US Steps Up Scrutiny of Foreign Transactions - Pharmaceutical Technology

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US Steps Up Scrutiny of Foreign Transactions
Companies engaged in global mergers and acquisitions may be hearing from the Department of Justice more often to ensure that corruptive practices are not taking place.

Pharmaceutical Technology
Volume 35, Issue 4, pp. 50-52

Other payments considered illegal may not be so apparently "corrupt," because the statute applies to "anything of value." If made in an effort to secure business, prohibited conduct may also include inviting officials to participate in overseas travel for purposes of attending conferences and educational seminars or to promote a particular product, funding postmarketing studies, and gifts of free pharmaceutical samples. Even payments to charitable foundations can be problematic. In 2004, a US-based pharmaceutical company settled with the SEC for a violation of the FCPA's accounting provisions after its Polish subsidiary made a series of payments to a local charity to induce the group's president (who was also a Polish government official) to influence the purchase of the company's pharmaceutical products.

In the context of merger and acquisition activity, pharmaceutical companies must be wary not to "purchase" FCPA liability by failing to conduct due diligence on proposed transaction partners. Such "successor liability" generally attaches in stock transfers or mergers, but may also attach in an asset purchase. Prior to any merger, the acquiring company should assess corruption levels of the countries in which the target entity conducts business; search for government affiliations; review the target's existing FCPA compliance program and controls; test the adequacy of the target's books and records; and insert contract provisions in the merger agreement that would indemnify the acquirer against FCPA violations and include representations and warranties that the target has made no corrupt payments to foreign officials.

Penalties for running afoul of FCPA can be substantial. Companies convicted under the act's antibribery provisions are subject to criminal fines up to $2 million per violation, and individuals face up to five years' imprisonment, along with criminal fines of up to $100,000 per violation. Accounting provision violations can trigger fines as high as $25 million for companies while individuals face up to $5 million in fines and 20 years' imprisonment. In addition, the SEC can impose civil penalties up to $10,000 per violation. The cost of the investigation may also run into the hundreds of thousands of dollars. In December 2008, a German corporation and three of its subsidiaries pleaded guilty to criminal violations of FCPA's internal controls and account provisions. They paid criminal fines of $450 million, disgorged profits totaling $350 million, and paid approximately $856 million in additional fines and disgorgement of profits imposed by the German government.

Some of DOJ's "red flags" for pharmaceutical company FCPA violations include:
  • Lack of transparency in expense and account records
  • Transactions with a foreign third-party clinical research organization (CRO) that has ties to government officials or relies on government contracts
  • Unusual payment patterns
  • Collaborations with CROs based in countries or geographic regions with reputations for bribery (e.g., Russia, China, Middle East, Africa, Italy, Greece).

To avoid running afoul of FCPA and its enforcement agencies, pharmaceutical firms should:

  • Develop an FCPA compliance policy, setting the right tone at the top of the organization and communicating it regularly to senior executives so that compliance is aligned with corporate policy.
  • Translate the company code of conduct into the languages of each country where the company does business and ensure the translation is distributed to officers, employees, and agents in each office.
  • Require interactive Internet-based training for both foreign-based employees and foreign agents. Training should be in the recipient's native language, accompanied, whenever possible, by personal training conducted by in-house counsel or ethics officers.
  • Review sales and marketing operations in high-risk countries, particularly where there is dependence on third-party agents.
  • Conduct documented due diligence on all CROs prior to engagement to identify any potential FCPA-related risks.
  • Prohibit compensation packages for foreign agents that would incentivize corrupt payments, such as success fees, to foreign officials.
  • Include a contractual right to audit CROs for compliance and subject all expenditures by foreign agents to frequent and random audits.
  • Require foreign agents and distributors to operate under written contracts that specify prohibited conduct under the FCPA and obtain signed certifications that they understand and will comply with those provisions.
  • Require written prior approval by an identified compliance officer for anything that could be construed as a payment to a foreign official.
  • Make FCPA review part of merger-and-acquision due diligence; insurance policies generally will not cover FCPA violations.
  • Institute confidential reporting mechanisms.

Overall, the best approach for pharmaceutical companies dealing with third parties that are involved in the pharmaceutical industry abroad is to proceed under the assumption that the third parties are government officials in some shape, manner or form, and that for purposes of FCPA compliance, they are all "foreign officials." Consider any payment to these "foreign officials" as potentially creating a risk. Heightened scrutiny should be exercised to evaluate all expenditures made to these "foreign officials" to assess their reasonableness and connection to a legitimate business purpose, and to ensure that, if made, the payments are accurately documented in the company's books and records.

Carlos F. Ortiz* is a former federal prosecutor and current shareholder in LeClairRyan's Government Investigations and Criminal Defense, Taxation, Financial Services Litigation and Regulation, and Business Litigation Practice Area Teams, as well as its Healthcare Industry Team, based in Newark, NJ, and New York, NY,
. Michael Goldklang is an associate in LeClairRyan's Business Litigation Practice Area Team, based in Newark, NJ.


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