By David Laufman
The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), which jointly enforce the Foreign Corrupt Practices Act (FCPA or Act), have declared the pharmaceutical and medical device industries are now under increased scrutiny for potential FCPA violations. For companies operating overseas, it is therefore more important than ever to ensure that antibribery compliance and internal control systems are sufficient to prevent and detect unlawful business practices.
Prohibited Practices Under The FCPA
Under the FCPA, it is unlawful for a business or individual to “corruptly” offer, pay, promise to pay, or authorize payment of “anything of value” to a “foreign official” for the purpose of “obtaining or retaining business.” According to the DOJ, an individual or entity has corrupt intent if a payment is “intended to induce the recipient to misuse his official position wrongfully to the payer or to any other person.” The FCPA also makes it unlawful to engage in accounting practices that omit or mask corrupt payments to foreign officials.
In addition to prohibiting direct payments to foreign officials for corrupt purposes, the FCPA criminalizes indirect payments to foreign officials through intermediaries (such as agents and distributors) if made with the knowledge that any portion of the payment will go directly or indirectly to a foreign official. Moreover, companies may be held liable for demonstrating conscious disregard or deliberate ignorance concerning improper payments by intermediaries to foreign officials.
The FCPA’s antibribery and accounting provisions broadly apply to both domestic and foreign companies whose stock is traded on U.S. exchanges and to domestic and foreign companies required to file reports with the SEC. Its provisions also apply to “any person” (both business entities and natural persons) who engages in covered conduct, regardless of whether the person is a U.S. citizen or resident or does business in the United States. In that regard, U.S. parent companies must be mindful that they are potentially liable for violations by a foreign subsidiary. At the same time, foreign companies and individuals must understand that they are subject to FCPA liability if they cause, directly or through agents, an act in furtherance of a corrupt payment to take place within the territory of the United States.
Penalties For Violations
Violations of the FCPA can result in substantial criminal and civil penalties. Companies convicted under the Act’s antibribery provisions are subject to a criminal fine of up to $2 million per violation, while individuals face up to five years’ imprisonment and criminal fines of up to $100,000 per violation. Criminal violations of the FCPA’s accounting provisions are subject to a fine of up to $25 million, while individuals face up to a $5 million fine and 20 years’ imprisonment. In addition, the SEC has authority to impose civil penalties of up to $10,000 per violation.
Risks For Pharma, Medical Device Companies
Pharmaceutical and medical device companies operating overseas are particularly vulnerable to FCPA violations because of the nature of public health systems in many foreign countries and the reliance on intermediaries to market and distribute their products. Particularly in high-risk countries such as China, Russia, and the former Soviet republics, every juncture of interaction with foreign officials entails a risk of improper payments, especially when intermediaries are involved in a transaction. In many countries, hospitals are owned or operated by the government, and doctors and hospital officials are therefore viewed by DOJ and the SEC as government employees (and therefore “foreign officials”) for FCPA purposes. Thus, payments to doctors or hospital officials in exchange for bulk pharmaceutical purchases or incentive discounts for volume purchases of medical devices could lead to criminal or civil liability under the FCPA. AGA Medical Corporation (AGA), for example, agreed to a $2 million criminal penalty in 2008 as part of a deferred prosecution agreement (DPA) with the DOJ concerning payments to doctors in China employed by government-owned hospitals.
So, too, payments by medical device companies to foreign government officials to facilitate the approval of patents are subject to prosecution under the FCPA. As part of its DPA, AGA admitted that it agreed to make payments through a local Chinese distributor to Chinese government officials to obtain approval for medical device patents.
The last few years have seen the emergence of several trends in antibribery enforcement with implications for pharmaceutical and medical device companies.
Surge in Enforcement Actions: FCPA enforcement has become a top priority for the DOJ and the SEC. In the first 20 years after the FCPA’s enactment in 1977, the government prosecuted only 17 companies, whereas, between 1998 and 2008, more than 50 companies were prosecuted. Approximately 120 FCPA investigations are currently open, and the DOJ and the FBI have augmented prosecutorial and agent resources to pursue FCPA cases.
Increased Prosecution of Individuals: Between 1977 and 1997, only 33 individuals were prosecuted. In contrast, between 1998 and 2008, the government charged more than 70 individuals with FCPA violations, including senior company officials.
