AGA Medical Reaches Settlement With Justice Dept. Over Bribes In China

Full article reprinted from "The Gray Sheet" - June 9, 2008

AGA Medical, a private firm that makes patent foramen ovale closure devices, agreed June 3 to immediately pay a $2 million criminal penalty under the Foreign Corrupt Practices Act (FCPA) and enter into a deferred prosecution agreement with the U.S. Department of Justice in connection with payments the company made to doctors in China.

Under the agreement, AGA will continue to cooperate with the department's investigation of its sales practices relating to corrupt payments, false books and records, and any inadequate internal controls at AGA, for three years. The company will also continue implementing new compliance and ethics programs, and must engage an independent monitor by Aug. 3.

Corrupt Payments Made Via Chinese Distributor

In the case, AGA admitted that between 1997 and 2005, the company and its officers and employees agreed to make corrupt payments, through a Chinese distributor, to government-employed Chinese doctors in exchange for their purchase of AGA products.

The practice violates FCPA, which prohibits payments or gifts to foreign physicians or any government official or agent working for a government-owned institution, such as a hospital. Most penalties assessed under the act are over $5 million.

Specifically, in December 1997 an AGA official signed and executed a distributorship agreement with a Chinese distributor for medical products for government-owned Chinese hospitals. On Dec. 20, 1997, the Chinese distributor said that hospitals wanted a 10% discount, and that physicians in the hospitals wanted a 10% commission, on all the AGA products sold.

In January 1998 the Chinese distributor traveled to Minnesota to further discuss the prices he would charge for the products, and the kickbacks that the distributor would pay to physicians to induce them to purchase AGA products.

In a separate incident in May 2001, the Chinese distributor told AGA about a meeting with an official in China's Patent Protection Bureau, and the distributor agreed he could hasten the review of the application if AGA would submit payments to "sponsor" the patent official for speeding up the patent approvals.

According to criminal information filed by the Justice Department June 3 in the U.S. District Court for the District of Minnesota, these corrupt practices continued between AGA and the Chinese distributor from the late 1990s until 2005.

AGA Board Began Internal Investigation In 2005

Upon hearing of the payments, directors of AGA's board decided in 2005 to conduct an internal investigation of the matter, and ultimately self-reported the payments to the Justice Department, according to AGA General Counsel Ron Lund.

Lund said he thought the settlement agreement with the Justice Department had gone "reasonably well," and that AGA attorneys "are especially satisfied that the company got totally behind" the agreement.

He did not think the Justice Department's requirements for an independent compliance monitor would be particularly difficult or onerous for AGA to meet. "It is a very small company, and we can quickly get up to speed to follow new compliance directives," he noted.

The Justice Department stated it agreed to defer prosecution of AGA for three years in recognition of AGA's voluntary disclosure of the improper payments and its cooperation in the federal investigation. The department will dismiss the criminal information if AGA abides by the terms of the agreement.

Lund added that during the time frame the payments were made to the Chinese distributor, "corruption was rampant" within China's medical system, and that it still is.

He said that for years, European governments have turned a blind eye to their medical device firms' corrupt dealings with the Chinese government, only enforcing anti-corruption laws within their own borders. This put many American companies, which had to deal with tougher corporate oversight by the U.S. government, at a disadvantage, Lund remarked.

Nonetheless, Lund said, "the German government is finally cracking down" on such deals between its companies and Chinese officials.

China's Ministry of Health uncovered 1,001 bribery cases related to the purchase and distribution of drugs and medical devices, totaling more than 31.47 million yuan [$4.47 million], during 2007 (PharmAsia News, April 6, 2008).

- Sue Darcey

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