SEC Provides Insight Into The Foreign Corrupt Practices Act and Life Science Companies
At yesterday’s session of CBI’s Pharmaceutical Compliance Conference in Washington, DC, Andrew Ceresney, Director of Enforcement at the Securities and Exchange Commission, provided compliance officers with an eye-opening look at the many ways SEC seeks out violations of the Foreign Corrupt Practices Act. He focused on three types of potential interactions that pharma reps in foreign countries have with healthcare professionals that most often raise FCPA concerns. These are “pay-to-prescribe” cases, bribes to get drug products on a formulary or approved list, and bribes “disguised as charitable contributions.” Ceresney also went through accounting and disclosure issues that companies should watch out for in order to avoid the wrath of the SEC.
The life science industry is vulnerable to bribery allegations overseas because pharma reps have “regular contact with doctors, pharmacists, and administrators from public hospitals in foreign countries,” Ceresney states. “These people often are classified as foreign officials for purposes of the FCPA, and they often decide what products public hospitals or pharmacies will purchase.”
Pay-to-Prescribe cases: “Some of our cases involve simple cash payments to doctors and other medical officials,” notes Ceresney. However he also brought up numerous examples of “more innovative schemes created for the purposes of rewarding prescribing physicians.” He mentioned the SEC’s case against Pfizer in 2012 in which employees in China rewarded “high-prescribing doctors” in the Chinese government with entertainment functions. He stated that the company also created various “point programs” where doctors could accumulate points based on Pfizer prescriptions, and redeem there for medical books, tea sets, cell phones, and reading glasses. In Croatia, Pfizer reps also rewarded doctors for agreeing to use Pfizer products.
Bribes for Formulary placement: Ceresney stated that SEC brought a case against Eli Lilly where the company’s Poland subsidiary paid $39,000 to a small foundation started by the head of a regional government health authority. That official placed Eli Lilly’s drugs on the government reimbursement list in exchange. Eli Lilly ended up paying $29 million to settle.
Bribes Disguised as Charitable Contributions: “The FCPA prohibits giving ‘anything of value’ to a foreign official to induce an official action to obtain or retain business, and we take an expansive view of the phrase ‘anything of value,’” advised Ceresney. In addition to the Eli Lilly case above, the SEC settled with Stryker for $13.2 million after a Greek subsidiary allegedly made a donation of $200,000 to a public university to fund a “pet project” of a doctor in exchange for business. SEC also brought charges against Schering-Plough for a $76,000 donation paid by the company’s Polish subsidiary to a charitable foundation headed by the director of a governmental body that funded the purchase of pharmaceutical products and that influenced the purchase of those products by hospitals.
“The lesson is that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry,” stated Ceresney, who believes that companies have improved their FCPA compliance in recent years. “The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance.”
Ceresney encouraged attendees to check out the SEC-DOJs joint “Resource Guide to the U.S. Foreign Corrupt Practices Act.” He noted that many pharmaceutical operate in “high risk countries prone to corruption.” This resource provides a thorough outline of the FCPA’s anti-bribery and accounting provisions to mitigate the risk. Ceresney stressed that compliance programs must focus on third party and distributor due diligence. Using distributors “creates the risk that the distributor will use their margin or spread to create a slush fund of cash that will be used to pay bribes to foreign officials,” he stated. “Because of this added layer of cash flow, companies frequently improperly account for bribes as legitimate expenses.” To properly control for this, companies must ensure that payments to third-parties are legitimate business expenses and “thoroughly vet third-party agents.”
Self-Reporting
Like many government speakers and panels at compliance conferences, Ceresney put a plug in for self-reporting. “Self-reporting and cooperation allows us to detect and investigate misconduct more quickly than we otherwise could, as companies are often in a position to short circuit our investigations by quickly providing important factual information about misconduct resulting from their own internal investigations,” he stated. The SEC is also “focused on making sure that people understand” the benefits associated with self-disclosure. “The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation.”
For example, earlier this year the agency entered into a deferred prosecution agreement with an engineering and construction firm that self-reported misconduct related to bribing foreign officials. Often the agency will levy reduced penalties on companies that cooperate. “Our joint SEC-DOJ FCPA settlement with Bio-Rad Laboratories for $55 million reflected a substantial reduction in penalties due to the company’s considerable cooperation in our investigation,” he noted. There, Bio-Rad “provided translations of numerous key documents, produced witnesses from foreign jurisdictions, and undertook extensive remedial actions.” View our look at that case here.
“I will add,” Ceresney warned, “when we find the violations on our own, and the company chose not to self-report, the consequences are worse and the opportunity to earn significant credit for cooperation often has been lost.” He believes the potential of a whistleblower suit only adds to the uncertainty and risk when a company fails to self-report. It’s a “huge gamble,” he noted.
Accounting and Disclosures in Financial Reports
“We at the SEC view accurate financial reporting as going right to the heart of investor protection in our capital markets,” states Ceresney. “Investors deserve accurate financial and related information about companies so that they can make appropriate investing decisions.” He noted that the number of enforcement actions brought by the SEC increased by over 40 percent in 2014 compared to 2013. Ceresney spoke to the importance of internal control, which have been “prominently featured” in recent SEC cases. He offered companies some guidance on this topic, stating that problems often arise when internal controls are not tailored to the particular business or aren’t updated as the business grows. He also advised senior leadership to ask “tough questions” about financial reporting and not turn a blind eye to potential problems.
Lastly, Ceresney spoke to the issue of appropriate disclosures made by companies on their SEC Form 8-K, the document used to alert shareholders of any material developments. “One significant type of key event that we see causing problems with disclosure in your industry is disclosures on your dealings with the FDA,” he advised. “FDA dealings and approvals are the lifeblood of your business and are so important to investment decisions.” SEC recently charged a medical tech company and its management with making “material misstatements and omissions in [the company’s] public filings about the timing of the company’s Food and Drug Administration application.”
“The message from these cases is that you need to be completely accurate in recounting your dealings with the FDA,” Ceresney added. “So much turns on those interactions and not being straight with investors will have significant consequences.”
Ceresney provided an important point in conclusion: “Companies often discover FCPA violations when investigating accounting problems or when implementing internal controls, particularly expense controls, so I believe that your efforts in each of these areas can be seen as mutually reinforcing – if you put in place internal controls designed to prevent and detect FCPA violations, you can end up preventing accounting and disclosure violations, and vice versa.” View the full text of Ceresney’s presentation here.
SEC’s address highlighted the FCPA’s broad reach. As companies continue to tap into global markets, they must place a priority on monitoring their international marketing for potential bribery issues. We will continue to follow SEC’s activity in this space.