On 12 November 2009, Lanny Breuer, Assistant Attorney General in the Criminal Division of the DoJ, gave a speech to the Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum. Mr. Breuer made it abundantly clear that the DoJ intends to enforce the FCPA vigorously in the pharma and medical device sectors. He seemed to come very close to asserting that FCPA violations are virtually inevitable, stating that:
“The depth of government involvement in foreign health systems, combined with fierce industry competition and the closed nature of many public formularies, creates a significant risk that corrupt payments will infect the process. The Criminal Division stands ready to ferret out this illegal conduct and we are uniquely situated to do so.”
It is widely known that the DoJ is currently pursuing a number of medical device cases (Biomet Inc, Stryker Corp, Zimmer Holdings Inc, Smith & Nephew plc and Medtronic Inc). The DoJ is also pursuing a number of pharma companies that won orders under the Oil-for-Food Program (Novo Nordisk and Akzo Nobel have both settled, while a number of investigations are ongoing, for example the investigation of Glaxo Smith Kline).
Another case of considerable interest is the Schering-Plough case which related to charitable contributions made via their Polish operations. The Polish foundation which received the payments had a founder/president who was also the director of a government health fund which provided money to hospitals throughout Poland for the purchase of pharmaceutical products. The donations were allegedly falsely recorded as being in respect of “disease prevention”.
Governmental organisations have an increasing ability to fully resource and inform these more technical investigations. Mr Breuer’s experience with DoJ is that:
“In the pharmaceutical context, we have additional expertise that significantly enhances our ability to proactively investigate and prosecute these often complex cases. That additional expertise is located in our health care fraud group, where we have prosecutors and analysts with the industry knowledge necessary to quickly identify corrupt practices. These two groups – our FCPA unit and our health care fraud unit – are already beginning to work together to investigate FCPA violations in the pharmaceutical and device industries in an effort to maximize our ability to effectively enforce the law in this area.”
Key Risk Area – Government officials, agents and distributors
Interactions with government officials will come under the closest scrutiny for obvious reasons. Breuer provided some thoughts as to what this means in the pharma and medical device contexts:
“… consider 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.”
Care then needs to be taken not just when operating in the countries traditionally recognized as being high risk (such as China, Nigeria, Brazil and Indonesia) but all those with state owned health case systems (such as the UK, Canada, Germany, Japan and France).
Many companies use agents and/or distributors to interact with government officials, to market their products or act as intermediaries or facilitators. Significantly, under the FCPA and most EU laws, companies are liable for the actions of not only their subsidiaries, but also their joint venture partners, distributors and agents.
Why is the next wave of FCPA activity relevant to Europeans?
Obviously some European Pharma companies are being targeted directly by the DoJ at the moment – in particular those with a clear US nexus, such as a listing or physical presence. This is only going to increase.
In addition the DoJ will be encouraging foreign regulators to enforce as aggressively as they do – effectively doing their best to ensure a level playing field and to pre-empt companies from forum shopping. Some good examples of this resulted from the prosecutions undertaken by the DoJ in connection with the alleged kickbacks paid to Saddam Hussein’s government by participants in the United Nation’s oil for food program mentioned above. Perhaps the most explicit case was the settlement agreement with Akzo Nobel: in this, the DoJ settled on the basis that the defendant would come to an acceptable settlement with the Dutch Public Prosecutors totaling Euro381,000 within 180 days of the December 2007 DoJ plea agreement. If Akzo Nobel did not, then DoJ would receive a further US$800,000 payment (Euro540,000 equivalent). Therefore if Akzo Nobel did not reach the prescribed settlement with the Dutch Prosecutors, they would be paying the DoJ approximately an “additional” Euro159,000 (US$260,000 equivalent).
The one clear benefit of such co-ordination, is that it does allow companies to draw a line under the relevant allegations as opposed to being exposed to sequential prosecutions each fuelled by the other. Along these lines, we understand that the SFO has now opened its own investigation into Halliburton and KBR following the US$579 million settlement with the DoJ in respect of alleged bribes paid to Nigerian officials in relation to the Bonny Island LNG project which was settled in the US in February 2009.
Furthermore we see other trends of the SFO (and other European regulators) becoming more “Americanized” in their prosecutorial methods for example:
- Use of plea agreements
- Use of failure of controls to prosecute – in the UK for example the SFO citing S221 of the Companies Act 1985 which requires accurate business records to be kept in their recent cases against Balfour Beatty and Amec
- Crediting companies for co-operation and self reporting
- Application of Monitors on companies to ensure ongoing compliance
- Pursuing individual convictions and pushing for long jail terms
- Increasing value of fines (both in terms of headline figures as well as relative to the profits resulting for the alleged corruption).
Often more serious than the financial penalties though is automatic debarring from competing for public contracts. Under the Public Contracts Regulations 2006, a company will be automatically and perpetually debarred where it is convicted of a corruption offence, which would include a conviction (or a guilty plea and settlement).
A copy of Lanny Breuer’s speech to the Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum can be found here.
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