Archive for the ‘Pharmaceutical Industry’ Category

Friday Roundup

Friday, April 11th, 2014

It’s a complex world, you ask – I answer, scrutiny alerts and updates, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

It’s a Complex World

The world in which we live in is seldom simple and straight-forward.  This includes the so-called “fight” against corruption and bribery.  Regarding China’s “crackdown” on bribery, the BBC China Blog reports:

“Much has been written about China’s ongoing crackdown on corruption, but now one of the world’s biggest banks has put a price on it.  According to a report published by Bank of America Merrill Lynch this week, the Chinese government’s anti-graft campaign could cost the economy more than $100bn this year alone. [...]  Many of the micro effects of Xi Jingping’s anti-corruption drive have already been well documented of course; a slowdown in the restaurant trade for example, and a big dip in sales of luxury goods.  Over the past year or so, in Shanghai’s posh malls and boutique designer shops – once at the centre of the happy merry-go-round of official largesse and gift giving – you’ve almost been able to hear the sound of the weeping and gnashing of teeth. But the BofAML report suggests that the campaign is also having a significant and troubling macroeconomic effect.  Since early last year, it says, government bank deposits have been soaring, up almost 30% year on year. Even honest officials, the report suggests, are now so terrified of starting new projects, for fear of being seen as corrupt, that they’re simply keeping public funds in the bank.  [...] The report’s authors admit their calculations are a “back-of-the-envelope estimate of fiscal contraction”, but even if they are only half right it is an extraordinary amount of money and it highlights some of the challenges facing China’s anti-corruption crusader-in-chief, President Xi Jinping.”

Some-what related to the above topic, as noted in this Washington Times article:

“A key player in Nigeria’s emergence as Africa’s largest economy says U.S. companies are ceding investment opportunities to China and the Obama administration should do more to reverse the trend.  “The Obama administration has to focus more on Nigeria, said Prince Adetokunbo Sijuwade, whose family holds royal status in a vital corner of southern Nigeria and is invested heavily in transportation and oil infrastructures. “We feel that we can learn from the U.S. in terms of expertise. [...]  Prince Sijuwade speculated that several factors may have deterred U.S. investors in recent years, from concerns about government corruption to security. But he argued that allegations of widespread corruption in Nigeria are “overstated.”“Corruption is all over the world,” he said, noting potential U.S. investors’ fears of violating the Justice Department’s anti-corruption laws as an inhibiting factor on Nigerian investment.”

You Ask – I Answer

This op-ed poses the question “what’s driving pharma’s international bribery scandals?”

You ask – I answer.

A dubious and untested enforcement theory + extreme risk aversion because of potential exclusion from government sponsored healthcare programs + other typical reasons for why other companies face FCPA scrutiny, such as employees and third parties acting contrary to a company’s good-faith compliance policies and procedures = several FCPA enforcement actions against pharma and healthcare related companies.

Scrutiny Alerts and Updates

The Wall Street Journal reported earlier this week:

“GlaxoSmithKline PLC is investigating allegations of bribery by employees in the Middle East, according to emails reviewed by The Wall Street Journal, opening a new front for the company as it manages a separate corruption probe in China.  A person familiar with Glaxo’s Mideast operations emailed the U.K. drug company late last year and earlier this year to report what the person said were corrupt practices in Iraq, including continuing issues and alleged misconduct dating from last year and 2012. The emails cite behavior similar to Glaxo’s alleged misconduct in China, including alleged bribery of physicians. [...]  In an email, the person said Glaxo hired 16 government-employed physicians and pharmacists in Iraq as paid sales representatives for the company while they continued to work for the government. A government-employed Iraqi emergency-room physician has prescribed Glaxo products, even when they weren’t in the hospital’s pharmacy and a competitor’s brand was in stock, an email from the person said. Glaxo has been hiring government-employed Iraqi doctors as medical representatives and paying their expenses to attend international conferences, the person alleged in the emails. Glaxo pays other doctors high fees to give lectures in exchange for promoting and prescribing its drugs, the allegations continued. After Glaxo won a contract with the Iraqi Ministry of Health in 2012 to supply the company’s Rotarix vaccine, Glaxo paid for a workshop in Lebanon for Iraqi Ministry of Health officials, the email said. That included paying for a doctor’s family to travel to Lebanon “so it would be a family vacation for him at the hotel.”

