Life Sciences Anti-Corruption Enforcement Trends To Watch For
The life sciences industry faces unique anti-corruption challenges associated with doing business in jurisdictions around the world with complex regulations and heavy public sector involvement in the delivery of health care services.
Unlike many multinational corporations, life sciences companies have to deal with government involvement in just about every aspect of their business, from research and development, through licensing and manufacturing, to distribution and final sales. Anti-corruption enforcement by US and foreign agencies is on the rise, and there are signs that this trend will continue.
The joint enforcement of the Foreign Corrupt Practices Act (FCPA) by the Department of Justice and the Securities and Exchange Commission remains the predominant enforcement mechanism of international anti-corruption law.
Between 2016 and 2020, US enforcement agencies filed almost 50% more FCPA-related lawsuits than in the previous five years. Life science companies remain a major US enforcement target, second only to the oil and gas industry.
As of 2011, the DOJ and SEC have filed enforcement actions against 23 life sciences companies that resulted in a total of $ 1.7 billion in fines, penalties, and levies.
The life sciences industry has seen a number of recent activities to enforce the FCPA. In 2020, the DOJ and SEC filed four lawsuits against U.S. and international pharmaceutical and medical device companies totaling $ 500 million in fines, penalties, and levies, and placed future reporting requirements.
In one of its largest lawsuits, Cardinal Health has resolved an SEC investigation into a Chinese subsidiary it acquired in 2010 in connection with improper payments to health care workers.
Cardinal’s subsidiary held marketing accounts for a European dermocosmetics company whose products it sold. That company ran the employees of Cardinal’s subsidiary, who used account funds to make payments to government health workers and employees of government-owned companies who influenced purchasing decisions. Cardinal agreed to pay $ 8.8 million to resolve alleged violations of the FCPA’s books and records and internal accounting controls.
In another measure, Herbalife Nutrition Ltd. Completed a joint DOJ and SEC investigation into book and file violations related to its operations in China between 2006 and 2016.
Herbalife employees paid the Chinese authorities with authority to approve licenses in 2006 and continued those payments over a 10-year period to encourage sales, a total of $ 25 million in entertainment and gifts to Chinese officials. Herbalife agreed to pay $ 123 million to resolve the investigation.
Corruption Risks in Life Sciences
Paying bribes to increase sales remains the greatest risk of corruption for life science companies. Because of government involvement in health care procurement in most parts of the world, health professionals responsible for procurement and prescribing medicines are typically considered “foreign officials” for the purposes of the FCPA.
Like the enforcement of the anti-kickback law in the US, payments to doctors and administrative staff who arrange for drugs to be bought or sold overseas may be subject to the FCPA’s bribery rules. Misrepresentation of payments to these individuals can affect the accounting rules of the FCPA, even if bribery cannot be proven.
Price controls and government approvals
Many countries regulate the sale of drugs through price controls, and virtually all of them require some regulatory approval before they can be sold domestically. The regulators who control drug sales prices and approvals vary by jurisdiction, but often involve people who are considered foreign officials. Interactions with and payments to these persons, including through third parties, must be carefully checked in order to avoid possible allegations of bribery.
Life science companies have dramatically increased the number of clinical trials conducted overseas in recent years, creating both an opportunity and an avenue to facilitate bribery. Clinical trials abroad are often overseen by local medical personnel who are often viewed as foreign officials. These individuals may face bribes in exchange for approval. The clinical trials themselves can also be an unnecessary effort with the true intention of marketing the company’s products to foreign officials.
High risk paths for corrupt payments
Life science companies have the usual suspects for potential bribery risks: excessive payments to consultants, brokers, distributors or third party agents; Gifts, hospitality, entertainment and travel expenses to politically exposed persons; and contributions to charities or companies affiliated with foreign officials.
Life science companies should also be aware of the potential for:
- Falsely reported speaker fees and fees;
- Counterfeit or overpriced storage contracts;
- Excessive bills to customers or sales partners;
- Joint ventures with companies affiliated with foreign officials;
- Abused or falsified marketing and advertising spending;
- Fake refund requests or cash distributions;
- Excessive margins or discounts for distributors or channel partners; and
- Research grants or official examiner costs.
Expectations for 2021 and beyond
We expect more resources and awareness of anti-corruption efforts from both the US and overseas in the foreseeable future. Life science companies can expect:
- Expanded use of the FCPA’s accounting rules to penalize companies for suspected corrupt behavior when the DOJ is unable to raise allegations of bribery;
- Increased use of non-FCPA mechanisms, including money laundering, postal fraud and wire transfer fraud, to combat corrupt behavior outside the scope of the FCPA;
- Enhanced enforcement by non-US enforcement agencies, including increased cooperation and information sharing between those agencies;
- Increased regulatory expectations regarding the design and effectiveness of corporate compliance programs and the implementation of robust internal corrective actions when misconduct is detected (or should have been detected); and
- Increased whistleblower activity and higher whistleblower awards.
This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.
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W. Warren Hamel, a partner at Venable, heads the firm’s investigations and commercial defense. He conducts internal investigations and defends private, corporate and non-profit clients in commercial and environmental criminal defense as well as in civil litigation.
Nick A. Mongelluzzo, an associate at Venable, helps clients enforce civil and criminal enforcement actions and advises on conducting internal company investigations.