By THOMAS CATAN And AMIR EFRATI
Google Inc. is close to settling a U.S. criminal investigation into allegations it made hundreds of millions of dollars by accepting ads from online pharmacies that break U.S. laws, according to people familiar with the matter.
The Internet company disclosed in a cryptic regulatory filing earlier this week that it was setting aside $500 million to potentially resolve a case with the Justice Department. A payment of that size would rank high among the criminal or civil penalties paid by companies in disputes with the U.S. government.
Google gave virtually no details in its filing about the probe, saying only that it involved "the use of Google advertising by certain advertisers."
The investigation has examined whether Google knowingly accepted ads from online pharmacies, based in Canada and elsewhere, that violated U.S. laws, according to the people familiar with the matter. It's unclear whether those online drugstores were alleged to have sold counterfeit or expired drugs, whether they didn't require a valid doctor's prescription, or both.
A Google spokesman declined to comment, as did a spokeswoman for the Justice Department.
At a conference on Wednesday, Sergey Brin, Google's co-founder and a current high-ranking executive and board member, sidestepped questions about the investigation.
"Luckily, since we changed roles a few months ago, I don't have to deal with filings, and the DOJ, the SEC or other acronyms," Mr. Brin said, using the initials for the Justice Department and Securities and Exchange Commission.
Search engines can be liable if they're found to be profiting from illegal activity online. In December 2007, the three largest Internet companies, Google, Microsoft Corp. and Yahoo Inc. agreed to pay a combined $31.5 million fine to settle civil allegations brought by the Justice Department that they had accepted ads from illegal gambling sites.
One question under investigation is the extent to which Google knowingly turned a blind-eye to the alleged illicit activities of some of its advertisers—and how much executives knew, the people said.
The probe has been conducted by the U.S. Attorney Office in Rhode Island and the Food and Drug Administration, among other agencies, according to the people familiar the investigation. A spokesman for the Rhode Island U.S. Attorney, Peter Neronha, declined to comment. A spokeswoman for the FDA said the investigation was ongoing and declined to comment further.
The health care and pharmaceutical industry spent more than $1 billion on online advertising in the U.S. last year, according to research firm eMarketer.
Google, like other Internet companies, has struggled for years to deal with what it calls "rogue online pharmacies." In 2003, for instance, Google said it banned ads from U.S. companies that offer drugs like Vicodin and Viagra without a prescription.
Google acted after other big companies, including Yahoo and Microsoft, made similar moves as the FDA began publicly pressuring sites to accept only advertisements for drugs from licensed Internet pharmacies.
But the company said it would continue carrying ads for Canadian pharmacies, even though it's illegal for U.S. customers to buy drugs from them.
The decision riled some U.S. druggists and drew criticism from regulators. At the time, the FDA's associate commissioner for external relations said he was "disappointed" in the search engine's decision.
Google made changes last year to its policies for online drug ads after the FDA began its latest investigation into the company's practices, according to a person familiar with the matter.
Google announced in February 2010 that it would begin allowing ads only from U.S. pharmacies accredited by the National Association of Boards of Pharmacy, a Park Ridge, Ill., organization representing the 50 state pharmacy boards, and from online pharmacies in Canada that are accredited by the Canadian International Pharmacy Association.
In September Google filed a federal lawsuit in San Jose, Calif., seeking to block individuals running illegitimate pharmacies from advertising on its search engine and to recover damages.
"Rogue pharmacies are bad for our users, for legitimate online pharmacies and for the entire e-commerce industry—so we are going to keep investing time and money to stop these kinds of harmful practices," Google lawyer Michael Zwibelman wrote in a post on the company's blog at the time.
The investigation is Google's latest brush with law enforcement and regulatory agencies in both the U.S. and abroad. The company is facing multiple investigations into possible antitrust and privacy violations in several nations. Google maintains that its breakneck growth will inevitably attract greater regulatory scrutiny, and that it's done nothing wrong in connection with other probes.
—Don Clark and Siobhan Gorman contributed to this article.
Write to Thomas Catan at firstname.lastname@example.org
and Amir Efrati at email@example.com