As the seventh largest economy in the world, “Brazil represents an attractive marketplace for any company in the healthcare sector with international growth ambitions. Brazil ranks as the top recipient of foreign direct investment in Latin America and is the world’s ninth largest market (worth nearly $15.5 billion) for pharmaceuticals and drugs. However, “Brazil is widely perceived as a country wrought with corruption at every level.” According to Transparency International’s Global Corruption Perceptions Index for 2011, Brazil ranks 73 out of 182 in, with a score of 3.8 (scores range between 0 (highly corrupt) and 10 (highly clean)); by comparison, the United States is at 24, with a score of 7.1.
Almost seventy percent of companies surveyed by the International Finance Corporation of the World Bank perceive corruption to be a “major constraint” for doing business in Brazil. A significant number of international companies report that they have been subjected to requests for bribes and other unofficial payments from public officials when applying for licenses and registrations necessary to conduct business in Brazil. The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have brought at least four actions against foreign companies conducting business in Brazil for corruption: (1) Embraer; (2) Panalpina, Inc. (DOJ and SEC Actions); (3) Nature’s Sunshine Products, Inc. (SEC Action); and (4) Tyco International Ltd. (SEC Action).
Despite these obstacles the authors of a recent article from the Food and Drug Law Institute (FDLI) examined the implications of the Foreign Corrupt Practices Act (FCPA) in Brazil. The authors, three attorneys from Skadden Arps, assert that companies can take certain steps to manage these risks in Brazil. Nevertheless, it is important for companies to recognize that “the threat of potential prosecution under the FCPA differs little in many respects from the threat of prosecution in the United States under the Anti-kickback statute or for violation of the federal Food Drug and Cosmetic Act” (FDCA). Critical to safely navigating an investment in Brazil is
- an understanding of the multi-layered government regulatory environment,
- having a clear plan for assuring FCPA compliance, and
- working hard with Brazilian partners to remain compliant.
Brazil’s Healthcare Agencies
Companies will encounter multiple Brazilian health agencies involved in regulating the sale of healthcare products, including drugs and medical devices. All of these organizations play a role in the development and sale of pharmaceutical products and medical devices within Brazil. Each presents a potential FCPA risk; understanding this structure is the first step towards assuring a safe investment.
At the top, is Brazil’s Ministry of Health, the federal executive branch responsible for public health in Brazil and oversees Brazil’s national health system. Numerous public agencies, foundations, secretariats, and other public health institutions comprise the Ministry. Among these, the Fundação Oswaldo Cruz Foundation (“Fiocruz”) is a scientific foundation for research and development in biomedical sciences. Two noteworthy institutions reside within Fiocruz.
First, the Institute of Drug Technology (“Farmanguinhos”) is the largest pharmaceutical company officially linked to Brazil’s Ministry of Health. Farmanguinhos produces over one billion different products each year that are distributed by Brazil’s Unified Health System to meet demands in Brazil and abroad. Among the drugs produced by Farmanguinhos are antibiotics, anti-inflammatories, pain relievers, medicines for endemic diseases (such as malaria and tuberculosis), antiretroviral AIDS, and drugs for cardiovascular and central nervous system.
Second, Brazil’s Immunobiological Technology Institute (“Bio-Manguinhos”) produces and develops immunobiological items including vaccines, laboratory reagents, diagnosis kits, and biopharmaceuticals and is the main immunobiological provider to the Ministry of Health. Bio-Manguinhos supplies forty-seven percent of the vaccines for Brazil’s national immunization program. Bio- Manguinhos is the leading exporter of human vaccines in Brazil, and contributes significantly to the total export sales of pharmaceuticals from Brazil.
Brazil also has the National Health Surveillance Agency (“Anvisa”), an independently administered and financially-autonomous regulatory agency within the government of Brazil that is linked to the Ministry of Health through a management contract. Anvisa is responsible for regulating, controlling, and inspecting products and services that have the potential to pose risks to public health. Among other things, Anvisa monitors and regulates drugs, medical devices and controls, and smoking products, and provides technical support in the grant of patents.
Regulatory Requirements In Brazil’s Pharmaceutical Industry
Brazil is perceived to have the most burdensome government administrative requirements of any country in the world, and Brazil’s pharmaceutical industry is likewise subject to extensive regulation. For example, any pharmaceutical firm seeking to operate in Brazil must register its products with Anvisa. Anvisa requires that a full array of clinical testing be performed in Brazil, regardless whether the drug already has FDA approval. Anvisa approval must also be obtained prior to the issuance of any pharmaceutical patent; this rule has contributed to a significant backlog of pharmaceutical patent applications. Finally, a foreign company seeking to market a pharmaceutical product must have a domestic partner, given the Latin American business culture’s reliance on personal relationships.
