Settlement Watch: Novartis AG, the SEC, and Continued Trouble for Pharma in China

By John Thorpe

It was recently announced that Novartis AG settled charges with the United States Securities and Exchange Commission (SEC) totaling $25 million for allegedly bribing healthcare professionals (HCPs) in China. Novartis’ settlement is the latest in a series of settlements for life sciences companies in the Chinese market- a place where both the opportunity for profits and the risk of engaging in corrupt activities is high.


According to the SEC, Novartis violated the Securities Exchange Act of 1934 by “attempting to mask their bribes by recording them on the corporate books as legitimate travel, entertainment, conference, lecture fees, marketing events, educational seminars, and medical studies expenses.” This was in direct violation of the books and records and internal control provisions of the Foreign Corrupt Practices Act (FCPA) (commonly referred to as the “accounting provisions”). The FCPA is an amendment to the Securities and Exchange Act.

These allegations are similar to past allegations leveled at other companies like Bristol-Myers Squibb and Mead Johnson Nutrition and serve again as a reminder of the need to develop risk-managed compliance architectures for business operations and third party vendor relationships (covered, in part, in Polaris’ previous blogpost on new donations rules in China).

Moving forward, it will be important for Life Sciences companies to be aware that risk-generating business activities and a lack of compliance oversight (e.g., risk-based auditing, monitoring, and due diligence) may draw scrutiny (and the threat of large fines) from not only the US Government but also the Chinese government. Over the last decade, the Chinese Government has initiated anti-corruption campaigns while riding on a growing wave of economic nationalism (read more here). In 2014, this led to the Chinese government handing GlaxoSmithKline a fine of nearly $500 million for bribing hospitals and doctors through kickbacks facilitated by travel agencies and pharma industry associations.

The recent flurry of settlements emerging from the Chinese subsidiaries of life science companies call for more direct oversight and involvement from global compliance operations. Many of the same control elements used to mitigate risk in places like the U.S. and Europe warrant implementation in Chinese business activities. This includes fair market value analysis of payments to not only healthcare providers and healthcare organizations, but also more broadly to a wider array of focus arrangements and any payments made by third-party vendors (who have historically functioned as key facilitators of bribes) like, for example, vendors offering services related to: data procurement; HEOR studies; IIS grants; and facility registration and access fees. It will also include the institution of appropriate review and approval pathways for educational grants, research grants, and similar funding mechanisms.

When Life Sciences companies decide to invest in China there are a number of underlying issues that need to be kept in mind: (1) corruption is a recurrent problem; (2) the SEC and the Department of Justice (DOJ), along with the Chinese government, have increased anti-corruption enforcement efforts; (3) state-owned entities frequently act like private entities; and (4) there have been numerous reported instances of unethical activities on the part of Chinese healthcare providers and organizations (indeed, for many, it’s a part of how they make money). Together, these issues create a high risk environment necessitating the establishment, maintenance, and verification of compliance controls.