As noted in the article, GSK has been under FCPA scrutiny since 2011 and GSK’s scrutiny China was the frequent focus of media attention last summer (see here for the prior post).

Quotable

Russel Ryan (King & Spalding and former high-ranking SEC enforcement attorney) hits a home run with this recent Wall Street Journal editorial titled:  ”When Regulators Think They Are Prosecutors.”  It states, in pertinent part:

“[A]dministrative agencies like the SEC were never intended to become arms of law enforcement. They were created to regulate, not prosecute. [...]  There are good constitutional reasons why agencies like the SEC were not born with this power to prosecute and punish. Prosecuting private citizens and companies is serious business. It’s a core executive branch function historically entrusted to the attorney general, a “principal Officer” subject to unfettered presidential control under Article II of the Constitution. [...]   [I]f policy makers insist on transforming the commission and similar agencies into quasi-criminal prosecutors with ever-increasing power to seek harsh punitive sanctions, those agencies should be brought under the stewardship of the attorney general or given cabinet rank with leaders who are removable at the president’s pleasure. Even that wouldn’t cure a second level of constitutional infirmity. Based mostly on precedent established before the SEC had any power to punish, courts have exempted SEC prosecutions from many bedrock due-process protections taken for granted in criminal cases. The presumption of innocence, for example, is largely meaningless because the SEC can win by a mere “preponderance of the evidence” rather than proof beyond reasonable doubt. The right to remain silent is equally hollow because courts let the SEC treat silence as evidence of guilt. For SEC defendants who can’t afford a good lawyer, tough luck, because there’s no right to have counsel appointed at government expense as there would be in a criminal prosecution. And even when the SEC loses after trial, double jeopardy doesn’t prevent it from trying to reverse the verdict or force a retrial, as it would a criminal prosecutor.  Dodd-Frank made things even worse by expanding the SEC’s ability to impose draconian financial penalties in administrative proceedings that have lax evidentiary rules, no jury trial, and limited judicial oversight.Basic constitutional safeguards should protect American citizens and businesses whenever a law-enforcement agency seeks to punish them for alleged wrongdoing, even in nominally civil proceedings. It’s time to incorporate those safeguards into an increasingly penal administrative prosecution system that is quickly sliding down a slick and constitutionally hazardous slope.”

For Ryan’s previous guest post on similar issues, see here.

Reading Stack

Certain of the conduct at issue in this week’s FCPA enforcement action against HP and related entities concerned alleged conduct in Poland.  This article from a Polish news service looks at what happens “when the dust settles.”

An insightful post on the Trace Blog from a former DOJ FCPA enforcement attorney who oversaw several monitors titled “Five Questions That can Keep Your Monitor From Running Away.”  Perhaps the best question though is: are monitors truly needed in many FCPA resolutions?  (See here and here for prior posts).

For your viewing enjoyment here, recently indicted Ukrainian businessman Dmytro Firtash (see here) has released a video which insists he is an innocent party caught at the center of a “battlefield for the two biggest global players of Russia and the USA”.

*****

A good weekend to all.

Potpourri

Tuesday, September 24th, 2013

Countering the contagion effect and please come to Cambodia.

Countering the Contagion Effect

A contagion effect generally refers to how one company’s actions or scrutiny can spread throughout an entire industry in which the company operates.

Much has been written about pharmaceutical company GlaxoSmithKline’s scrutiny in China (see here) and how GSK’s scrutiny has led to scrutiny of other multinational pharmaceutical companies operating in China.

In a recent conference call with investors, global healthcare products company Covidien sought to pro-actively counter the contagion effect.  During the call, the first words out of the mouth of Covidien Chairman, President and CEO Jose Almeida were as follows.

