Schering Will Audit Compliance With Anti-Bribery Law Under SEC Settlement

Schering-Plough will retain an independent consultant to review its compliance with the Foreign Corrupt Practices Act as part of a $500,000 settlement with the Securities & Exchange Commission.

The consultant will "review and evaluate Schering-Plough's internal controls, record-keeping and financial reporting policies and procedures as they relate to Schering-Plough's compliance with FCPA," a June 9 SEC order states.

The consultant is directed to issue a report within six months recommending policies to be implemented by the company.

Schering is expected to adopt any policies recommended by the consultant unless it can demonstrate to SEC that they would be "unduly burdensome."

The order settles allegations that Schering violated the foreign bribery statute in its dealings with a charity associated with the director of the Silesian Health Fund in Poland.

The SEC complaint alleges that, from 1999-2002, the head of Schering-Plough Poland's oncology unit authorized payments totaling approximately $76,000 to the charity with the intent of influencing purchases of Schering products.

Schering did not admit to the allegations but agreed to pay a $500,000 civil penalty.

The SEC order notes that no U.S. employee was aware of the payments, and Schering said that the conduct at issue was halted by its Polish subsidiary in 2002.

The settlement underscores the challenge facing Schering CEO Fred Hassan in his self-described mission to win the trust of policymakers, regulators and other stakeholders in Schering.

Hassan discussed his efforts to create a culture of business integrity within Schering during a recent industry conference, and suggested that all big pharma CEOs need to concentrate on "earning trust" from stakeholders (see ¹ (Also see "Pharma CEO Mission Is Defined By Complexity, Products And Trust – Hassan" - Pink Sheet, 14 Jun, 2004.)).

Since joining Schering in April 2003, Hassan has made a priority of resolving the many open investigations of the company (² , p. 19).

One of the first cases Hassan resolved was an SEC investigation into allegations that former CEO Richard Kogan violated Fair Disclosure regulations (³ (Also see "Schering Drug Licensing Division To Be Headed By Ex-Pharmacia Exec" - Pink Sheet, 15 Sep, 2003.), p. 32).

Schering received formal notice of the SEC investigation of its Polish subsidiary in November. SEC brought the action on the grounds that Schering failed to properly record the payments in its financial reports (since they were characterized as charitable donations).

The SEC order alleges that Schering did not have proper controls in place to prevent violations of FCPA.

Prior to March 2002, Schering "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," SEC said.

The SEC order lists several clues that should have raised concerns with Schering about the payments.

First, the charity receiving the donations (the Chudow Castle Foundation) "is not a healthcare-related entity." The agency noted that Schering-Plough Poland's policies stipulated that donations were supposed to be for healthcare entities; the charity "represented to S-P Poland that its by-laws permitted the foundation to engage in healthcare-related programs," but SEC concluded that the manager knew that to be false.

A second warning sign, SEC said, was that the payments to the charity were large relative to the total budget for charitable donations.

Third, the payments appeared to be structured so that each individual donation was below the manager's authorization limit. Finally, the head of the charity was in a position to influence purchasing decisions.

In a footnote, SEC suggests another possible clue overlooked by Schering: by 2002, 53% of Intron A and 40% of Temodar sales in Poland were in Silesia.

Schering is not the only manufacturer under investigation for its dealings in Poland. SEC noted that its investigation "is continuing as to others."