Washington Legal Foundation: Navigating Industry Targeted Enforcement of the Foreign Corrupt Services Act

The Washington Legal Foundation (WLF) recently published a working paper entitled, “Taking Your Medicine: Navigating Industry-Targeted Enforcement of the Foreign Corrupt Practices Act.”

Established to address cutting-edge legal issues, the WLF Legal Studies Division produces and distributes substantive, credible publications targeted at educating policy makers, the media, and other key legal policy outlets. The Division deals almost exclusively with legal policy questions as they relate to the principles of free enterprise.

Background

Over the past several years, the pharmaceutical and medical device industries have been establishing research and development facilities, clinical trial programs, and related strategic partnerships outside of the U.S. As WLF notes, “their efforts are designed to accelerate the development of new drugs, devices, treatments, and techniques,” which is extremely beneficial to patients and physicians. Companies are also pursuing such ventures across American borders to open a door to relatively untapped—and potentially lucrative—emerging markets such as India, China, and Brazil.

These efforts toward globalized product and market development have positioned the companies involved for tremendous growth over the next several decades. However, the nature of these “international activities also involve a variety of significant risks that require careful consideration and close oversight.” As a result, WLF put together this working paper to discuss recent developments in the U.S. and international anti-corruption enforcement efforts that have occured over the past year.

Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act of 1977 (FCPA), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to or bribe foreign government officials to assist in obtaining or retaining business. In other words, FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business.

WLF traces the growing interest in FCPA to November 12, 2009, when Assistant Attorney General and Department of Justice (DOJ) Criminal Division Chief Lanny A. Breuer took the stage to present the keynote address at the Tenth Annual Pharmaceutical Regulatory and Compliance Congress in Washington, D.C. In his speech, Breur described an aggressive FCPA enforcement agenda focused on the pharmaceutical and medical device companies, in the months and years ahead.

The anti-bribery provisions of the FCPA make it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. This means that paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value is prohibited. FCPA also carries penalties for any publicly-held company that maintains inaccurate books and records or inadequate internal accounting controls (the accounting and record-keeping or “books-and-records” provisions).

The Department of Justice (DOJ) is responsible for all criminal enforcement and for civil enforcement of the anti-bribery provisions with respect to domestic concerns and foreign companies and nationals, and the Securities and Exchange Commission (SEC) handles other matters.

The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the anti-bribery provisions or if they conspire to violate those provisions. A U.S. company or national may be held liable for a corrupt payment authorized by employees or agents operating entirely outside the United States, using money from foreign bank accounts, and without any involvement by personnel located within the United States.

The offer or promise of a corrupt payment can constitute a violation of the statute. This means that a corrupt payment does not actually have to take place for a company to be liable under FCPA. The FCPA prohibits any corrupt payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain any improper advantage, or to induce a foreign official to use his or her influence improperly to affect or influence any act or decision.

Developments in FCPA

WLF explained that “Breuer’s speech was an unusual event” because federal law enforcement “rarely singles out a specific industry for FCPA scrutiny in a public forum.” His remarks indicate that a substantial portion of law enforcement attention and resources are now focused on the pharmaceutical and medical device industries.

For example, he noted how one third of U.S. pharmaceutical companies’ sales, upwards of $100 billion, are generated outside the United States “where health systems are regulated, operated and financed by government entities to a significantly greater degree than in the United States.” What makes this arrangement unique is that “it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.” This means that the FCPA has a broad mandate to go after companies in foreign countries.

Breuer also explained in his speech how in many of these countries healthcare and government are inextricably intertwined, and when combined with “fierce industry competition,” this environment poses a significant risk of corruption. As a result, he noted that the DOJ has decided to become “intensely focused on rooting out foreign bribery in [the pharmaceutical and medical device] industry.”

A series of other comments were made in the months after his initial speech, indicating increasing the size of DOJ’s enforcement section, and taking new measures to combat bribery and white-collar crime. Another development was that DOJ began announcing it would target individuals, specifically high-level executives of companies for violations under FCPA.

Risk Areas for Industry

After one significant case, WLF noted that officers and directors of pharmaceutical and device companies “are now faced with the prospect of regulatory and law enforcement scrutiny of their leadership, even in situations where they lack knowledge of or involvement in activities several layers of management below them.”