“Before we get into the strategy, let me spend a moment and  speak about three things that are very important to our company; ethics,  integrity and the quality of what we make. There’s been a lot of conversation  about FCPA  issues in China, Russia, Brazil. You hear that a lot and read them a lot in the  Wall Street Journal in the last two months.  Covidien has an unparalleled effort in creating an  environment where our employees are trained and they practice ethical behavior.  There’s no good business where there’s no ethics behind the business of our  products.  We’re very proud to have pioneered  significant amount of changes in how we do business in many countries in the  world. We were early adopters of the code of [EviMed] but not only we adopt it  for the US, we moved that code and we have it on a global basis.  Covidien provides a significant amount of training  for our sales reps in every part of the world, telling them what is right and  what is not right. We also have compliance committees and grants committees that  absolutely filter any kind of disbursement of money that would go to a society  or training of physicians.  Covidien does not permit, or it does not pay for physicians  to travel from their country of origin to attend any third-party conference in a  different country. We stopped doing that close to four years ago, because we  thought that some of the practices were not aligned with our code of conduct,  and how Covidien wants to do business.  So we have 38,000 employees around the globe and I can tell you that we do  everything we can to make sure that we’re doing the right things for our  customers and doing them in an ethical way. We also have patient safety at the  top of our mind all the time. Quality of our products is the most important  thing that we have. It’s not just about the reputation of the company; it is  about the patient that is receiving their treatment. And not having adherence to  quality will create an issue in safety for those patients, and we feel very  proud about our track record.”

Please Come to Cambodia

Much has been written about whether the FCPA and its enforcement deters foreign investment.  (See here for instance).

Companies obviously make foreign investment decisions based on a host of legal and non-legal risks and thus empirically separating and measuring the impact of FCPA enforcement on foreign investment decisions is difficult.  Moreover, despite the general rise in FCPA enforcement concerning conduct in certain high risk jurisdictions such as China, India, and Brazil, there continues to be vast amounts of foreign direct investment in those countries by companies subject to the FCPA prohibitions.

Any “evidence” that the FCPA and its enforcement deters foreign investment thus tends to be anecdotal.

Such as this recent article in the Cambodia Daily concerning recent remarks by U.S. Ambassador William Todd.

According to the article, despite Todd’s “efforts to promote Cambodia as an attractive destination for business, major American companies are reluctant to invest here as they still perceive the country as indelibly corrupt.”  The article quotes Todd as follows.

“I believe now is the time for big U.S. businesses to come here. And I believe that they want to come here—but I believe that the issue about corruption is preventing them from coming here.”

“The corruption issue, to be frank with you, has created what we think is a drag on the economy. It’s basically something that’s prevented a lot of U.S. businesses from coming in here.”

“I see probably three or four companies a week who want to do business here in Cambodia, who either want to buy things, or sell things, or open things,” he said, “and I’ve seen some very large business—some of America’s largest—and they want to basically make 100-billion-dollar investments, 200-billion-dollar investments and so on, but they get scared off.”

Friday Roundup

Friday, August 23rd, 2013

In the classroom, what if, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

In the Classroom

I am pleased to share this release concerning a new Foreign Corrupt Practices Act class I am teaching this semester at Southern Illinois University School of Law.  As noted in the release, the course is believed to be one of the first specific FCPA law school classes offered that is exclusively devoted to the FCPA, FCPA enforcement and FCPA compliance.

I am grateful for the media coverage the class has attracted.  See here from Corporate Counsel, here from Main Justice, and here from Corporate Crime Reporter.

What If?

As highlighted in this previous post concerning JPMorgan’s scrutiny in China,  the conduct at issue in the front-page New York Times article was disclosed (sort of) in the company’s August 7th quarterly filing.  That filing identified, under the heading “Regulatory Developments” the following.

“A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.”

In the disclosure context, it has been noted by various courts that once a company “speaks” on an issue, its statements to the market can not be so incomplete as to be misleading.  Was JPMorgan’s August 7th disclosure misleading?  If not misleading, a bit “too cute?”  If JPMorgan’s August 7th disclosure mentioned the reason for the SEC’s request for information and that the request was in connection with an FCPA inquiry, would there even have been a front-page article in the NY Times on August 18th?  And if there was no front-page NY Times article would JPMorgan’s FCPA scrutiny have dominated the news this week?

