International Law Advisory - Schering-Plough Corporation (“SPC”) agreed to pay a $500,000 civil penalty to settle a civil action filed by the Securities and Exchange Commission

On June 9, 2004, Schering-Plough Corporation (“ SPC”) agreed to pay a $500,000 civil penalty to settle a civil action filed by the Securities and Exchange Commission (“ SEC”) alleging that the company had violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”).  The SEC charged that the Polish branch of a wholly-owned European subsidiary of SPC (“SP Poland”) had made improper payments to a charity associated with a Polish government official to influence purchases of SP Poland pharmaceutical products, and had improperly recorded these payments in company records.  The SEC further charged that SPC’s internal controls had been inadequate because they failed to require employees to conduct “due diligence” investigation prior to making charitable contributions to determine any associations between the charity and public officials.  In addition to the $500,000 civil penalty, SPC consented to an SEC administrative order requiring SPC to cease-and-desist violations and to retain an independent consultant to review SPC’s FCPA internal controls.  This enforcement action illustrates the importance of maintaining effective FCPA compliance programs for foreign subsidiaries and the potential abuse of “charitable giving” as a mechanism to provide unlawful bribes to foreign officials.

The SEC alleged the following facts, which SPC neither admitted nor denied in entering into the settlement:  SP Poland is a provider of pharmaceutical products and services in Poland.  The Silesian Health Fund is a regional government health authority in Poland that has influence over the purchase of pharmaceutical products by hospitals and other entities through the allocation of health fund resources.  The Director of the Health Fund was also the founder and President of a Foundation established to restore castles and other historic sites.  Between February 1999 and March 2002, the Health Fund official solicited, and the manager of SP Poland’s oncology unit made, multiple payments to the Foundation totaling approximately $76,000, which SP Poland characterized in its records as charitable donations relating to medical and health promotion efforts.  During this time period, sales of certain SP Poland oncology products in the Silesian region increased substantially relative to other regions.

The SEC noted in its administrative order that the payments were made without the knowledge or approval of any SPC employee in the United States.  However, the SEC alleged, SPC’s policies and procedures for detecting possible FCPA violations by its foreign subsidiaries were “inadequate in that they did not require employees to conduct any due diligence prior to making promotional or charitable donations to determine whether any government officials were affiliated with proposed recipients.”  The SEC further alleged that SPC should have been alerted to the violation given that (a) the foundation is not a healthcare-related entity, (b) the payments to the charity were significant relative to the company’s budget for such donations, (c) the oncology unit manager appeared to have structured the payments so as to exceed his authorization limits, and (d) the founder and president of the charity was the director of the Silesian Health Fund and able to provide or influence others to provide benefits to SP Poland.

If you have any questions about this enforcement action or more generally about the FCPA, please contact Edward Krauland at (202) 429-8083, Erik Kitchen at (202) 429-8132, or Aaron Hutman at (202) 429-8124.