Larger Financial Penalties: In December 2008, the German corporation Siemens AG and three of its subsidiaries (Siemens) pleaded guilty to FCPA violations resulting from approximately $1.4 billion in payments to government officials and intermediaries in Asia, Africa, Europe, the Middle East, and South America — including payments to facilitate the purchase of medical devices. Siemens shattered all previous records by paying a criminal fine of $450 million as well as disgorgement of profits totaling $350 million (on top of approximately $856 million in fines and disgorgement of profits imposed by the German government). Nor was the Siemens case an outlier: In February 2009, KBR agreed to pay a $402 million criminal fine as part of a guilty plea to charges that it conducted a decade-long operation to bribe Nigerian government officials.
Greater International Cooperation: Companies are now subject to a complex web of foreign anticorruption enforcement. Nearly 40 countries are signatories to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and many have adopted domestic antibribery legislation. The Siemens investigation was instigated by German authorities, and when Siemens pleaded guilty in the United States, DOJ acknowledged that the unprecedented sharing of information and evidence between U.S. and German prosecutors was made possible by the use of mutual legal assistance provisions in the OECD Convention.
Ongoing Industry Investigations
Recent SEC filings indicate that pharmaceutical companies Eli Lilly, AstraZeneca, and Bristol-Myers Squibb are currently the subject of FCPA investigations. AstraZeneca’s filing specifically disclosed that the SEC has requested documents concerning payments to doctors or government officials in Croatia, Russia, and Slovakia. There have been no similar disclosures of new FCPA investigations of medical device manufacturers, but neither have there been any public indications that the government has resolved previously disclosed investigations of Johnson & Johnson; Wright Medical Group; Medtronic Inc.; Biomet Inc.; Stryker Corporation; Zimmer Holdings, Inc.; or Smith & Nephew PLC.
In May 2009, however, Danish pharmaceutical giant Novo Nordisk agreed to pay the United States a $9 million penalty, and to enter into a three-year DPA, in connection with illegal payments by its agents to the former Iraqi government to obtain contracts to provide insulin and other medicines.
Best Practices for Maximizing Compliance
It is insufficient merely to have a robust written code of conduct that prohibits improper payments to foreign officials. To prevent violations — and minimize the enforcement consequences if violations nonetheless occur — companies should implement the following prudential measures:
- Conduct risk assessments based on the incidence of corruption in the countries where they operate and the nature of interaction with foreign government officials by employees, agents, and distributors.
- Translate the company code of conduct into the languages of each country where the company operates and ensure the translation is disseminated to employees, agents, and distributors there.
- Require company employees overseas — as well as foreign agents and distributors — to receive interactive, Internet-based training in their native language, accompanied, where possible, by in-person training by company lawyers or ethics officials.
- Conduct rigorous vetting of foreign agents and distributors, including background checks with the U.S. embassy or consulate, and avoid hiring intermediaries with family or personal ties to foreign government officials.
- Require that foreign agents and distributors operate under written contracts that specify prohibited conduct under the FCPA, and obtain annual certifications that they understand and will comply with those provisions.
- Audit expenditures by agents and distributors more frequently, particularly in high-risk countries.
- Regularly review foreign sales and marketing operations and eliminate compensation systems for agents and distributors that create potential incentives for corrupt payments to foreign officials, such as success fees.
- Require prior legal approval for anything that is, or could be construed as, a payment to a foreign official — particularly gifts and entertainment expenses — and ensure that such payments, if made, are fully and accurately documented in the company’s books and records. Although permitted under the FCPA, “facilitating” payments to foreign officials to expedite “routine governmental functions” — such as payments to obtain permits or license to do business in a foreign country, or to process visas and work orders — should be prohibited to avoid even the appearance of impropriety.
Examine the adequacy of confidential reporting mechanisms (such as a “hotline” or special website) for individuals to report allegations of corruption, and act upon credible allegations of wrongdoing in a timely manner.
About the Author
David Laufman, a white-collar litigation partner in the Washington, D.C. office of Kelley Drye & Warren LLP, previously served as Assistant U.S. Attorney for the Eastern District of Virginia and as Chief of Staff to the Deputy Attorney General of the United States.