The U.S. Department of Justice recently announced an enforcement initiative targeting the pharmaceutical industry for investigations and prosecutions under the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits improper payments to foreign government officials for the purpose of obtaining or retaining business and mandates that companies that issue securities take affirmative measures to prevent such payments. Originally enacted in 1977, the statute received relatively little attention until 2005, when the government stepped up its efforts to investigate and prosecute foreign bribery. These recent efforts have produced more activity—in the form of criminal sanctions and securities enforcement actions against corporations and individuals—in the last four years than in the previous 28 years of the statute’s existence.
The Justice Department believes that there are two key reasons why the pharmaceutical industry deserves enhanced FCPA scrutiny. The first factor is the volume of activity. According to data compiled by the Pharmaceutical Research and Manufacturers Association of America, in 2008 approximately $100 billion, or roughly one-third of the industry’s total sales, came from outside the United States. The second factor is the nature of the environment where that activity occurs. Where health systems are often not simply regulated but actually operated and financed by the government, a pharmaceutical company will likely encounter countless individuals who may meet the definition of a “foreign official” during the process of manufacturing, exporting, pricing, selling, marketing, and gaining approval for its product (the government cited, for example, doctors, pharmacists, lab technicians and other health professionals). The closed nature of many of these health systems, coupled with the fierce competition to enter them, also heighten the risk that financial arrangements which may be considered improper will infect the process.
As part of the enforcement initiative, the Justice Department’s FCPA unit will partner with its healthcare fraud group to identify and investigate such improper agreements. Targeted arrangements will be similar to those that would violate the federal Anti-Kickback statute if given in the United States – including cash, gifts, charitable donations, travel, meals, entertainment, grants, speaking fees, honoraria, and consulting arrangements, among others.
In its announcement, the Justice Department sounds the alarm for pharmaceutical companies contemplating making unlawful payments to overseas officials. In addition, the government also serves notice that liability may extend not just to companies who formulate and carry out a calculated plan to improve their financial performance through foreign bribery, but also to those companies who fail to implement and maintain robust and rigorous compliance programs designed to prevent, detect, and remediate such activity. The government has made clear once again that it considers a compliance program specifically tailored to FCPA concerns to be an essential element of any company’s strategic plan that includes business overseas.
Compliance programs should contain components designed to educate and train employees about the content and reach of the FCPA, allow for the internal reporting of suspected violations without consequences, and provide for substantial and swift sanctions when a violation is discovered. Moreover, the government expects that FCPA compliance programs will recognize the need to conduct meaningful due diligence regarding third parties who do business on the company’s behalf, and provide a clearly articulated framework for that process. Time and again, the government has enforced this requirement by extracting substantial sanctions from companies who fail to implement sufficiently robust programs.
About the FCPA
The FCPA’s prohibitions and affirmative obligations create a thicket of legal issues and mandate that steps are taken to prevent, detect, and remediate violations by those subject to the statute’s reach. The statute contains two main components, commonly referred to as the “anti-bribery” and “accounting” provisions. The anti-bribery provisions outlaw corrupt payments to foreign officials, whether directly through officers and employees or through the use of third parties such as consultants, joint venturers, and freight forwarders. The accounting provisions create a series of affirmative obligations, requiring corporations that issue securities to make and maintain books and records that accurately and fairly reflect the company’s transactions and to devise and maintain a system of internal controls to prevent and detect violations.
The FCPA is noteworthy for the relatively low level of intent required to establish a violation and the breadth of jurisdiction granted to the government. Individuals and corporations face vicarious liability for “knowing” violations of the anti-bribery provisions—a term that encompasses a “high probability” that another individual will use the company’s funds to offer or make corrupt payments. To prove the existence of such knowledge, the government often relies on a calculus of factors made up of various “red flags”—such as operating in countries where there is widespread corruption or making payments which are secretive or unusual—identified as potential indicators of illegal activity.
The FCPA’s prohibitions and obligations extend to a wide geographic scope of conduct and a diverse group of potential defendants. The statute applies not just where American companies, citizens, and permanent residents seek to further efforts to make improper payments or arrangements by engaging in conduct in the United States, but also where such conduct occurs anywhere in the world. In addition, the statute potentially reaches foreign private issuers and foreign non-residents where their actions further illegal activity.
The Justice Department’s recent pronouncement makes clear that pharmaceutical companies must take steps to insulate themselves from FCPA liability. At a minimum, that means implementing effective compliance programs customized to address FCPA-related concerns. Companies in other industries previously targeted by the government have already suffered the consequences of disregarding the statute’s mandates, which typically come in the form of hefty fines, disgorgement of profits, and the imprisonment of company officers. Those cases demonstrate that in the FCPA context, an ounce of prevention beats a pound of cure.
For more information, please contact William Athanas at 866-362-6380 or Sheila Sawyer or Mike Gardner at 800-487-6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.