Cardinal Health: Its Payroll, Someone Else’s Instructions

The Cardinal Health FCPA case ended in a February 28, 2020 settlement with the Securities and Exchange Commission requiring Cardinal to surrender $5,400,000 in gains and pay a $2,500,000 civil penalty over alleged failures to control and accurately record supplier-directed marketing payments in China. The agency alleged that Cardinal China employed people who took their daily instructions from a supplier and paid marketing expenses at their direction. For an insider, the revealing split was between the company signing the employment contracts and the company deciding what those employees did.

This Foreign Corrupt Practices Act case concerned Cardinal’s accounting and recordkeeping. The agency alleged that purported marketing payments reached government-employed healthcare providers and employees of state-owned retailers to promote a supplier’s products.

The Chinese Distribution Business and Its Marketing Accounts

According to the order, Cardinal entered China in November 2010 by acquiring an established pharmaceutical distributor’s Chinese subsidiaries. Those businesses distributed prescription medications, medical devices and consumer health products, and administered marketing money for suppliers.

The order describes how the marketing accounts held excess distribution margin that Cardinal China was contractually required to return to its customers. The arrangement allowed Cardinal China to make payments from those accounts as the customers’ employees directed. The accounts remained on Cardinal China’s books, which fed into Cardinal’s financial statements.

The order says most of those accounts were terminated after the acquisition, partly because Cardinal recognized the risks of running another company’s marketing expenses through its own books. It alleged that an arrangement with a European dermocosmetic supplier continued through 2016. Cardinal China was that supplier’s exclusive Chinese distributor of nonprescription, over-the-counter products.

Distribution margin matters because it can finance spending beyond the product sale. In the Securities and Exchange Commission’s 2015 speech FCPA, Disclosure, and Internal Controls Issues Arising in the Pharmaceutical Industry, the enforcement director described how a distributor’s margin can fund payments to officials, with the extra layer of cash flow helping disguise them as legitimate expenses. According to Cardinal’s order, the money sat in accounts the distributor ran, and its own staff signed off on the payments.

Cardinal’s Employees, the Supplier’s Instructions

The order says Cardinal China formally employed approximately 2,400 people for the dermocosmetic supplier under an administrative and human resources agreement. Most were beauty assistants and supervisors working in retail stores. Other employees worked in sales, marketing, management and back-office roles.

According to the order, the supplier managed those employees day to day. Cardinal China signed their employment contracts, administered payroll and handled other personnel functions. Its distribution margin also meant that it benefited when their marketing efforts increased sales.

The Securities and Exchange Commission alleged that Cardinal treated the arrangement as carrying minimal risk and failed to apply its full internal accounting controls. Marketing employees interacted with state-owned hospitals and retailers without Cardinal’s full anti-bribery training or oversight. Many used the supplier’s email accounts and computer systems, which Cardinal’s compliance personnel could not access.

We see a company paying for work its compliance team could not fully see. In the agency’s account, Cardinal China employed the staff, paid their expenses and profited from their work, yet could not read the supplier-controlled email they used for some of that business.

Printing Fees That Reached Public Employees

The Securities and Exchange Commission alleged that purported marketing payments were redirected to government-employed healthcare providers and employees of Chinese state-owned retailers. Cash, luxury goods, gift cards and travel were among the forms those payments took. The stated purpose was to promote the dermocosmetic supplier’s products.

According to the order, complicit third-party vendors helped disguise the payments. Transactions with healthcare providers appeared as payments to printing companies for production fees, while falsified or incomplete documentation supported reimbursement for expensive gifts. Cardinal China executed payment requests without enough supporting material to verify what the money bought.

The scale makes that approval failure hard to dismiss. The agency said Cardinal China authorized and paid more than $250 million from the marketing accounts during 2013 through 2016 with insufficient payment policies and procedures. For someone approving an invoice, the significant connection is between the service described, the person requesting payment and the person who ultimately received the benefit.

The Warnings Were Already Inside Cardinal

According to the Securities and Exchange Commission, Cardinal had already identified the danger of supplier marketing accounts before the dermocosmetic arrangement ended. By July 2011, it had directed its Chinese subsidiary to wind down all pharmaceutical marketing accounts because suppliers could use them to make hidden payments to officials. Certain large suppliers’ accounts nevertheless continued for several years.

