In November 2009, then DOJ Assistant Attorney General Lanny Breuer delivered this Foreign Corrupt Practices Act speech at a pharmaceutical industry conference. In the speech, Breuer warned the audience as follows.
“[C]onsider the possible range of “foreign officials” who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, 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.”
In the speech, Breuer also talked about “the importance [of] rigorous FCPA compliance polic[ies] that are faithfully enforced” and reminded the audience as follows.
“[A]ny pharmaceutical company that discovers an FCPA violation should seriously consider voluntarily disclosing the violation and cooperating with the Department’s investigation. If you voluntarily disclose an FCPA violation, you will receive meaningful credit for that disclosure. And if you cooperate with the Department’s investigation, you will receive a meaningful benefit for that cooperation—without any request or requirement that you disclose privileged material. Finally, if you remediate the problem and take steps to ensure that it does not recur, you will benefit from that as well.”
Over five years and ten FCPA enforcement actions against pharma/healthcare companies later, Andrew Ceresney (Director of the SEC’s Enforcement Division) delivered a nearly identical speech earlier this week.
The below post excerpts Ceresney’s speech.
When reviewing the speech, you may want to keep the following in mind.
As highlighted in this prior post, the enforcement theory that physicians, lab personnel, etc. are “foreign officials” under the FCPA was first used in 2002 and has since been used in 17 corporate enforcement actions.
Even even though Ceresney’s speech contains several citations, it is telling that the following assertion lacks any citation “doctors, pharmacists, and administrators from public hospitals in foreign countries … are often are classified as foreign officials for purposes of the FCPA.”
There is no citation for this assertion because it is one of the most dubious enforcement theories of this new era of FCPA enforcement and an enforcement theory that finds no support in the FCPA’s extensive legislative history. (See here for “The Story of the Foreign Corrupt Practices Act“).
Of further note, despite extracting hundreds of millions of dollars from risk averse corporations based on this “foreign official” theory, the DOJ and SEC have never used this enforcement theory to charge any individual.
Another issue to consider.
As highlighted in this recent post, despite the continued foreign scrutiny of the pharma and healthcare industry, the corporate dollars continue to flow to U.S. physicians and other healthcare workers. It is one of the more glaring double standards when it comes to FCPA enforcement and enforcement of U.S. domestic bribery laws.
With that necessary information, to Ceresney began his speech as follows.
“Pursuing FCPA violations is a critical part of our enforcement efforts. International bribery has many nefarious impacts, including sapping investor confidence in the legitimacy of a company’s performance, undermining the accuracy of a company’s books and records and the fairness of the competitive marketplace. Our specialized FCPA unit as well as other parts of the Enforcement Division continue to do remarkable work in this space, bringing significant and impactful cases, often in partnership with our criminal partners.
Now, our FCPA focus obviously covers many industries. For example, we have conducted a recent sweep in the financial services industry that will yield a number of important cases. But the pharma industry is one on which we have been particularly focused in recent years. A few factors combine to make it a high-risk industry for FCPA violations. Pharmaceutical representatives have regular contact with doctors, pharmacists, and administrators from public hospitals in foreign countries. Those people often are classified as foreign officials for purposes of the FCPA, and they often decide what products public hospitals or pharmacies will purchase. This influence over the awarding of contracts is true for virtually every country around the globe.
There have been three types of misconduct that we have seen arise most often in our pharma FCPA cases. One is “Pay-to-Prescribe”; another is bribes to get drugs on the approved list or formulary; and the third is bribes disguised as charitable contributions. Let me discuss each of these in turn.
In “Pay-to-Prescribe” cases, we see public official doctors and public hospitals being paid bribes in exchange for prescribing certain medication, or other products such as medical devices. Some of our cases involve simple cash payments to doctors and other medical officials. But we have also seen some more innovative schemes created for the purposes of rewarding prescribing physicians. For example, in our 2012 action against Pfizer, subsidiaries in different countries found a variety of illicit ways to compensate doctors. In China, employees invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions. Pfizer China also created various “point programs” under which government doctors could accumulate points based on the number of Pfizer prescriptions they wrote. The points were redeemed for gifts ranging from medical books to cell phones, tea sets, and reading glasses. In Croatia, Pfizer employees created a “bonus program” for Croatian doctors who were employed in senior positions in Croatian government health care institutions. Once a doctor agreed to use Pfizer products, a percentage of the value purchased by a doctor’s institution would be funneled back to the doctor in the form of cash, international travel, or free products. Each of these schemes violated the FCPA by routing money to foreign officials in exchange for business.