Scrutiny Alerts and Updates

Entertainment Gaming Asia

Entertainment Gaming Asia, Inc., a company with shares listed on NASDAQ, is the focus of this article in the Cambodia Daily which states:

“Venturing into Cambodia’s casino market in May 2011, Macau-backed gambling firm Entertainment Gaming Asia (EGA) promised tens of thousands of dollars to the wife of Pailin’s provincial governor in order to lease land for the construction of a new casino … [...]   There is no suggestion that the land lease arrangement breaks any laws.  But EGA’s registration with the SEC means the company is subject to the U.S. Foreign Corrupt Practices Act (FCPA). [...] EGA senior vice president Traci Mangini declined to comment on the land-lease arrangement.“We are not available for comment,” Ms. Mangini said in an email. Contacted this week, Mr. Chhean [who has held the powerful local position of governor in Pailin for more than a decade] insisted there was nothing improper about the land being rented from his wife. “It is correct that they hire the land [from my wife], they have hired it for two years already,” he said. He said the casino was fully approved by the government in Phnom Penh, and that he had no role in the licensing decision. Mr. Chhean said there was nothing inappropriate about the wife of a governor having business interests.”

Microsoft

This March 2013 post highlighted Microsoft’s FCPA scrutiny and how the DOJ and SEC “are examining kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy.”  Add Pakistan and Russia to the list.  As reported in this Wall Street Journal article:

“In Russia, an anonymous tipster told Microsoft that resellers of its software allegedly funneled kickbacks to executives of a state-owned company to win a deal, the people familiar with the matter said. In Pakistan, a tipster alleged that Microsoft authorized a consulting firm to pay for a five day trip to Egypt for a government official and his wife in order to win a tender, the people familiar with the matter said. The two contacted Microsoft directly in the last eight months, the people said.”

Eli Lilly

In December 2012, Eli Lilly agreed to pay $29 million to resolve an SEC FCPA enforcement action concerning alleged conduct in China, Brazil, Poland and Russia (see here for the prior post).

Lilly is again under scrutiny.  As referenced here by Reuters:

“U.S. drugmaker Eli Lilly and Co said it was ‘deeply concerned’ about allegations published in a Chinese newspaper that it spent more than 30 million yuan ($4.90 million) to bribe doctors in China to prescribe the firm’s medicines instead of rival products. A former senior manager for the company, identified by the pseudonym Wang Wei, told the 21st Century Business Herald that bribery and illegal payments at Eli Lilly’s China operations were widespread. [...] Eli Lilly said in an emailed statement to Reuters that it was looking into the matter. ‘Although we have not been able to verify these allegations, we take them seriously, and we are continuing our investigation,’ the statement said. The U.S. firm said it had been made aware of “similar allegations” of kickbacks in 2012 by a former sales manager. It said the firm had opened an investigation at that time involving staff interviews, e-mail monitoring and expense report audits.”

For the Reading Stack

Informative posts here and here on the FCPAmericas blog on how Brazil’s new bribery law compares to the FCPA.  Also on the FCPAmericas blog, informative posts here and here regarding the unknows of the law.

In reference to JPMorgan’s FCPA scrutiny over its alleged hiring of family members of alleged “foreign officials,” this article in the Economist states:

“Connections also count in the West, of course. Following initial reports of the SEC’s investigation in the New York Times, a flood of stories have noted the jobs held in politically sensitive American firms by the sprogs of American politicians. Even when offspring are not involved, the revolving door between the public and private sectors raises questions about why people are hired. JPMorgan Chase did not hire Tony Blair as a senior adviser for his knowledge of risk weights, after all. Mary Schapiro, a former head of the SEC, recently joined Promontory, a consultancy packed with ex-regulators used by banks to cope with regulation (she has said she will not lobby any government body in her new role). If it is unfair to cite these names, it is only because there are so many others. If the regulators genuinely fret about why firms make hiring decisions, they may want to extend their inquiries to Washington, DC, and New York as well.”