The order describes an Italian manufacturer’s marketing account that Cardinal China closed after an internal report in 2012 said Chinese authorities had fined the manufacturer’s Chinese subsidiary for providing benefits to hospitals. Cardinal China closed a U.K. manufacturer’s account after its parent’s chief executive received a report in 2013 alleging that Cardinal China employees had used it to bribe employees of China’s Center for Disease Control.

The order describes warnings about the dermocosmetic arrangement too. In December 2012, an employee questioned the legality of the marketing accounts and employment structure and recommended an external audit. The agency alleged that neither Cardinal nor Cardinal China responded with sufficient improvements to the controls over the accounts or employees.

According to the order, the Shanghai Administration of Industry and Commerce fined Cardinal China in September 2014 for giving luxury dermocosmetic products to a retailer’s employees based on the retailer’s sales. The supplier requested the gifts, which were funded from the marketing accounts. The Securities and Exchange Commission alleged that Cardinal still failed to improve supervision and account oversight sufficiently.

The order describes a July 2015 discovery of smartphone purchases for undisclosed reasons that prompted a direct exchange. Cardinal China’s vice president of compliance emailed a colleague, copying the subsidiary’s president, about the supplier’s likely resistance to Cardinal’s standard compliance procedures. Another employee’s response, quoted in the order, put the missing control plainly:

The agency alleged that the controls still did not improve until 2016. We see a warning that named the precise weakness: people could spend on gifts and entertainment while the company administering their money lacked control over that spending. An employee who saw the requests and the response could explain how that gap survived.

The order says a compliance audit in May and June 2016 found expenses that breached Cardinal China’s policies. In June, executives in the United States received another internal report that the marketing employees were channeling payments to Chinese government officials.

A Marketing Label Can Hide the Customer’s Influence

Fresenius Medical Care provides a related example of alleged payments to public health care personnel hidden in marketing records. The Securities and Exchange Commission’s separate order described bonuses for publicly employed Chinese healthcare professionals tied partly to treatments and new patients. It said emails suggested that the bonuses were intended to influence clinic procurement decisions, and that a senior manager cautioned against calling the payments bonuses because of compliance concerns.

The 2022 Journal of Forensic and Investigative Accounting paper Fresenius Medical Care: A Case Study on the FCPA traces how the bonuses appeared as center marketing fees. It also describes an internal audit that questioned payments through a third party without reports showing services performed. The study makes the accounting connection visible: a marketing entry, a public purchaser’s influence and missing evidence of the work supposedly purchased.

Cardinal’s alleged printing-company payments expose a similar mismatch between an account description and the person benefiting. We look at that relationship with the insider who understands the business. Someone who knows which supplier directed the spending, or which public employee received the gift, can explain what a routine-looking invoice leaves out.

What Cardinal Agreed to Pay

The civil penalty was smaller than the gains the agency attributed to the arrangement. The order tied those gains to Cardinal China’s distribution, administrative and human resources services. Cardinal earned money from the same arrangement the agency alleged it had failed to control.

For SEC whistleblower rewards, the range is an aggregate 10% to 30% of qualifying money collected, shared among eligible whistleblowers. We assess how your information contributes to the case and which reward program applies. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers under that separate law.

The Evidence Behind the Approval

The evidence that connects a decision to a payment is concrete here. The order links employment contracts and supplier-controlled communications to marketing accounts, vendor payments and internal warnings. A person familiar with one part of that chain may know why an expense description differed from the spending it funded.

A payroll employee may understand who managed the staff whose contracts Cardinal signed. A finance employee may know what support accompanied a printing invoice or gift reimbursement. A compliance employee may know which systems were inaccessible and what management heard about the problem. We bring those views together around the actual transaction and the business decision it served.

You Know Who Directed the Spending

If you know why a supplier controlled employees on your company’s payroll or what its marketing invoices really paid for, talk with our whistleblower experts about that arrangement. We develop the case with you and bring in FCPA whistleblower lawyers who understand distribution accounts, public healthcare customers and concealed payments. You have a partner from the first conversation through the pursuit of your whistleblower award.