By Gail Dutton, Life Science Leader magazine
At least a dozen life sciences companies are under investigation by the DOJ and the Security and Exchange Commission for Foreign Corrupt Practices Act (FCPA) violations. It’s not that companies are more corrupt, but that the FCPA is being enforced more stringently, using broader definitions. This year alone, fines already have exceeded $1 billion, up from a mere $11 million in 2004.
The lesson for life sciences companies is to review their existing policies, in light of the strictures placed upon firms like Johnson & Johnson, which last April paid $77 million in FCPA fines, and Novo Nordisk, which paid $9 million in 2009 for Oil-for-Food program kickbacks. One year prior, Siemens was assessed $2 billion in global fines for bribery, as anti-corruption laws throughout the world are strengthening.
The Johnson & Johnson fine signaled a significant change in the way the DOJ prosecutes and settles FCPA cases. The case revolved around the definition of a government official. The company’s subsidiaries in Greece, Poland, and Romania were charged with paying public health workers to induce them to purchase Johnson & Johnson medical devices, as well as with paying kickbacks to Iraq to obtain Oil-for-Food contracts.
The FCPA has been law since 1977, but is just now being stringently enforced, according to Paul T. Friedman, chair of the FCPA and anticorruption task force and partner in the San Francisco office of Morrison & Foerster. “For life sciences companies focused on compliance, the first order of business is to understand past and current practices regarding operations and cooperation with regulations and use that to guide their compliance efforts,” Friedman says. “That includes identifying government touch points.”
Regarding Johnson & Johnson, the DOJ specifically states, “Healthcare providers who work at publicly owned hospitals are government employees. … Therefore such healthcare providers … are ‘foreign officials’” as defined in the FCPA. That designation was integral to the Johnson & Johnson case.
Johnson & Johnson’s subsidiary DePuy, Inc. received a memo from its Greek distributor, DePuy International (DPI), noting that, “The existence of cash incentives to surgeons is common in Greece,” and that the consulting fee should be “sufficient to cover [DePuy International] and J&J cash incentives.” The distributor wrote that, “The selling price must be carefully calculated so that the distributor’s profit would be sufficient to pay cash incentives,” estimated at 30% of sales. A subsequent memo, this time from the DPI VP of marketing in response to a letter from DPI counsel, noted that without such payments, “We’d lose 95% of our business by the end of the year.” Between 1998 and 2008, DePuy and its subsidiaries paid approximately $16.4 million in cash incentives to Greek healthcare practitioners. Ultimately, it paid $21.4 million in DOJ fines for its Greek involvement.
While the definition of “foreign official” remains broad, the courts have subsequently ruled that “the nature and characteristics of the business entity” must be taken into consideration in determining where a person is a foreign official, Friedman adds.
The fallout isn’t over for J&J, though. In May, “J&J shareholders filed suit for alleged breaches of fiduciary duties stemming from the company’s failure to implement internal controls sufficient to detect and prevent bribery of publicly employed administrators, doctors, and pharmacists in foreign countries,” according to Bethany Hengsbach, J.D., partner, in the Los Angeles office of Sheppard Mullin.
As John Skousen, compliance officer at Life Technologies, points out, “Outside the United States, most hospitals have a government element,” causing multinationals to reexamine the ways in which they market to physicians, particularly in light of the DOJ’s focus (since 2009) on the pharmaceutical industry and corruption.
Life Technologies minimizes the issue with a firm “no bribery” policy. “We’ve said, ‘No facilitation payments at all,’ and we’ve always said that,” Skousen stresses. Caridian BCT, Inc. takes a similar approach. “Any relationship founded on a bribe lacks integrity,” notes Lisa Hayes, VP of global corporate marketing and communications. “Because many of our customers worldwide are agencies of, or are otherwise closely affiliated with, local or national governments, we have always been mindful of the FCPA,” she stresses. “Therefore, our compliance policies have applied not only to our employees, but to our distributors as well.”
But, Friedman cautions, “There’s more to it than that. The executives I’ve talked with often haven’t had a clear understanding of the requirement of the anticorruption laws. For example, the FCPA prohibits paying or promising to pay anything of value for a foreign government official where the purpose is to obtain or retain business. It’s easy to recognize a bag of cash as a bribe, but what does ‘anything of value’ mean?” The actual situations are less clear-cut.
Lanny Breuer, assistant attorney general, criminal division, DOJ, defined “anything of value” as “cash, gifts, charitable donations, travel, meals, entertainment, grants, speaking fees, honoraria, and consultant arrangements, to name a few,” speaking at the Tenth Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum in 2009. That definition blurs the boundary between bribery and legitimate expenses, leading to confusion.
Even hiring consultants can be problematic. For example, a university professor hired to direct research in another country may run afoul of the FCPA if that person also sets regulatory standards or is involved in reviews or other conflicts of interest, Friedman points out. “You have to have a good contract and transparency with the institution they work for so it’s clear they have permission to do this work on the side,” Friedman says. He also advises following the product life cycle, determining a potential consultant’s normal involvement in the process.
“Throughout the industry, most of the issues occur with third-party distributors,” Skousen observes. At Life Technologies, “We beef up our vetting and due diligence process, engage with them [distributors], and also examine their infrastructure.” Life Technologies pays particular attention to vetting third parties. “A lot of third-party distributors come out of nowhere with government contracts in hand,” Skousen says, so vetting these businesses through multiple organizations including consultants, insurers, and professional and trade organizations is prudent. Compliance officers also may need to trace the company’s ownership, presence, reach, competitive involvement, local liabilities, and key customers.
Important New Laws To Know About
Globally, the United Kingdom Bribery Act is the newest of the anticorruption laws and applies not just to British companies, but to any company that conducts business in Britain. The UK Ministry of Justice issued an interpretative guidance last spring, indicating that a listing on the London Stock Exchange alone does not constitute conducting business in the UK, Hengsbach says (although listing on an American exchange subjects a company to the FCPA). “However, there’s been no court interpretation,” she cautions.
More stringent than the FCPA, the UK Bribery Act deals with bribery of government and nongovernment personnel. It forbids facilitation payments of any kind, to anyone, anywhere in the world, regardless of whether those payments are legal in that jurisdiction. It also strictly regulates hospitality, promotional, and other business expenditures, although the Ministry assures companies that legitimate expenses will not be construed as bribery.
The Bribery Act does offer one significant advantage the FCPA does not, however. The Bribery Act accepts a robust anticorruption policy and training as a defense. “Those procedures go beyond annual training,” Hengsbach stresses. “They include procedures that are proportional to the risk and to the complexity of the operations, top-level commitment and involvement in formulating antibribery policies, periodic risk assessment, due diligence in vetting third parties, training that is proportionate to the risks, and monitoring and review to respond to changing regulations and evolving risks.”
Other nations also are developing or implementing anticorruption laws. China’s new antibribery law took effect May 1, criminalizing bribery to foreign government officials and to officials of international public organizations. It targets those seeking improper commercial benefit, but leaves many of the terms undefined. The new law applies to any who engage in bribery in China and to foreign invested enterprises established in China that engage in bribery anywhere in the world.
“As new laws like the UK Bribery Act have been adopted, we have taken appropriate steps to evaluate such laws and evolve our policies, procedures, and training accordingly,” Caridian’s Hayes says. That’s a point too many companies overlook. They focus on their home country’s laws and overlook the burgeoning potpourri to which they are subjected. To comply with the growing body of laws, Friedman recommends meeting the most stringent requirements and consulting with in-country counsel to ensure compliance with each local regulation.