Cardinal Health (NYSE:CAH) has agreed to pay more than $8.8 million to settle charges that a former subsidiary in China failed to detect bribes paid to government hospital officials and employees of state-owned retailers to buy skincare products.
The settlement springs from a Securities and Exchange Commission investigation into Cardinal China, which Cardinal Health formed in 2010 from the Chinese subsidiaries of a pharma, medtech and consumer products distribution company it purchased, according to the SEC.
To comply with U.S. accounting code, Cardinal Health closed most of the “marketing accounts” maintained by Cardinal China’s predecessor, which some distribution customers used to fund their operations and marketing efforts in China. These accounts largely consisted of profits generated from distributing customers’ products, and Cardinal China was obligated to return these funds to the customers under its contractual agreements, according to the SEC.
Cardinal China made these payments without management authorization, and failed to accurately record payments made from the accounts, the agency said. One such marketing account was for an unnamed skincare company.
Cardinal Health did not apply its full internal accounting controls to these accounts, or to the conduct of the marketing employees whom Cardinal China employed for the skincare company, the SEC said. In 2016, Cardinal China learned that the marketing employees and the skincare company were using the marketing account to bribe healthcare providers at government hospitals and employees of state-owned retailers to purchasing the skincare company’s products. The bribes came in the form of cash, luxury goods, gift cards and travel.
“Due to Cardinal’s insufficient internal accounting controls, the marketing employees were able to easily disguise these payments by channeling funds through complicit third-party vendors and by characterizing transactions with healthcare providers as payments to printing companies for ‘production fees,’ and they were also reimbursed for high-value gifts based on falsified or incomplete documentation,” the SEC said in the settlement document.
Cardinal and Cardinal China ceased these payments in 2016 and has cooperated with the investigation. Cardinal China also terminating the marketing accounts and its employment contracts with the marketing
employees, adding anti-bribery clauses to the relevant contracts, and strictly limited the use of the remaining balance of the skincare company’s funds to low-risk expenses, such as salary payments, with “robust controls and monitoring from Cardinal China’s legal and compliance personnel,” the SEC said.
As the skincare company’s exclusive distributor in China, Cardinal Health reaped about $5.4 million in profits between March 1, 2013, and December 31, 2016, as a result of its deficient internal accounting controls relating to the marketing accounts, the agency concluded.
The SEC also ordered Cardinal to pay a civil penalty of $2.5 million and prejudgment interest of $916,887 to settle the charges.
Cardinal Health said in an email to MassDevice that it sold Cardinal China in 2018 and settled the SEC case in February 2020.
“Cardinal Health voluntarily disclosed to the U.S. Department of Justice (DOJ) and SEC possible violations of the internal controls and books & records provisions of the U.S. Foreign Corrupt Practices Act related to a relationship Cardinal Health’s former Chinese distribution business held with a manufacturer of beauty and cosmetic products,” the company said. “The DOJ declined to take any action against Cardinal Health and the SEC entered into a civil, administrative settlement with Cardinal Health, whereby Cardinal Health, without denying or admitting to the SEC’s findings, consented to a settlement in the amount of $8.8 Million.”