Mitigating Corporate Corruption In The Healthcare Industry
Over the last few years, an increasing number of international healthcare companies have faced litigation under the Foreign Corrupt Practices Act (FCPA). The most high-profile of these cases was arguably that of Siemens AG, Europe's largest engineering conglomerate, with significant healthcare operations, which agreed to pay a record $800m in fines and disgorgement of profits after an investigation into allegations of serious bribery under the FCPA. In addition, other major cases are currently being investigated, and it is thought that the healthcare industry will continue to face legal scrutiny going forward. Indeed, officials at the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have reportedly said that the pharmaceutical industry would be a particular focus in 2009, arguing that corruption risk tends to be higher in the sector than in many others. This seems to be due to a combination of factors, including the objectives set by the DOJ and the SEC, the ongoing effects of the financial crisis, and the general nature of the healthcare sector, which has close ties to government.
As such, companies must take care to ensure compliance with the FCPA.
Healthcare companies susceptible to violations.
The FCPA was passed in 1977 to address both the transparency requirements provided under the Securities Exchange Act of 1934 and the rising issue of the bribery of foreign officials. But FCPA enforcement has intensified in recent years, with US regulators increasing their scrutiny of various sectors, and doling out significant fines and penalties. This has been notable in the pharmaceutical and medical devices industries, where several companies are currently being investigated for violations of the FCPA and other anti-kickback and fraud abuse statutes. A number of previous investigations have resulted in a fine, and the penalties are getting more severe. “Recent FCPA enforcement activity trends towards increased financial penalties for corporations and a prosecutorial focus on individuals,” says Kimberly Egan, a partner at DLA Piper LLP. “In 2008, 60 percent of FCPA prosecutions were of individuals. In addition, the SEC Deputy of Enforcement, Scott Friestad, said that the financial penalties that the Commission expects to see in 2009 ‘will dwarf the disgorgement and penalty amounts that have been obtained in prior cases'.” This may be partly due to the increased cooperation between US regulators and foreign governments in the pursuit of such investigations, which increases the success rate of enforcement.
Of course, several other factors are also notable here, not least the ongoing effects of the financial crisis. For example, as competition increases, it is likely that the number of employees making corrupt payments to obtain sales will also increase, as will the likelihood of them getting caught. This is reflected in the figures – at the end of 2003, the US recovered about $1.8bn for the year from the healthcare sector via judgements and settlements. But today, it is reportedly more like tens of billions of dollars – a significant increase. However, the nature of the industry and the developments impacting it are also important parts of the equation. A significant number of customers and business partners associated with US healthcare companies are employed by public healthcare systems in various countries, and since many of these individuals qualify as ‘foreign officials' under the FCPA, any payment made to influence their business decisions may be considered a bribe in violation of the Act. “US regulators view all employees of government healthcare institutions – from the most senior executives to the most junior employees – as foreign officials within the meaning of the FCPA,” explains Gary DiBianco, a partner at Skadden Arps Slate Meagher & Flom LLP. “Accordingly, improper payments or other benefits made to such individuals, in the eyes of the regulators, run afoul of the FCPA,” he says. Furthermore, the definition of ‘foreign officials' is often broader in countries such as China, Russia and Mexico, including not only members of the Ministry of Health, but also other bureaucrats such as doctors, nurses and any other staff, thereby exacerbating the risk of litigation for companies.
Clearly, the potential vulnerabilities of the healthcare industry are numerous and varied. As such, pharmaceutical and healthcare companies run a great risk of breaking the law when marketing and distributing their products, notes Doug Tween, a partner at Baker & McKenzie LLP. “Payments for product registration, placement on hospital formularies, clinical trial outcomes, treatment protocols, or the writing of prescriptions could be considered a corrupt payment under the FCPA. Even making contributions to an official's favoured charity can run afoul of the FCPA, as Schering Plough found out in 2004,” he says. Furthermore, many healthcare companies operate in foreign countries via a local agent, and US regulators stipulate that even if an incriminated payment has been made by a third party in a foreign country, the company will still be subject to an FCPA enquiry.
Naturally then, the increased litigation has had an impact on a number of large companies. Besides Siemens, whose fine was one of the largest ever delivered, other global brands have also been found guilty of committing various forms of corporate corruption. For example, AstraZeneca received a document request from the SEC in 2006 that related to the company's operations in Italy, Croatia, Russia and Slovakia. According to a 2008 filing, the group has responded to the SEC's request, but the outcome of its investigation is as yet unknown. Similarly, Eli Lilly turned over documents relating to its Polish subsidiary a few months ago. Again, that investigation is ongoing. “Also, in June last year, AGA Medical settled a US DOJ investigation by agreeing to a $2m criminal fine and retention of a corporate compliance monitor,” adds Mr DiBianco. “According to the settlement papers, AGA Medical employees allegedly made corrupt payments to Chinese healthcare professionals to secure sales.