The SEC alleges that since at least 1998 and continuing to early 2006, DePuy, Inc.6 (DePuy), the wholly owned subsidiary of J&J engaged in widespread bribery scheme in Greece to sell its implants. In 1997, DePuy International, Ltd. (DPI)7, a subsidiary of DePuy, hired a Greek individual (Greek agent), for selling orthopaedic implants in Greece. He was very familiar and well known in the Greek orthopaedic industry with long-standing relationship with the doctors. During this period, DPI initiated two contracts with the Greek agent. In September 1997, DPI hired a Greek company (Greek distributor), which was under the ownership of the Greek agent. According to the agreement, the Greek distributor was ready to market DePuy products in Greece and agreed to pay DPI for re-selling the products primarily to public hospitals. After a month, DPI signed a separate contract with a private company Isle of Man, which was owned by the Greek agent. According to this contract, DPI agreed to pay a 25% commission on every- thing that the Greek distributor purchased to the private company. According to the second contract, the private company would provide marketing support to the Greek distributor and DPI. In fact, the contract was a fraud to promote bribery. DPI started infl ating the prices it charged to the Greek distributor, and then paid this as a commission to the private company. But in reality the private company did not provide any signifi cant support to DPI. The commissions were revised to 35% in 1998; the Greek agent used these commissions to bribe publicly employed doctors to use DePuy implants.
On 5 November 1998, J&J acquired DePuy and the company’s Policy on Business Conduct (PBC) became effective over the DePuy from that day onwards. J&J’s PBC prohibited the payment of bribes,
6 A Delaware Corporation is a surgical implant company that the J&J acquired in November 1998 .
7 DPI is a British corporation headquartered in Leeds, England. It is a wholly owned subsidiary of J&J. DPI over- saw the sale of DePuy products in Greece.
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requirement of keeping accurate books and records and dictated controls over payments to third parties.
However, without considering the PBC, a top DePuy executive (executive “A”) went on to become a top J&J executive in the United States, and he and the DPI executives together knowingly continued the same practices in J&J, including the engagement of widespread bribery scheme in Greece to sell its implants.
In April 1999, certain J&J executives decided to pay the illegal payments to the private company in the Isle of Man irrespective of considering the objections from executive A. As a part of this, on 22 March 1999, an executive at J&J’s existing operating company in Greece, J&J Medical Helles, sent a mail to his supervisor, cautioning him that the Greek agent had managed over the years to build off- shore accounts via various representations he has, which in turn helped the agent to have signifi cant competitive advantage when dealing with Greek surgeons.
Another letter by a DPI attorney on 24 June 1999, sent to DPI executive and copied to J&J in- house counsel, objected the draft contract with the Greek distributor. He mentioned that, this objec- tion is because of 35% commission, which appeared to be a bonus payment. This letter stated that the Greek distributor was already required to market DePuy products, and those who drafted the agreement could not explain how the money would be used to increase market share. In response to this issue, on 13 March 2000, a status report by a DPI executive wrote that DPI decided to pay 30% commission to the Greek agent (or a nominee company of his choice) and the Greek agent would take his personal remuneration and any other local support payments that he needed from this sum.
In January 2000, two of DPI executives who dealt direct with Greek business met with DPI’s presi- dent and recommended for the termination of contract, because of the concern over bribery. In the same month at the J&J’s international sales conference, the DPI president raised the issue with the supervisor, executive “A”. At this conference, three of DPI executives discussed the issue with executive “A” and recommended for the termination of contract with Greek distributor. On the next day, executive “A”
along with DPI’s president discussed the issue with representatives of the Greek agent. As part of this discussion, executive “A” offered to buy the Greek distributor and accepted to retain the Greek agent as a consultant.
After the discussion with Greek distributor, executive “A” sent an email explaining that DPI had decided to terminate the contract with Greek distributor, but the major issue with the proposal was that the company would lose half of its business even by 3 years. The letter also mentioned that two of DPI’s executives were trying to fi nd an alternative solution in order to acquire the Greek distributor for retaining the sales and handling the market customer practices. Eventually, DPI negotiated to follow Executive “A” and to buy the Greek distributor.
In November 2000, in a draft due diligence report by a DPI lawyer and accountant stated that there is no evidence of bribery in the Greek distributor’s books and could not determine whether they are engaged in these illegal practices. On the same day, the Greek distributor’s outside accountant sent an e-mail to DPI fi nancial executive stating that the Greek distributor’s inventory was overvalued by 35%
and would have to adjust after the acquisition by the DPI. This mail showed the evidence that the Greek distributor had paid infl ated prices to fund the payments to the private company and to cover cash incen- tives that the Greek agent paid.