Recent Developments In Brazil’s Efforts To Combat Corruption
Like many countries, Brazil has recently taken steps to combat government corruption. The National Congress of Brazil is currently considering a bill, revised in March 2012, that would substantially strengthen its foreign bribery law. Highlights of the bill include
- direct civil liability for corporations for acts of their directors, officers, or employees,
- harsh sanctions with fines between 0.1 and 20% of a company’s gross revenue for the previous year, and
- credit for voluntary disclosures and compliance programs.
The Congress is expecting to vote on the legislation before July 2012. In 2010, Brazil also enacted legislation disqualifying anyone convicted of a serious crime from running for political office at any level for eight years. Brazil’s Comptroller General also maintains an on-line “Transparency Portal” that allows any citizen to monitor federal accounts and contains information concerning government spending and transfers of government funds.
Implementation Of Formal FCPA Compliance Procedures
The article offers recommendations for companies seeking to conduct business in Brazil. First, the authors recommend that a company implement formal FCPA compliance procedures as part of its overall internal controls and compliance program. While the existence of an effective FCPA program may not fully shield a company from an FCPA inquiry, it may reduce the scope of an enforcement proceeding and lessen penalties. The SEC and DOJ have both indicated that a statement in a company’s code of ethics, without more, is not a sufficient FCPA compliance program. At a minimum, companies seeking to transact business in Brazil should:
- Establish a compliance code that clearly prohibits bribes and other forms of corruption: Companies should develop clearly articulated corporate policies requiring compliance with the FCPA, including the establishment of compliance standards and procedures to be followed by all directors, officers, and employees, as well as all business partners, such as agents, consultants, and joint venturers.
- Establish an independent compliance Force: A top corporate officials should be responsible for implementation and oversight of all regulatory and compliance policies, standards, and procedures, including with respect to the FCPA.
- Implement an effective FCPA training program: Companies must ensure that all of their directors, officers, employees, agents, and business partners are aware of and understand their compliance policies and procedures regarding the FCPA by requiring:
- All employees be trained on FCPA, with periodic refresher courses, and
- Annual certifications attesting to compliance with FCPA policies.
- Establish a system for reporting potential violations: Companies should implement a reporting system for directors, officers, employees, agents, and business partners for reporting suspected violations of company policies, or suspected criminal conduct.
- Take appropriate remedial action if violations occur: Companies must respond appropriately to actual or suspected violations of the FCPA or compliance programs. This includes taking appropriate disciplinary action against employees, and terminating relationships with agents and business partners that commit such violations.
- Conduct thorough due diligence of all agents and business partners: Companies should establish policies requiring extensive pre-retention due diligence of all agents and business partners. These policies should include a detailed, step-by-step vetting process, as well as post-retention oversight of the agent or business partner. Records of the due diligence process should be created and retained.
- Contracts with third-parties should require compliance with the FCPA: All contracts with agents and business partners should be in writing and require compliance with the FCPA. In particular, such contracts should include provisions that:
- Set forth the requirements of the FCPA and require compliance therewith;
- Allow audits of the books and records of the agent or business partner for FCPA related issues; and
- Permit termination of the relationship with any agent or business partner in the event of an FCPA violation.
- Impose appropriate internal controls: Companies should establish i nancial and accounting procedures designed to ensure proper maintenance of a system of internal accounting controls and accurate books, records, and accounts in compliance with the FCPA.
- Conduct internal FCPA compliance audits: Companies should conduct audits at regular intervals to ensure that their compliance programs, including their anticorruption provisions, are effective and implemented properly.
Embarking on that First Transaction
The authors acknowledge that, “Good communication from the outset of negotiations with the potential Brazilian business partners is critical.” “Critical to this communication is gaining an understanding that your partner in Brazil may have to allow you to conduct an on-site review of their business operations.”
It is also critical to develop and portray a vigilant attitude on FCPA compliance, both internally and externally. This is done both through effective communications by corporate leadership and during all key steps of the investment process. The authors tell companies to ask the following questions:
- As regards the proposed transaction, what are the regulatory requirements that must be met in Brazil?
- Does this person’s position present the potential for engaging in corrupt activities associated with the proposed transaction, either in establishing it, or in achieving local regulatory compliance in its downstream execution?
- In the event allegations of corruption emerge, and a DOJ investigation ensues, will the failure to have interviewed this individual prior to embarking on the transaction be considered a failure in due diligence?
Companies should also inquire whether their potential Brazilian partner has come under investigation by law enforcement authorities in Brazil. Unlike in the United States, individuals and businesses under investigation in Brazil have the right to access certain investigative files, including communications between prosecutors and the police about the substance of the investigation. Reviewing such materials may answer many questions concerning the propriety of engaging in the proposed transaction.
Conclusion
Ultimately, the authors maintain that the risk of business corruption in Brazil can be safely managed through “careful, competent and thorough management of the risks at the outset and during the business relationship.” Such actions must “assure that everyone understands the importance of compliance and so that, in the event of isolated employee or business partner misconduct, the appropriate prosecutive authorities recognize that you and your organization has an excellent culture of compliance and has conducted its business operations at home and abroad in the manner that society could reasonably have expected.”
