At recent legal conferences, senior officials from the Department of Justice and the Securities and Exchange Commission have announced that the pharmaceutical industry will be the focus of enhanced scrutiny in 2009 regarding compliance with the Foreign Corrupt Practices Act ("FCPA"), which prohibits the bribery of foreign government officials and accounting practices that mask such conduct. Pharmaceutical companies operating overseas face singular FCPA risks because of the nature of public health systems in many foreign countries, and the systems for marketing and distributing their products. In many countries, hospitals are owned or operated by the government, and doctors and hospital officials are, in essence, government employees. The marketing of pharmaceutical products therefore involves commercial transactions with "foreign officials" for purposes of the FCPA, creating potential criminal and civil liability.
Particularly given a recent surge of enforcement activity, and the potential consequences of a violation, it is therefore essential for pharmaceutical companies to refresh their understanding of the FCPA and to re-examine their existing compliance and internal control systems to ensure that procedures are in effect to prevent and detect corruption.
The FCPA in a Nutshell
Under the FCPA, it is unlawful for a covered business or individual "corruptly" to offer, pay, promise to pay, or authorize payment of anything of value to a "foreign official" (including employees of state-owned enterprises and certain public international organizations) for the purpose of obtaining or retaining business or securing any improper business advantage. 15 U.S.C. §§ 78dd-1(a), 78dd-2(a). The FCPA also makes it unlawful to fail to meet specified record-keeping and internal control requirements. Id.
§ 78m(b)(2) and (b)(5).
Payments made to foreign officials through intermediaries (such as agents or consultants) are as illegal as direct payments by a company employee or official if made knowing that any portion of the payment will go directly or indirectly to a foreign official. Moreover, evidence of conscious disregard or deliberate ignorance with respect to payments to intermediaries can constitute actionable knowledge of illegality. Id.
§§ 78dd-1(a)(3), 78dd-2(a)(3).
The FCPA's antibribery and accounting provisions 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. The Act's provisions also broadly 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. companies should be aware that violations by a foreign subsidiary may be attributable to the U.S. parent.
The FCPA contains an exception to the prohibition against payments to foreign officials for payments (often referred to as "facilitating" or "grease" payments) to "expedite or to secure the performance of a routine governmental action," provided that such action does not include a decision by a foreign official to award new business or continue an existing business relationship. The statute specifies that "routine governmental action" refers to "an action which is ordinarily and commonly performed by a foreign official," such as the issuance of permits or licenses to enable a company to do business in a foreign country, processing official documents such as visas and work orders, scheduling inspections, loading or unloading cargo, providing certain utility services, "or actions of a similar nature."
The FCPA also contains two affirmative defenses to an alleged antibribery violation, which the defendant has the burden of establishing. First, a defendant may assert that the payment in question was lawful under the written laws of the foreign country in which the payment was made. Second, a defendant may assert that the payment (or gift) was a "reasonable and bona fide expenditure, such as travel and lodging expenses," and was "directly related to" either "the promotion, demonstration, or explanation of products or services" or to "the execution or performance of a contract with a foreign government or agency thereof."
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, and individuals face up to five years' imprisonment and criminal fines of up to $100,000 per violation. Criminal violations of the FCPA's books and records 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.
FCPA prosecutions unmistakably are now a top enforcement priority for the Department of Justice and the SEC. In the first twenty 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. Enforcement activity particularly has increased over the past three years: in 2008, the Justice Department criminally prosecuted 16 FCPA cases, compared to only 6 in 2007. According to a senior Justice Department official, approximately 110 FCPA investigations are currently open.
Nor have recent prosecutions targeted only U.S. companies. In December 2008, for example, the Justice Department reached a $17.8 million settlement with Fiat in which all the corporate defendants were foreign-based companies that had American Depositary Receipts traded on the New York Stock Exchange and therefore were subject to the FCPA's accounting and internal control provisions.
Financial penalties also are reaching astronomical heights. 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. As a result of the company's extraordinary cooperation with U.S. authorities, Siemens avoided conviction under the antibribery provisions of the FCPA (and thereby avoided potential debarment), pleading guilty instead to criminal violations of the statute's internal controls and accounting provisions. But it 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).
