FCPA: Mead Johnson Nutrition Company

In terms of the FCPA, the accounting and record-keeping provisions were the focal point of the Securities and Exchange Commission’s (“SEC”) recent resolution with Mead Johnson Nutrition Company (“Mead Johnson”), a healthcare Delaware corporation with common stock listed on the New York Stock Exchange. No violations of the anti-bribery provisions were alleged. However, of significance is the degree to which rather limited though knowing control over the actions of its distributors triggered violations of the accounting and record-keeping provisions.

At issue as part of the Order Instituting Cease-and-Desist Proceedings was Mead Johnson’s Chinese subsidiary (“Mead Johnson China”). The subsidiary used third-party distributors to market, sell, and distribute products to healthcare professionals (“HCPs”) in China. The focus of the order was the misuse of marketing and sales funds to make improper payments to HCPs at state-owned hospitals to promote the sale of Mead Johnson products.

Mead Johnson had internal policies to prohibit improper payments and gifts to HCPs. Yet certain employees of Mead Johnson China compensated HCPs through funds generated by discounts to distributors (known as “Distributor Discounts”) that were, in part, to be allocated for certain marketing and sales efforts. Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent and some even provided specific guidance as to the expenditures.

Mead Johnson China’s employees maintained certain records related to the Distributor Allowance, including records reflecting payments to HCPs. However, those records were incomplete and did not reflect that a portion of (sic) Distributor Allowance was being used contrary to Mead Johnson’s policies.

In its findings, the SEC through the administrative order found that the Distributor Allowance was used “contrary to management’s authorization and Mead Johnson’s internal policies.” It further found that “Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.”

Mead Johnson did not self-report after its initial internal investigation. Mead Johnson’s cooperation and extensive remedial measures after the second internal investigation were found to be significant. The remedial measures included:

Termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, addition positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-gong basis; and providing employees with a method to have immediate access (sic) the company’s policies and procedures.

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