The pharmaceutical and medical device industry has always been among the most heavily regulated in the United States. In recent years, however, these companies have become the subject of another regulatory and law enforcement focus: the Foreign Corrupt Practices Act (FCPA).
The FCPA is a federal law that prohibits U.S. persons, companies, and issuers from, among other things, bribing or attempting to bribe foreign officials in order to secure an improper business advantage. The FCPA was passed in 1977, but laid relatively dormant for decades. In recent years, however, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have significantly stepped up enforcement of the FCPA. For some perspective, since 2008, the top ten FCPA enforcement actions have cost those ten companies a total of $4.4 billion in fines and disgorgement.
Given the frequent interaction with foreign officials, any company operating in a highly regulated or state-controlled industry has an inherently higher risk of one of its employees, consultants, subsidiaries, or partners committing an FCPA violation. Because the FCPA’s definition of “foreign officials” is so expansive, pharmaceutical and medical device companies are constantly interfacing with such officials. For instance, in China, most hospitals are state institutions, making doctors and executives foreign officials for the purposes of the FCPA. The risks are not limited only to the sale of pharmaceutical products to state-owned entities. Because of the level of government involvement in foreign health markets, the approval, manufacturing, importation, exportation, pricing, and marketing of drugs and medical devices will be subject to government approval at every turn.
Given the inherent risks, it is unsurprising that there has been a marked uptick in DOJ and SEC investigations into the international sales practices of life science companies. Earlier this year, Swiss-based pharmaceutical giant Novartis AG agreed to pay $25 million to the SEC to settle charges that it violated the FCPA when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales. Also in 2016, SciClone Pharmaceuticals paid $12 million to settle claims stemming from international subsidiaries making improper payments to healthcare professionals at state-run institutions in China. A few years ago, Orthofix International, a Texas-based medical device company, was charged with paying routine bribes referred to as “chocolates” to Mexican officials to obtain sales contracts with government hospitals. The list goes on and on.
In light of the financial, reputational, and even criminal consequences that come with FCPA violations, pharmaceutical and medical device companies of all sizes must proactively address their anti-corruption compliance needs. Companies must analyze their international footprint to determine their greatest sources of risk, develop and implement a comprehensive anti-corruption policy, train their relevant staff, consultants, and subsidiaries, and ensure that the company’s culture takes the risks seriously. Other key initiatives include sound accounting and monitoring practices for all overseas sales, due diligence procedures for engaging third-party consultants or distributors, and clearly-established mechanisms for reporting and investigating potential FCPA violations. The U.S. government has made it clear that adopting an anti-corruption policy that sits on a shelf collecting dust will not limit your liability—so-called “paper” compliance programs do not suffice.