In January 2001, J&J cancelled DPI’s acquisition of the Greek distributor and eventually renamed it DePuy Helles. After this, the Greek agent’s associate became the head of DePuy Helles. DePuy Helles initiated a consultant agreement with DPI, as per the new agreement the Greek agent received 27% of all its sales in Greece. However, the issue became more complicated in 2001, when DPI’s outside di- rectors questioned the amount of payment made by DPI to the agent for tax reasons. To hide the truth,
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DPI executives split the payments between two new fi ctitious agreements with some payments paid by DPI and others paid by DePuy Helles. This bribe payment to doctors became rampant in Greece by the Greek agent and DPI executives often referred to as “professional education” or “support.”
The issue became more critical because of the dispute over the sales of surgical implants in Greece.
As a result, in October 2003, the company decided to dismiss the services of the Greek agent and hired another agent to fi ll the same role in bribery scheme. In January 2005, a new EUCOMED Code of Business Practice8 (refer the Exhibit: EUCOMED Code of Business Practice (exerts)) came to effect.
During the period of 2003–2006 (dismissal of Greek agent and his replacement), Depuy Helles, em- ployees withdrew petty cash and paid the doctors directly. The company booked this amount of US$
590,000 as miscellaneous. In 2006, after receiving a whistleblower complaint, J&J’s internal audit group discovered the payment to Greek doctors. Finally, according to the SEC allegations, the J&J earned US$ 24,258,072 in profi ts on sales obtained through bribery during 1998–2006.
The SEC also alleges that MD&D Poland, another J&J subsidiary, engaged in severe bribery schemes and thereby the company earned US$ 4,348,000 profi ts from its sales. As part of increasing sales, the MD&D Poland created sham civil contracts with publicly employed doctors and hospital administrators and paid them for using the company’s medical devices. From 1 January to 30 June 2006, the company made US$ 7,775,000 of improper civil contract payments to public doctors. The company stated that, in some cases, the amount paid to the doctor was a percentage of the value of a hospital tender, in others it was a fl at fee requested by the doctor or hospital administrator.
For infl uencing the public doctors and hospital administrators, the company also paid travel expenses to attend medical conventions in Poland and abroad. Some of the trips were to the United States for conferences and others were to tourist areas in Europe, which included spouses and family members to what amounted to vacations. The company employees also faked travel expenses in order to generate cash. The money was then funnelled to doctors as bribe payments. The company accounts shows that MD&D spent approximately US$ 7.6 million on these travel sponsorship during 2000 to 2006.
Another subsidiary of J&J in Romania, called J&J d.o.o. (Pharma Romania), bribed publicly em- ployed doctors and pharmacists to prescribe J&J products. The SEC alleges that the employees worked with Pharma Romania’s local distributors used to deliver cash to public doctors who ordered J&J drugs for their patients. The company also provided travel to certain doctors who agreed to prescribe J&J products. According to the estimate, from 2000 to 2007 the company earned US$ 3,515,500 in profi t from its sales through the bribery.
In SEC investigation, it found that two of the subsidiaries of J&J, Cilag AG International and Janssen Pharmaceutica N.V. (collectively “Janssen-Cilag”) who were part of Oil for Food Program,9 were involved in rampant corruption. During the period of this program, Janssen-Cilag sold pharmaceuticals to an arm of the Iraqi Ministry of Health known as Kimadia. However, the company did all its business with Kimadia in Iraq through a Lebanese agent. This agent’s primary contact with the companies was through an area direc- tor at Janssen-Cliag’s offi ce in Lebanon. As per the contract with the company, the agent used to get 12%
8 This code of Business Practice (hereinafter referred to as the “Code”) provided special guidelines which is ap- plicable to its members of business practice in Europe and, generally elsewhere. The intention of this code is not to supplant or supersede any national laws or regulations or any other professional or business codes (which include company codes) which applicable to its members.
9 This program was intended to provide humanitarian relief for the Iraq population, which faced severe hardships under international trade sanctions that followed Iraq’s 1990 invasion of Kuwait. As per this program, the Iraqi government agreed to sell its crude oil and use the proceeds to purchase food, medicine and critical infrastruc- ture supplies.
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commission on sales in Iraq. When the Kimadia started demanding kickbacks,10 Janssen-Cliag raised the commission to the agent on sales in Iraq by 10% to 22%. This hike was also approved by a Janssen-Cilag area director in Lebanon and the managing director for Janssen-Cliag’s Middle East West Asia (MEWA) group in Belgium. The Company justifi es the hike in way that the agent could conduct promotional activi- ties in Iraq. This commission increment helped the agent to pay 10% kickbacks to the Iraqi ministries and mask the payments as legitimate agent commissions in the companies’ books and records.
The SEC investigation found that the kickback payments of approximately US$ 857,387 were made in connection with 19 Oil for Food contracts. These payments were executed through the agent to Iraqi-controlled accounts in order to avoid detection by the UN. The fee was used as a bribe to the Iraqi regime, which was camoufl aged on J&J’s books and records by mischaracterizing the bribes as a legiti- mate commission. For generating the funds to pay as bribes and to conceal those payments, Janssen- Cliag and its agent infl ated the price of the contracts by at least 10% before submitting them to the UN for approval. The SEC alleges that due to this scheme, the J&J generated a profi t of US$ 6,106,225.