Additionally, under the FCPA, companies and individuals can face liability indirectly based on the actions of third parties, even if they did not know or approve of those activities. If, for example, enough unresolved “red flags” surface in the course of dealing with a third party, or there are other reasons for the company to have known that a third party was involved in the provision of improper inducements to foreign officials designed to result in some benefit for the company, the company can be charged with the knowledge of that conduct and be held liable for it.

This risk, according to WLF, highlights the care that drug and device companies, and their officers and directors, must take in handling key aspects of their non-U.S. activities, including their affiliations with third-party clinical research organizations (CROs), due diligence regarding those and other third party partners and representatives, and relationships with government affiliated or state-run academic and healthcare facilities.

Another trend that companies should be aware of is the expanding cooperation between U.S. and non-U.S. law enforcement in the anticorruption context. A cross-border law enforcement cooperation and information sharing is working in anticorruption cases is only growing, placing companies within reach of a wider and wider enforcement net. This is evidenced by the fact that several pharmaceutical and medical device companies both large and small have confirmed that they have received subpoenas and/or letters from the DOJ and SEC putting them on notice that they are under investigation for the development, sale, licensing, and marketing of their products in foreign countries.

Payments: Anything of Value

One of the significant challenges posed by the increased attention and enforcement under the FCPA are the provisions dealing with bribery and kickbacks, or other improper inducements provided in order to drive a company’s drug and device sales. According to recent press reports, the DOJ and SEC letters noted above have identified several types of activities under investigation in this area, including bribery to induce drug purchases by doctors employed by the government; commissions passed through sales agents who visit doctors; payments to hospitals to secure approval for drug purchases; and payments to officials to secure regulatory approvals.

As the WLF explained, while these instances may appear straightforward, FCPA liability can be triggered by provision of “any thing of value” in exchange for an improper action by the recipient of the benefit. There is no de minimis exception, and “any thing of value” is interpreted literally by U.S. law enforcement.

This can raise particularly difficult questions with regard to the pharmaceutical and medical device industries, where meals and small gifts have been an integral and accepted part of product marketing and sales. Although those practices have been limited domestically in recent years following scrutiny of issues such as off-label marketing, under the low threshold of the FCPA, seemingly benign day-to-day sales and marketing activities could result in costly law enforcement attention when they occur overseas.

Even charitable contributions have resulted in FCPA liability, when the contributions were linked to a foreign official with the ability to influence business opportunities for the donor.

Other Concerns/Risks

WLF noted that companies must also have oversight with respect to clinical trials, given that such a significant amount of research and studies are being conducted internationally. DOJ is reportedly investigating whether drug companies conducting clinical trials outside the United States may be offering improper inducements to influence the outcomes of those trials, either directly or through third parties.

There is also concern that medical ghosting involving a foreign doctor or scientist working in a state-run healthcare system could violate the FCPA because ghosting involves benefits conferred by the company on the “author” (publication credit), in exchange for a benefit to the company (an independent article in a medical journal supporting use of their product).

Recommendations and Conclusions

As a result of the increased enforcement and attention regarding the FCPA, WLF noted that “any business focusing on or with a physical presence in emerging markets, or actively engaged with third party partners or representatives in those markets, faces a day-to-day battle to address anti-corruption-related risks. Moreover, these risks extend not just to companies setting up facilities or other operations in country, but also to those entering the market to sell their products, and even to those looking to license new technologies developed in recently established foreign incubators.

To address these challenges, and those posed by an intertwined government and health care system, WLF recommended that companies approach these areas “with the expectation that even the slightest appearance of impropriety may draw significant law enforcement scrutiny.”

In the end, Breuer counseled potential targets of FCPA scrutiny to ensure they have a “rigorous FCPA compliance policy that is faithfully enforced,” to “seriously consider voluntarily disclosing” violations that are discovered, and to quickly remediate the source of any violations. He noted that failure to take these steps can result in substantial negative consequences including significant criminal fines and possible exclusion from Medicare and Medicaid. Fines and penalties can range from $10,000 to $500,000, and can result in debarment from federal health care programs. Meaning that companies cannot sell their products to programs such as Medicare, Medicaid, and Veterans.

Accordingly, WLF noted that meeting the “DOJ’s compliance mandate is neither simple nor inexpensive, but is critical for pharmaceutical and medical device companies hoping to avoid, or at least successfully weather, corruption-related scrutiny from U.S. or non-U.S. law enforcement.