In the context of GlaxoSmithKline’s scrutiny in China, this Wall Street Journal article highlights “China’s fast-growing but deeply underfunded medical system” where “doctors are widely seen as underpaid, which makes them prime recipients of honorariums, which are
legal, or illegal cuts of sales from drug companies …”.

*****

A good weekend to all.

Friday Roundup

Friday, August 2nd, 2013

Scrutiny alerts, misleading yet interesting, the flip side, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Updates

Baxter International

The Wall Street Journal reports that Baxter International “investigated a joint venture in China and discovered expense violations there last year.”  According to the article, Baxter took action after employees of Guangzhou Baxter Qiaoguang Healthcare Co., reported problems internally in July 2012.  According to the article, similar allegations were made in July 2013 that “employees at Baxter’s joint venture paid travel agencies for arranging conferences between 2011 and 2012 for Chinese health officials.”  According to the article, “employees at several hotels identified as the conference sites in the documents said they had no records of the conferences.”

ENI

IntelliNews report here:  “ENI SpA  chief executive Paolo Scaroni will become a target of a major US Foreign Corruption Practices Act investigation by the US Department of Justice and the US Securities Exchange Commission in connection with an Algerian bribery scandal, [Italian] judicial sources said.” Among other things, the article states: “Judicial sources in Milan said they have compelling evidence Scaroni had personal knowledge of the bribe paid by SAIPEM and that SAIPEM is directly controlled by ENI and its management.”

As noted in this previous post, Eni has ADRs registered with the SEC.  In 2010, Eni resolved (see here) an SEC FCPA enforcement action concerning Bonny Island, Nigeria conduct.  In resolving the action, Eni consented to the entry of a court order permanently enjoining it from violating the FCPA’s books and record and internal controls provisions.

Weatherford

The company recently disclosed as follows concerning its long-lasting FCPA scrutiny.

“During the quarter ended June 30, 2013, negotiations related to the oil-for-food and FCPA matters progressed to a point where we recognized a liability for a  loss contingency that we believe is probable and for which a reasonable estimate  can be made.  Certain significant issues remain unresolved in the negotiations and, if these issues are not resolved to the Company’s satisfaction,  negotiations may be discontinued and such unresolved issues may ultimately  impact our ability to reach a negotiated resolution of the matters.  At this  time, the Company estimates that the most likely amount of this loss is $153 million.”

A $153 million settlement would be the eighth largest in FCPA history.

Avon

The company recently disclosed as follows concerning its long-lasting FCPA scrutiny.

“As previously reported in August 2012, we are in discussions with the SEC and the DOJ regarding resolving the government investigations. Our factual presentations as part of these discussions are substantially complete. In June 2013, we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12. The DOJ and the SEC have rejected the terms of our offer. Although we expect that the DOJ and the SEC will make a counterproposal to our offer, they have not yet done so. Our discussions with the DOJ and the SEC are ongoing.

There can be no assurance that a settlement with the SEC and the DOJ will be reached or, if a settlement is reached, the timing of any such settlement or the terms of any such settlement. We expect any such settlement will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlement with the SEC and the DOJ. Under certain circumstances, we may also be required to advance significant professional fees and expenses to certain current and former Company employees in connection with these matters. Until any settlement or other resolution of these matters, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations.
At this point we are unable to predict the developments in, outcome of, and economic and other consequences of the government investigations or their impact on our earnings, cash flows, liquidity, financial condition and ongoing business.  However, based on our most recent discussions with the DOJ and the SEC, the Company believes that it is probable that the Company will incur a loss upon settlement that is higher than the offer made by the Company of approximately $12, which was accrued by the Company as of June 30, 2013. We are unable to reasonably estimate the amount of any additional loss above the amount accrued to date; however it is reasonably possible that such additional loss will be material.”

Owens-Illinois

The beverage company recently disclosed as follows.