Let me turn to a second form of bribery, which is aimed at getting products on a formulary. Of course, getting your company’s drugs on formularies is important to success in this industry. But the FCPA requires that you do this without paying bribes, and we have taken action where companies have crossed that line. We brought a case against Eli Lilly that included such violations. There, the company’s subsidiary in Poland made payments totaling $39,000 to a small foundation started by the head of a regional government health authority. That official, in exchange, placed Lilly drugs on the government reimbursement list. That action involved a variety of other FCPA violations and Eli Lilly paid $29 million to settle the matter.
The Eli Lilly case brings me to my third point, which concerns bribes disguised as charitable contributions. As you might know, 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.” The phrase clearly captures more than just cash bribes, and Eli Lilly is not the only matter where we have brought an action arising out of charitable contributions.
For example, in Stryker, we charged a medical technology company after subsidiaries in five different countries paid bribes in order to obtain or retain business. Stryker’s subsidiary in Greece made a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor. In return, the doctor agreed to provide business to Stryker. Stryker agreed to pay $13.2 million to settle these and other charges.
Similarly, in Schering-Plough, we brought charges against the company arising out of $76,000 paid by its Polish subsidiary to a charitable foundation. The head of that foundation was also the director of a governmental body that funded the purchase of pharmaceutical products and that influenced the purchase of those products by other entities, such as hospitals. In settling our action, Schering-Plough consented to paying a $500,000 penalty.
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. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions. We will continue to pursue a broad interpretation of the FCPA that addresses bribery in all forms.”
Under the heading “Compliance Program,” Ceresney stated:
“The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program. I can’t emphasize enough the importance of such programs. This is a message that I think has started to get through in the past 5 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. I encourage you to look to our Resource Guide on the FCPA that we jointly published with the DOJ, to see what some of the hallmarks of an effective compliance program are. I’ll highlight just a couple.
First, companies should perform risk assessments that take into account a host of factors listed in the guide and then place controls in these risk areas. The pharmaceutical industry operates in virtually every country, including many high risk countries prone to corruption. The industry also comes into contact with customs officials and may need perishable medicines and other goods cleared through customs quickly. They may also come into contact with officials involved in licensing and inspections. These are just a few examples of risk factors that a risk assessment should be focused on in this particular sector.
A healthy compliance program should also include third-party agent due diligence. In addition to using third-party agents, many pharmaceutical companies use distributors. This 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. Because of this added layer of cash flow, companies frequently improperly account for bribes as legitimate expenses. To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent. Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”
Under the heading, “Self-Reporting and Cooperation,” Ceresney stated:
“The existence of FCPA compliance programs place companies in the best position to detect FCPA misconduct and allow the opportunity to self-report and cooperate. There has been a lot of discussion recently about the advisability of self-reporting FCPA misconduct to the SEC. Let me be clear about my views – I think any company that does the calculus will realize that self-reporting is always in the company’s best interest. Let me explain why.
Self-reporting from individuals and entities has long been an important part of our enforcement program. 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.
In addition to the benefits we get from cooperation, however, parties are positioned to also help themselves by aggressively policing their own conduct and reporting misconduct to us. We recognize that it is important to provide benefits for cooperation to incentivize companies to cooperate. And we have been focused on making sure that people understand there will be such benefits. We continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. 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, we announced our first-ever non-prosecution agreement in an FCPA matter with a company that promptly reported violations and provided real-time, extensive cooperation in our investigation. And just six weeks ago, we entered into a deferred prosecution agreement with another company that self-reported misconduct.
More commonly, we have reflected the cooperation in reduced penalties. Companies that cooperate can receive smaller penalties than they otherwise would face, and in some cases of extraordinary cooperation, pay significantly less. One recent FCPA matter in this sector illustrates the considerable benefits that can flow from coming forward and cooperating. 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. In addition to self-reporting potential violations, the company provided translations of numerous key documents, produced witnesses from foreign jurisdictions, and undertook extensive remedial actions. There, the DOJ imposed a criminal fine of only $14 million, which was equivalent to about 40% of the disgorgement amount – a large reduction from the typical ratio of 100% of the disgorgement amount.
In fact, we have recently announced FCPA matters featuring penalties in the range of 10 percent of the disgorgement amount, an even larger discount than the case I just mentioned. And in the Goodyear case we announced last week, we imposed no penalty. In those cases, the companies received credit for doing things like self-reporting; taking speedy remedial steps; voluntarily making foreign witnesses available for interviews; and sharing real-time investigative findings, timelines, internal summaries, English language translations, and full forensic images with our staff.
The bottom line is that the benefits from cooperation are significant and tangible. When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation. That obviously remains my view today. And I will add this – 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 is lost.
This risk of suffering adverse consequences from a failure to self-report is particularly acute in light of the continued success and expansion of our whistleblower program. The SEC’s whistleblower program has changed the calculus for companies considering whether to disclose misconduct to us, knowing that a whistleblower is likely to come forward. Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse.”