June 4, 2019
By Brad Brooks
SAO PAULO (Reuters) – The U.S. Securities and Exchange Commission is investigating Siemens AG, Philips NV and General Electric Co for allegedly using local middlemen to negotiate bribes with Chinese government and hospital officials to sell medical equipment, two U.S. sources with knowledge of the matter told Reuters.
The investigations into the companies’ business in China, along with an existing SEC probe into their sales in Brazil, are part of a new effort by U.S. regulators to crack down on alleged corruption in sales of costly medical equipment worldwide, said the sources, who spoke on condition of anonymity because they were not authorized to discuss the investigation publicly.
The SEC declined to comment.
Siemens, GE and Philips all denied wrongdoing and said they were unaware of any SEC investigation concerning their operations in China.
Reuters reported in May that the SEC, along with the U.S. Justice Department and FBI, were investigating Siemens, GE and Philips – as well as Johnson & Johnson – for allegedly paying bribes to win contracts in Brazil. The four companies all denied any wrongdoing in Brazil.
Under a U.S. federal law called the Foreign Corrupt Practices Act of 1977 (FCPA), it is illegal for Americans, U.S. companies or foreign companies whose securities are listed in the United States to pay foreign officials to win business. If found guilty of violating the act, firms could face fines from the SEC.
China’s medical device market stood at $58.63 billion in 2017 – compared to $10.8 billion for Brazil – according to the most recent data available from the U.S. Commerce Department.
In both markets, the companies benefited not only from the sale of the equipment but also from the bigger profit margins to be made on servicing it during its 10-to-15 year lifespan as well as selling software updates, spare parts and the materials used in operating the machines, the sources said.
China’s National Health and Family Planning Commission and the China Food and Drug Administration, which regulate the healthcare system, did not immediately respond to requests for comment.
Brazilian federal prosecutors declined to comment.
Some details of the alleged scheme in China were included in a shareholder lawsuit against current and former members of GE’s board in New York state court, which the company disclosed in its 2018 annual report.
The GE shareholder lawsuit, filed in New York state Supreme Court last December, alleges that since at least 2011 GE employees in China or workers at its subsidiaries “have bribed hospital administrators, engaged in collusive bidding, and given kickbacks to government officials.”
The lawsuit includes translations of Chinese criminal court rulings finding middlemen who sold GE equipment guilty of bribing Chinese government and hospital officials. Some hospital administrators confessed in open court and received prison sentences, according to rulings cited in the lawsuit. GE was not charged in the Chinese court rulings included as evidence.
The lawsuit accuses GE of colluding with Philips, Siemens and Toshiba Corp’s medical unit – which was bought by Canon Inc in 2016 – to fix prices and rig tenders for expensive medical equipment, such as MRI machines and CT scanners, through Chinese middlemen. The lawsuit included public data on how much Chinese hospitals paid for the equipment, which it said was routinely at least 40 percent above the price the middlemen paid to the companies. The difference was then distributed as bribes to health officials, the lawsuit alleges, with some money being pocketed by the middlemen and flowing back to the other companies, who allegedly put in “cover” bids to make the public tender appear competitive.
Lawyers for GE in February filed a motion to dismiss the lawsuit, saying the complaint failed to link alleged wrongdoing in China to any of the defendants. The judge in the case has not yet ruled on the motion.
Lawyers for the plaintiffs did not respond to emailed requests for comment.
Boston-based GE said in an emailed statement that it believes the lawsuit lacks merit, adding that “we are committed to integrity, compliance and the rule of law in every country in which we do business.”
Amsterdam-based Philips said in an emailed statement it is “fully complying with local and international anti-bribery and anti-corruption laws.” Philips said it was “not involved” in any of the transactions in the criminal cases in China and that it makes extensive efforts to ensure its third-party agents act lawfully.
Siemens said in an emailed statement that it had just become aware of the New York lawsuit and it would “investigate any new allegation of misconduct that directly or indirectly involves Siemens” that may arise from the litigation. Siemens, based in Munich, said that its policy is “to cooperate with law enforcement investigations when they occur.”
Canon said in an emailed statement that “Canon Medical Systems Group are committed to conducting business activities with the highest priority on compliance with laws” and that the company has a zero tolerance toward bribery.
Toshiba said in an emailed statement that it was not aware of the New York state lawsuit. It said company policies “prohibit illegal or improper payments against lawful business practices.”
(Reporting by Brad Brooks; Additional reporting by Brenda Goh in Shanghai and Makiko Yamazaki in Tokyo; Editing by Daniel Flynn and Will Dunham)