“The Company conducted an internal investigation into conduct in certain of its overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (the “FCPA”), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). The Company intends to cooperate with any investigation by U.S. authorities. On July 18, 2013, the Company received a letter from the DOJ indicating that it presently did not intend to take any enforcement action and is closing its inquiry into the matter. The Company is presently unable to predict the duration, scope or result of any investigation by the SEC or whether the SEC will commence any legal action.”

AB InBev

The beverage company recently disclosed as follows.

“As previously disclosed, we have been informed by the SEC that it is conducting an investigation into our affiliates in India, including our non-consolidated Indian joint venture, InBev India Int’l Private Ltd, and whether certain relationships of agents and employees were compliant with the FCPA. We continue to cooperate in this investigation and have been informed by the Department of Justice (DOJ) that it is also conducting a similar investigation. Our investigation into the conduct in question is ongoing and we are cooperating with the SEC and the DOJ.”

Misleading Yet Interesting

Perhaps one reason for why there appears to much confusion about the FCPA and FCPA enforcement is due to the vast amount of misleading information in the public domain concerning the FCPA.

This recent article in the Economic Times of India concerning Wal-Mart is an instructive example.

Stating that the FCPA is a “law that prohibits American companies and their foreign subsidiaries from bribing officials” is not a completely accurate statement concerning the scope of the law.  Stating that “the anti-bribery provisions of the FCPA are enforced by the Department of Justice and the accounting provisions by the Securities and Exchange Commission” is not completely accurate either.  The SEC can also bring civil actions for FCPA anti-bribery violations and the DOJ can also bring criminal actions for wilful violations of the accounting provisions.

“In 2008, for example, Siemens paid a fine of $1.6 billion, the largest ever for an FCPA violation.”  This is a false statement.  While the Siemens enforcement action is indeed the largest in FCPA history in terms of fine and penalty amount, the amount was $800 million.”

Citing a source that says Wal-Mart’s FCPA scrutiny could result in an enforcement action ”between $4.5 billion and $9 billion” is outrageous beyond belief.

Despite its deficiencies, the article highlights an interesting tension between conducting a thorough internal investigation and the treatment of employees.  The article states:

“The long shadow of Bentonville, channelled by the permanent gaze of investigators, is causing angst among the Indian staff of Walmart. A company official quoted earlier says the army of investigators, who enjoy sweeping powers to seize documents and equipment of the staff, are seen by many employees as intrusive and as an extra-judicial authority in the office. For example, the investigators scan even the couriers sent out by the staff. The official quoted above says the objective to ensure FCPA compliance is causing even minor situations to snowball.”

[...]

“In another case, Richard Leonard, a British citizen and general manager for asset protection in India, was on a store visit to Ludhiana, that too with Asia head Price, when he received a frantic call from a colleague that KPMG executives were trying to seize his desktop computer and break open his drawer. He immediately called other colleagues, asking them to stop the investigators from taking possession of his workstation. On his return to the office, Leonard dashed off e-mails to his bosses, including Walmart’s global head Mike Duke, on how employees like him have lost respect in the office and they are being portrayed as “criminals” by independent auditors.”

The article also states:

“Walmart is asking all India employees who have left or been suspended to sign a three-page ‘consultancy and cooperation agreement’, ostensibly with the FCPA fallout in mind. The agreement essentially requires them to make themselves available to provide any information or explanation of materials or documents requested by Walmart or any government authority. “The manner in which lawyers and audit team are going about doing their business, I have started believing that I have done something wrong,” says an employee.”

The Flip Side

This Forbes columnist asks – in the context of GlaxoSmithKline –  ”is big pharma addicted to fraud?”

