Diagnostic Products: Paying the People Who Chose the Tests
In the Diagnostic Products FCPA case, the Securities and Exchange Commission ordered the company to pay $2,038,727 in disgorgement over alleged commissions to doctors and laboratory employees who controlled purchases at Chinese state-owned hospitals. If you worked in diagnostic sales or finance, the revealing connection is familiar: the hospital order, the person choosing the product and the expense entry explaining who got paid.
What Diagnostic Products Sold and Who Chose It
Diagnostic Products Corporation developed and manufactured medical diagnostic test systems and related test kits. The Los Angeles company sold through subsidiaries and distributors, with overseas sales accounting for more than 70% of its annual revenue, according to the SEC’s May 20, 2005 order. Its Chinese business put the company in regular contact with the people who chose products for public hospitals.
The SEC described DePu Biotechnological & Medical Products as Diagnostic Products’ business in Tianjin, China. It began as a joint venture with a local government entity and became a wholly owned subsidiary in 1997. DePu’s customers were primarily state-owned hospitals, and its financial results flowed into the parent’s consolidated financial statements.
The SEC identified doctors and laboratory employees with purchasing authority as foreign officials under the Foreign Corrupt Practices Act. The SEC alleged that payments sought to influence their official decisions and secure hospital business. For an insider in medical-device sales, the customer’s clinical title and purchasing role belong in the same picture: the person discussing the tests could also control the order.
The Hospital Sale Set the Commission
The SEC alleged that Diagnostic Products, through DePu, routinely paid approximately $1.6 million in improper commissions from 1991 through 2002. The parent was ordered to give up more than that in disgorgement. The alleged commissions typically represented 3% to 10% of sales to the hospitals. DePu set the percentage by the prevailing rate in the customer’s region, the sale amount and the prior relationship with the customer.
Under the alleged formula, the buyer got a cut of the buying. We see a sales incentive aimed at the wrong side of the transaction: the people entrusted to choose the tests had a personal stake in the supplier’s sales. An honest competitor had to win the hospital’s order while the alleged arrangement rewarded the people deciding where that order went.
The SEC’s account put DePu’s sales employees in the payment route and described payments made in cash, by mail or by wire transfer. It also alleged that local management knew about, approved and administered the commissions.
For someone who knows the hospital accounts, the commission calculation can explain what a payment entry leaves out. The customer’s region, the order value and the established relationship were all factors the SEC identified. Those details connect a payment to a particular piece of business and to the employee who knew why it was being made.
Sales Expenses Carried the Payments Into the Books
The SEC alleged that DePu recorded the improper commissions as legitimate sales expenses. DePu’s results then became part of Diagnostic Products’ consolidated financial statements. As the SEC described it, the same transaction had a recipient at the hospital, an expense description in China and a place in the U.S. parent’s accounts. Diagnostic Products’ alleged sales-expense disguise has a parallel in Fresenius Medical Care, where the SEC alleged that a China manager told an employee to avoid describing incentive payments as bonuses because of compliance concerns.
The order addressed books and records and internal accounting controls separately. The books-and-records allegation concerned the false description of the payments. The controls allegation pointed to how long the payments and improper accounting continued, while the anti-bribery allegation concerned buying the hospital employees’ influence.
That separation matters to people in different parts of the business. A sales employee may know the recipient’s role in selecting products, while an accountant may know the description used to book the payment. A manager may know why the commission was approved. We connect those accounts because the sales-expense label leaves out the very fact that made the payment valuable: who could direct the hospital’s business.
Tax Questions Brought the Commissions to Headquarters
Auditors’ questions about Chinese taxes brought the commissions to Diagnostic Products’ management, according to the SEC order. In late October 2002, DePu’s auditors raised tax issues related to the payments. The following month, a senior DePu manager discussed the payments and tax issues in a monthly report to the parent’s management, leading to its discovery of the payments.
The order says Diagnostic Products instructed DePu management to stop all commission payments in January 2003. The order also described revisions to the company’s code of ethics and compliance procedures and the establishment of a Foreign Corrupt Practices Act compliance program.
The sequence is useful to an insider because the revealing report began with the treatment of an expense. It connected a local accounting question to payments for public hospital business and then to a decision at headquarters. Someone who handled the auditor’s question or prepared the monthly report could understand both the payment practice and how management learned about it.
What the SEC Required of Diagnostic Products
The parent company’s SEC settlement addressed the alleged hospital commissions, their recording as sales expenses and the accounting controls that allowed them to continue. The order directed Diagnostic Products to stop violating the anti-bribery and accounting provisions and imposed the disgorgement obligation stated above. The agency’s action reached the U.S. parent through the Chinese business and its accounts.
The SEC also required an independent consultant to review the company’s Foreign Corrupt Practices Act compliance annually for three years and report findings to its board and the agency. That requirement followed the same operational problem the case exposed: local payment approvals and accounting descriptions had to be examined together. A written policy at headquarters could not explain away the commissions that local management allegedly administered.
What an Insider Can Connect
The strongest payment evidence in a case like this connects the hospital’s buying decision, the recipient’s role, the commission calculation and the way the company described the expense. Diagnostic Products’ case also shows the value of a monthly management report that carried a local payment issue to headquarters.
A sales employee may recognize the person behind a hospital account, while a finance employee may recognize the commission and the approval. Someone at headquarters may know how the issue was presented and what instructions followed. Our work is to bring those views together into a case that explains the transaction, the decision it bought and the people who understood it.
The SEC whistleblower program can pay eligible whistleblowers 10% to 30% of qualifying money collected. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers under that separate law. We assess the program that fits your information about the payments and the business they secured.
You Know Who Chose the Tests
If a hospital commission or sales-expense entry makes sense only when you know who chose the product, speak to one of our Whistleblower Experts about the commissions you saw. We build your case around that knowledge and bring in FCPA whistleblower lawyers who understand diagnostic sales, public hospital purchasing and subsidiary accounts. We stay beside you through the whole process to build your strongest FCPA whistleblower case.
