Firms may get points for rigorous investigations of alleged misconduct but need to ensure whistleblowers are satisfied with results
Last week, Mead Johnson Nutrition’s reached a $12 million settlement with the SEC, which found that the company had violated provisions of the FCPA. This settlement holds some valuable lessons for other firms conducting business with foreign distributors in high-risk jurisdictions.
Mead Johnson’s Chinese subsidiary was charged with making $2 million in improper payments over a five-year period to healthcare professionals at government-owned hospitals. The payments were intended to serve as an incentive to these healthcare professionals to market the company’s products, including recommending the company’s infant baby formula to new mothers. The company was found to have violated the books and records and internal controls provisions of the Securities Exchange Act of 1934, and agreed to pay $7.77 million in disgorgement fees, $1.26 million in prejudgment interest and a $3 million penalty. As part of the settlement, Mead Johnson did not admit to or deny the SEC’s findings.
‘Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other healthcare professionals in China to recommend its baby formula and give the company marketing access to mothers,’ said Kara Brockmeyer, chief of the SEC’s anti-foreign bribery unit, in a statement.
David Resnicoff, a partner in Miller & Chevalier’s international and white collar practice group, says other companies can learn several things from Mead Johnson’s settlement.
Like many multi-national companies, Mead Johnson faced the challenge of trying to manage rapid growth in a high-risk environment. China is among the highest risk jurisdictions in the world. ‘At the very minimum, companies who are growing quickly in high risk jurisdictions need to understand how their business is actually being conducted on the ground by its own employees, its agents and distributors, and then measure that against anti-corruption standards,’ Resnicoff says.
He suggests that companies like Mead Johnson are well advised to implement compliance assessments periodically--perhaps once every one to two years--that make ‘qualitative and quantitative inquiries into how the business is operating.’ Such assessments will shed light on the interactions between company employees, agents and distributors on the one hand, and government officials on the other. Appropriate actions then can be taken if misconduct is found. In the case of Mead Johnson, it seems its sales and marketing personnel were working hand-in-hand with distributors, so improper behavior would have surfaced immediately in the course of a compliance assessment.
Although the SEC found Mead Johnson had a ‘lax internal control environment’, Resnicoff says the company seems to have received some credit from the commission for conducting a thorough internal investigation in 2013 that alerted the company that there was a problem involving its distributors and for subsequently enhancing its compliance program. As a result, this may have led the SEC to not mandate a monitor or consultant as part of the settlement. There were no allegations that anyone at any of Mead Johnson’s US operations knew of, approved of or participated in any of the payments, which allowed the company to avoid having the Department of Justice bring criminal charges against it under the FCPA’s anti-bribery provision.
‘This case reinforces that there is a premium on doing internal investigations thoroughly and professionally to make sure that if they are ever examined by the SEC or DOJ, they withstand scrutiny,’ Resnicoff says. ‘There is no substitute for understanding how your business operates on the ground…If there is any indication of misconduct it is important to run that down and handle it in an appropriate way consistent with the facts.’
More often than not, handling it in an appropriate way will involve conducting a serious internal investigation and then deciding whether to present the findings to regulators. If the misconduct is rooted out through the internal investigation process, companies may legitimately choose not to report their investigations to regulators. However, if things are not handled properly, whistleblowers who reported internally may take complaints to regulators, who will scrutinize the results of the internal investigation, setting the company up for fines and penalties. Resnicoff believes this may be what happened in the case of Mead Johnson.
‘It seems the company made some conclusion about the risk that the distributor discounts posed, but the initial investigation failed to identify the actual misconduct and then the company decided not to disclose the matter to the SEC,’ he says.
‘Companies should expect that unsatisfied whistleblowers will bring their concerns to the government even after there has been an internal investigation,’ Resnicoff warns.