The question reminded me of the spot-on statement previously profiled here.  In a Law360 interview, Stephen Jonas (here), a partner in the Boston office of WilmerHale, was asked “what aspects of law in your practice are in need of reform, and why?”  He stated:

“One area greatly in need of reform, in my view, is the investigation of alleged health care fraud. This is an area in which the government regularly secures enormous settlements, starting in the tens of millions of dollars, and now exponentially expanding to the billions of dollars. Virtually every pharmaceutical company has now been subjected to one or more of these investigations and the results are predictable — enormous monetary contributions to the federal government. I find it hard to believe that wrongdoing is so rampant in this industry that every company has at least several hundred million dollars worth of it. The more likely answer is that these settlements often have far more to do with the leverage the government enjoys than the merits of what the company did or didn’t do. In order to stay in business, pharmaceutical and medical device companies must be able to sell products that can be paid for by Medicaid and Medicare. But a conviction for a health care offense would result in exclusion of the companies from federal health insurance and essentially a death sentence for their business. So they cannot afford to fight even the most debatable of charges. One of the results is that novel legal theories and sketchy evidence will never be tested in a court of law and negotiated settlements (under threat of exclusion) serve as “precedent” for the next case. That is a system badly in need of reform.”

Related to GSK, see here for my recent TV interview with LinkAsia.

Reading Stack

The always informative Miller & Chevalier FCPA Summer Review 2013.  As noted in the review “while investigation activity levels appear robust, the overall pace of  enforcement in 2013, in terms of resolved dispositions, remains at its lowest  level since 2006.”  This is correct, although difficult to square with a recent article from Compliance Week titled “FCPA Enforcement on the Rise Once Again.”  This is why an FCPA lingua franca is so important.  (See prior posts here and here).  Among other things, the Miller & Chevalier review contains useful charts including the nationality of companies under FCPA investigation and the countries implicated most frequently in FCPA enforcement actions.

Press coverage of BSG Resources and Beny Steinmetz (the wealthy Israeli for whom BSG Resources is named) regarding its business in Guinea continues.  (See this recent article from the U.K. Guardian).

An informative read from John Rupp (Covington) on how corporate interests and individual interests in a bribery investigation can collide and what corporate counsel can do to prevent this dynamic.

An interesting read from Trace Blog on how bribery schemes fall apart.  The post states:

“The reality is that many bribery schemes simply self-implode.  Think of it this way, once a bribe is paid, a corresponding debt is created to all who are involved in the scheme:  to the business partner who provides the funds; to the third party “consultant” who launders them through false pretense; to the accountant who cooks the books; to the bagman who delivers the payment; to each and every role player, big or small, who helps to bring about the bribe. At the time, loyalties may seem obvious: each co-conspirator will usually have a clear self-interest in keeping the bribery scheme hidden.  But as situations change, so too do incentives, and in business there are few guarantees as unsure as the honor among thieves.  [...] Think of all the bribery stories that have come to light simply by their own accord.”

*****

A good weekend to all.

 

Items Of Interest From GSK

Thursday, July 25th, 2013

By now you likely know that GlaxoSmithKline (“GSK”) is the subject of bribery scrutiny for its business practices in China.

This is hardly earth-shattering as the pharmaceutical industry (and more broadly the healthcare sector) has been the subject of much scrutiny in the past few years including for business practices in China.

What is unique about GSK’s scrutiny, as I explained to National Public Radio, is the Chinese government is investigating the alleged conduct at issue.

What is also interesting is the chronology of the story.

As noted in this prior post, last month the Wall Street Journal reported that GSK was “investigating allegations from an anonymous tipster that it sales staff in China was involved in widespread bribery of doctors to prescribe drugs, in some cases for unauthorized uses, between 2004 and 2010.”  As reported in the WSJ article, a Glaxo spokesman confirmed that the company was investigating the allegations, but that after thoroughly investigating “each and every claim” from the anonymous source, the company “has found no evidence of corruption or bribery in or China business.”

Earlier this week, GSK issued this release stating:

“Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behaviour of this nature.”

In short, that is quite a sequence of events and raises two questions.  How thorough was GSK’s earlier investigation and why didn’t the earlier investigation uncover the conduct disclosed earlier this week?

Yesterday, in an earnings conference call, GSK CEO Andrew Witty seemed to offer an explanation.  In actionable statements to the market, Witty suggested, not once, but several times, that the GSK-China employees defrauded the company.  The below cites are from a transcript of the earnings call posted by the website Seeking Alpha.

