiring the Chinese subsidiaries, Cardinal terminated most of the marketing accounts because of FCPA compliance risks associated with payment of marketing expenses to third-party distributors. Notwithstanding this effort, Cardinal maintained marketing accounts for a European supplier of non-prescription, over-the-counter dermocosmetic products in China.

Additionally, Cardinal employed 2.400 employees for the dermocosmetic company pursuant to an administrative and HR services agreement.  Cardinal did not supervise their day-to-day activities, and the marketing staff was responsible for drawing down the funds from the marketing accounts to promote dermocosmetic products.

While Cardinal terminated many marketing accounts because of FCPA risks, Cardinal inaccurately analyzed the accounts associated with the dermocosmetic company for corruption risks.  As a result, Cardinal did not apply its full accounting controls to these accounts or the marketing staff with access to these accounts.

Interestingly, after the acquisition, Cardinal ordered the termination of all marketing accounts.  Nevertheless, Cardinal China continued to operate a number of accounts for several large pharmaceutical companies.  Even after Cardinal discovered misconduct and improper payments being made from some accounts, Cardinal continued to operate the remaining accounts and never conducted a reassessment of the risk profile of these accounts.

Cardinal provided marketing funds for dermocosmetic purposes without requiring proper documentation and justification.  During the period of 2013 to 2016, Cardinal paid approximately $250 million from the marketing accounts.  The improper payments took a variety of forms, including cash, luxury goods, gift cards and travel.  The payments were disguised through third-party vendors and mis-characterizing expenditures as payments “production costs,” and other mis-labeled items.

In 2016, Cardinal learned that the marketing employees and the dermocosmetic company had hidden the purpose of certain marketing expenses, which were directed to healthcare professionals and foreign officials with decision-making authority over purchases.  Once discovered, Cardinal terminated the payments.

The lack of any meaningful oversight of these accounts was highlighted by the fact that Cardinal was fined by the Shanghai Administration of Industry and Commerce (“AIC”) for providing “secret commissions” to its sales staff.  Caardinal China’s Vice President later learned about improper uses of the accounts by sales staff and recognized the “enormous compliance risk” for Cardinal China.

The SEC cited Cardinal China’s remedial efforts, including terminating the marketing accounts and its employment contracts with the marketing employees, adding anti-bribery representation and obligations to the relevant contracts, and prohibiting use of the marketing funds except for low-risk expenses.