Legal: Foreign Policy

Pharma is caught in the cross-hairs of a government-enforcement initiative. The industry can take some comfort in the fact that it's not alone—all multinational companies, including those in the drug industry, are increasingly at risk of being investigated and prosecuted for engaging in corrupt foreign practices. Why the increased scrutiny? It's not based on anything so seedy or so simple as a surge in the occurrence of bribery and corruption worldwide. Rather, it's the fruit of tougher anticorruption laws and stepped-up enforcement in the United States and Europe—as well as post-Sarbanes-Oxley requirements that companies self-disclose violations. Under the federal Foreign Corrupt Practices Act, which is the government's Stradivarius in this area, offending companies face fines of up to $2 million per violation and offending individuals face jail terms of up to five years per violation. For pharma, the stakes are high and the temperature is rising.

R. Christopher Cook

Companies that make or sell pharmaceuticals on a global scale run a special risk. The reason: Pharmas sell directly to hospitals and physicians in foreign countries where healthcare is routinely owned or controlled by the government. Both US and foreign officials have made clear that they will punish companies for payments made to physicians to influence government or hospital purchasing decisions. The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have done precisely that in several big cases recently: Diagnostic Products Corporation's foreign subsidiary made improper payments to state-owned hospitals in China, resulting in a criminal conviction for the company, a $2 million criminal penalty, and a $2.7 million civil fine; Micrus Corporation made improper payments to physicians at government-owned hospitals in France, Turkey, Spain, and Germany, resulting in a $450,000 civil penalty and a deferred prosecution agreement from DOJ; Schering-Plough's Polish subsidiary made improper payments to a local charity headed by a government official, resulting in a $500,000 civil penalty; and Syncor's foreign subsidiaries in Taiwan, Mexico, Belgium, Luxembourg, and France made improper payments to physicians at government-owned hospitals, resulting in $2.5 million in civil penalties. Just last year, Bristol-Meyers Squibb announced an SEC inquiry into its German pharmaceutical subsidiaries. And with market growth in India, China, Brazil, and other nations increasingly outstripping that of the developed world, more and more firms are going global—and straight into the crosshairs.

Jonathan B. Leiken

Know the Laws—and Your Own Weak Links

Drug companies with global ops can reduce their risk by putting their house in order. First, a firm should establish clear policies to detect and prevent violations of the Foreign Corrupt Practices Act's antibribery provisions. Companies should also identify the functions most likely to be danger areas as well as the specific employees most in need of compliance—for instance, staff in business development or with access to funds for entertaining or marketing prospective customers or business partners. And most important, management must educate the entire crew about the new procedures, monitor compliance, facilitate reporting, and investigate and respond to violations of law as they are discovered.

An effective anticorruption compliance program depends on high-quality risk assessment. A company first must authorize oversight and consistency responsibilities—usually to the general counsel or a compliance officer or committee (with the assistance of outside counsel as necessary). In turn, these folks must master not only the Foreign Corrupt Practices Act's application to pharma but also all anticorruption laws in the foreign countries in which the company operates.

Once the relevant legal boundaries are determined, a list of fairly obvious questions follows: Which employees interact with physicians and hospitals in foreign countries? How are the company's products marketed there, and what methods are used to develop business relationships? What degree of independence does the company give to operations and agents there? What controls are in place to ensure that all expenditures for marketing or business development are documented?

Beyond these basics, finding the risks is not always easy. For large pharmas, it may be difficult to gather the precise details of particular business practices in foreign jurisdictions. Where company reps are independent contractors, for example, monitoring compliance can be tricky. One solution is to conduct interviews with these individuals as a way both to collect information about the business practices in question and to communicate the company's commitment to obeying the law.

Training programs are another approach to getting employees in foreign nations up to speed on compliance—while also gathering intel. Such sessions often result in participants asking questions about specific situations they have experienced, so legal counsel should be present to address any noncompliance that may be discovered.

Drafting anticorruption policies for operating in a foreign country is relatively straightforward. In short, the company needs a strong, unequivocal statement of its commitment to ethical conduct and compliance with the law. The policies should clearly instruct employees how to distinguish appropriate from inappropriate conduct, including which types of marketing and sales expenditures are permissible and which are prohibited. All processes for training, reporting, and investigating misconduct and improper payments should be clearly spelled out—as should how, if allegations are substantiated, the company will respond.

Good Faith Goes Far, but Save the Receipts

The hardest part of preventing corrupt activities is putting policies into effect. The danger typically arises from a company's failure either to adequately support and enforce those policies or to expend the effort necessary to implement the program.

The costs of anticorruption efforts vary with the scope of operations and the nature of the risks. Administering the program may require overcoming not only language differences but cultural barriers. To start with, in some countries the taboo against bribery is simply not as strong as it is in the United States, and the dangers of this activity must be emphasized in communications to foreign company agents.

When it comes to implementing anticorruption compliance, the point is not to look good on paper but to get results in practice. Companies should keep their eye on the prize: reducing the real-world risk that an employee or agent will pay a bribe, whether through ignorance, self-interest, or a misguided notion of helping the company. At the same time, since the program is a testament to the firm's good faith, careful documentation is critical. That way, if a bribe is paid to a doctor or hospital, the company can demonstrate the steps it took to obey the law.

When allegations of improper payments arise, management should conduct a prompt, thorough investigation, gathering all relevant facts. Only then will the company be in a position to decide, with the guidance of counsel, whether it is necessary or advantageous to make disclosure to DOJ or the SEC. A failure to do so will likely weigh heavily against the company if the violations are later brought to light.

No anticorruption program is perfect. Bribery and corruption have been around since the very first economies, and are eternal temptations to the greedy soul. Still, drug firms are now duty-bound to reduce the likelihood that every rep in every foreign country is on the up and up—and as daunting as this may seem, the fact is that serious efforts and reasonable policies can be effective. As more and more developing-world markets see double-digit growth, the growing opportunities—and competition—will only extend pharma's business. The sooner the industry nails down its anti-corruption compliance, the better.

R. Christopher Cook and Jonathan B. Leiken both former federal prosecutors, are attorneys in the Corporate Criminal Investigations practice group of the international law firm Jones Day. Cook can be reached at christophercook@jonesday.com and Leiken can be reached at jleiken@jonesday.com