“Certain senior managers in the Chinese business have acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system. To see these allegations made about people working for GSK is as we have said shameful and for me personally they are deeply disappointing. The alleged activities are not what we expect of our people and are totally contrary to our values.”

“In terms of sales force practices, basically what we have been told, what we understand from the Chinese investigators is that, what happened here was a number of managers who seem to be operating outside of our processes and systems in controls to allegedly generate this fraud …”.

“We haven’t been able yet to get into a full investigation mode ourselves. But working with the Chinese authorities, it appear that this is a consequence of the individuals working outside of the controls and processes of the company to defraud the company as well as, so then go on and do things which are potentially illegal.”

“We are going to continue to work with the authorities on this, our understanding at this point in time from the authorities is that this is around individuals, and the co-people and the senior management of the company in China, who are alleged to have worked around our systems and controls to both defraud us and then to potentially do things in appropriate in the marketplace.”

Was GSK the victim of rogue employee conduct?

The U.S. Attorneys’ Manual recognizes that “no compliance program can ever prevent all criminal activity by a corporation’s employees.”  In addition, high-ranking DOJ officials have recognized that “there will always be employees who decide to take matters into their own hands – they are a fact of life,” and that “even the best compliance program may not stop fraud or corruption from occurring.”  The former Assistant Chief of the DOJ’s FCPA Unit candidly stated “most government attorneys realize that a company can take every reasonable step to prevent wrongdoing but ultimately is powerless if somebody really wants to break the law.”

If GSK was the victim of rogue employee conduct will it even matter?

Here it is interesting to note that difference between the U.K. Bribery Act and FCPA enforcement.

As reported elsewhere, the U.K. Serious Fraud Office is also investigating GSK - hardly surprising given that GSK is a U.K. based company.  If any of the conduct under investigation occurred after the Bribery Act went live on July 1, 2011, the Bribery Act would apply including Section 7 which states that a “commercial organization will have a full defense if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing.”  The U.K. Ministry of Justice has recognized  that “no policies or procedures are capable of detecting and preventing all bribery” and that “no bribery prevention regime will be capable of preventing bribery at all times.”

Adequate procedures or good faith compliance efforts of course are not relevant as a matter of law when it comes to FCPA enforcement (they should be – see my article Revisiting an FCPA Compliance Defense), but the enforcement agencies have stated that this is a factor considered in determining whether and how to proceed in a case.

The involvement of Chinese law enforcement, U.K. law enforcement, and U.S. law enforcement sets up a potential and very interesting competition issue.  China and the U.K. would seem to have a greater and more direct interest in the conduct at issue compared to the U.S.

China vs. U.K. competition could get very interesting given the U.K.’s unique double jeopardy provisions.  These provisions were highlighted in connection with the 2010 BAE enforcement action in the U.S. and U.K.  Even though the offense BAE pleaded guilty to in the U.S. was not an FCPA offense, the U.K. was limited in the charges it could bring against BAE under its double jeopardy principles because of the U.S. first-filed action.  Then Serious Fraud Office Director Richard Alderman, responded to my question as follows:

“Q: Are you suggesting that simply because facts are alleged in a U.S. prosecution to support a non-corruption charge, that the U.K. is thereby prohibited from bringing a corruption charge as to those facts?

A: Yes. Our double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offence. Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction. As a result I could not continue to consider whether to prosecute BAE for an offence relating to Central and Eastern Europe once BAE had pleaded guilty in the US.”

Even though the U.S would seem to have the least direct interest in the conduct at issue, should there be an FCPA enforcement action against GSK (it shares do trade on U.S. exchanges), the U.S. would likely extract the largest settlement amount.  Of course as a foreign issuer, GSK could only be subject to the FCPA’s anti-bribery provisions to the extent a “means or instrumentality of interstate commerce” were used in connection with any improper payment scheme.  Not so of course with the FCPA’s generic books and records and internal control provisions.

The evolution of GSK’s bribery scrutiny, the conduct of potential rogue employees, and the competition between various law enforcement agencies that is likely to ensue, these are the items of interest from GSK’s scrutiny.