The Siemens case also exemplifies burgeoning international cooperation in antibribery investigations. Nearly forty countries are now signatories to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and several countries have adopted domestic antibribery legislation. It was German authorities who initiated the massive Siemens investigation, and when Siemens pleaded guilty in the United States, the Justice Department 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.
Prosecutions of individuals also are on the rise. 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. Senior company officials, moreover, are fair game for prosecution: Albert Stanley, the former Chairman of Halliburton subsidiary KBR, recently agreed to serve seven years in prison as part of a plea agreement stemming from the payment of $182 million in bribes to Nigerian government officials.
Risks for Pharmaceutical Companies
Although there have not been any recent criminal prosecutions of U.S. pharmaceutical companies for FCPA violations, other FCPA prosecutions in the health care industry and reported investigations make it clear that U.S. companies operating overseas are potentially at risk:
- In 2008, Astrazeneca, a U.K.-Swedish pharmaceutical company, reportedly was under investigation by U.S. authorities for unspecified FCPA violations.
- In 2007, Akzo Nobel N.V., a Dutch pharmaceutical company, reached a settlement with the Justice Department and the SEC regarding $280,000 in improper payments of "after-sales-service fees" by a subsidiary to Iraqi government officials under the United National oil-for-food program. The government was able to exercise U.S. jurisdiction because Akzo Nobel had American Depository Receipts traded on a U.S. exchange.
- In 2005, DPC Co., Ltd. (Tianjin), a Chinese entity, pleaded guilty to FCPA violations for paying $1.6 million to Chinese physicians and laboratory workers (in payments internally characterized as "commissions") at government-owned hospitals in exchange for agreements that the hospitals would purchase Tianjin's products and services. Tianjin paid a $2 million criminal fine and its U.S. parent, Diagnostic Products Corporation, paid a $2.8 million fine.
- In 2005, Micrus Corporation, a U.S. medical device company, entered into a deferred prosecution agreement with the Justice Department, and paid $450,000 in civil penalties, for having paid $105,000 to physicians employed by government-owned hospitals in France, Turkey, Spain, and Germany in exchange for the hospitals' purchase of Micrus products.
- In 2004, Schering-Plough agreed to a $500,000 settlement with the SEC because its Polish subsidiary had paid approximately $75,000 to a Polish charitable organization headed by a Polish government official. The official directed a Polish government agency that influenced pharmaceutical purchasing decisions of hospitals owned by the Polish government.
Best Practices for Maximizing Compliance
U.S. pharmaceutical companies operating overseas (either directly or through foreign subsidiaries) face a range of compliance challenges to avoid running afoul of the FCPA. Particularly in high-risk countries such as China, Russia, and the former Soviet republics, every juncture of interaction with foreign officials may entail a risk of potentially improper payments, particularly when agents or consultants are involved in a transaction. The risk of taking "short-cuts" that could result in violations will likely be magnified in the current economic downturn as companies exhaust efforts to maintain revenues and secure business advantages over competitors overseas.
For enforcement agencies, it is insufficient for companies merely to have a robust written code of conduct that prohibits improper payments to foreign officials. Rather, companies should undertake and systematize several prudential measures:
- Conduct risk assessments based on the incidence of corruption in the countries in which they operate and the nature of interaction with foreign government officials by employees, agents, consultants, and distributors.
- Translate the company code of conduct into the languages of each country where the company operates, and ensure that the translation is disseminated to officers, employees, consultants, and agents there.
- Require company employees overseas – as well as foreign consultants, 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 any foreign agents, distributors, or consultants, including in-person interviews by in-house compliance lawyers and background checks with the U.S. embassy or consulate. Expenditures by agents and consultants should be subject to more frequent audits, particularly in high-risk countries. Compensation systems for agents and consultants that create potential incentives for corrupt payments to foreign officials, such as success fees, should be prohibited.
- Require prior approval for anything that is, or could be construed as, a payment to a foreign official - particularly gifts and entertainment expenses - in order to assess their reasonableness and connection to a bona fide business purpose, 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.
- Institute confidential reporting mechanisms, such as a "hotline" or special website, for individuals to report allegations of corruption, and should act upon credible allegations of wrongdoing in a timely manner.