Mead Johnson Nutrition: Distributor Discounts, Paid Recommendations

In the Mead Johnson Nutrition FCPA case, the company agreed to pay $12,030,000 to resolve allegations that its Chinese subsidiary used distributor funds to pay health professionals for infant-formula recommendations and mothers’ contact information. The money belonged to the distributors by contract, but the Securities and Exchange Commission alleged that company employees helped direct its use. Someone who handled those allowances or sales reimbursements could see a connection the company’s accounting allegedly failed to show.

Mead Johnson manufactured and marketed infant formula and child nutrition products worldwide, including through its majority-owned Chinese subsidiary. The Securities and Exchange Commission announced the settlement on July 28, 2015, resolving charges that its books hid the payments and its controls failed to stop them. According to the order, Mead Johnson China’s presence grew from 28 to 241 cities from 2008 through 2013.

Paid Recommendations and Access to New Mothers

The Securities and Exchange Commission alleged that Mead Johnson China employees paid health care professionals at state-owned hospitals to recommend the company’s products to expectant and new mothers. They also paid for those patients’ contact information so the company could market formula to them directly. The alleged bargain bought both a recommendation inside the hospital and a way to continue selling afterward.

Mead Johnson China’s sales staff marketed through healthcare facilities and encouraged professionals to recommend its products and collect mothers’ details. According to the order, cash and other incentives funded that effort, despite company policies prohibiting improper payments and gifts that influenced recommendations. The agency treated those hospital professionals as foreign officials under the Foreign Corrupt Practices Act.

This is the commercial influence at the center of payments to government doctors. A recommendation can move a product even when the sales effort is aimed at the patient. We see a basic breach of trust in the alleged arrangement: the professional advising a new mother also had a financial incentive from the formula company.

The order put the alleged improper payments at approximately $2,070,000 from 2008 through 2013. That spending came through a business arrangement that already served the company’s distribution and marketing needs, giving the payment route an ordinary commercial appearance.

How the Distributor Allowance Worked

The alleged payments came from discounts Mead Johnson China gave its third-party distributors. Those distributors marketed, sold and delivered the company’s products, and their contracts allocated part of the discount to marketing and sales efforts for Mead Johnson China. The arrangement was called the Distributor Allowance.

The order identifies the contradiction inside that arrangement:

According to the Securities and Exchange Commission, company employees gave distributors specific guidance about spending, maintained some expenditure records and used allowance funds to reimburse sales personnel for marketing and other company expenses. Sales personnel then used the allowance to fund cash and other incentives for hospital professionals. The distributor contract, the spending direction and the reimbursement therefore tell different parts of the same transaction.

That is why distributor discounts and marketing funds deserve attention beyond the amount deducted from a price. The person negotiating the allowance may know its stated purpose. The employee administering reimbursements may know who actually received the money and which hospital relationship it supported.

A March 2015 Securities and Exchange Commission enforcement speech, FCPA, Disclosure, and Internal Controls Issues Arising in the Pharmaceutical Industry, described the wider business risk. Distributor margins can create cash available for improper payments, while the extra layer between company and recipient allows bribes to appear as legitimate expenses. Mead Johnson’s alleged arrangement gives that industry problem a concrete form: company-directed spending inside funds assigned to another business.

What the Books Hid and the Controls Missed

The Securities and Exchange Commission’s books-and-records and internal-controls findings described incomplete payment records and spending that escaped the company’s restrictions. The agency alleged that Mead Johnson China failed to record the allowance funds and payments accurately. Some records existed, including records of payments to health professionals, but they were incomplete and did not show that part of the allowance was being spent contrary to company policy. Those inaccurate subsidiary records flowed into Mead Johnson’s consolidated books.

On the controls side, the agency alleged that Mead Johnson failed to maintain a system that kept distributor-funded marketing expenditures within management’s authorization. The company already had policies forbidding improper payments to health professionals. Yet the order described a payment arrangement that operated outside those restrictions through the very distributors helping sell its products.

For an accounting or finance insider, the connection reaches beyond a poorly described expense. Who directed the expenditure, who received it and how it entered the company’s reporting can explain how the books allegedly hid the sales practice. The Securities and Exchange Commission alleged a similar accounting problem at Fresenius Medical Care, where bonuses to publicly employed health professionals in China were generally recorded as marketing fees.

An Internal Investigation Missed the Payments

Mead Johnson received an allegation about possible FCPA violations involving the China Distributor Allowance in 2011. The Securities and Exchange Commission’s order says the company’s internal investigation failed to find evidence that allowance funds were being used for improper payments to health professionals. The order also says the company did not initially report that allegation to the SEC and did not promptly disclose it when the agency inquired.

According to the order, Mead Johnson China subsequently discontinued Distributor Allowance funding to reduce the likelihood of improper payments, and stopped all practices involving compensation to health professionals by 2013. A second internal investigation began that year. These details matter to someone who saw the allowance in use: the first investigation’s conclusion and what employees knew about the spending could be very different accounts.

The Sales Profits and the SEC Settlement

The Securities and Exchange Commission attributed approximately $7,770,000 in profits to the alleged payments and ordered the company to give up that amount. The settlement terms separately required $1,260,000 in interest and a $3,000,000 civil penalty.

We see the imbalance in those terms: the penalty was smaller than the profits attributed to buying recommendations and access to new mothers. The order required the company to give up those profits as well.

What a Sales or Finance Insider Can Explain

The Mead Johnson allegations connect discount funding, distributor spending instructions, sales reimbursements, hospital recommendations and accounting records. Someone in sales or distribution may know how the allowance was discussed and who decided its use. Someone in finance may know how those expenditures were recorded and what the supporting records left out.

The internal-investigation history adds another part of the picture: what the company was told about the allowance and how it responded. We work with insiders to connect their knowledge to the payment’s full route, the benefit it bought and the decisions behind the accounting. That is where familiarity with a routine sales process can become evidence of a much larger problem.

Whistleblower Rewards Depend on the Claim

The SEC whistleblower award program can pay eligible whistleblowers a combined 10% to 30% of the money collected when their original information leads to a successful enforcement action with penalties and other required payments exceeding $1 million. For an insider with knowledge of foreign payments and misleading accounts, we assess that opportunity with FCPA whistleblower lawyers who understand the transaction.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Our whistleblower experts work with you and the right whistleblower lawyers to identify the strongest claim for what you know.

You Know What the Allowance Paid For

If you saw distributor funds used to buy recommendations or patient contacts, speak to our whistleblower experts about how the allowance was spent. We build the case around the commercial facts you know, bring in FCPA whistleblower lawyers experienced in overseas health-product sales, and stay beside you through the claim.