SEC Charges Lilly with Corruption Abroad: A Taste of Fines to Come

The Securities and Exchange Commission filed charges on Eli Lilly and Co. yesterday for violations of the Foreign Corrupt Practices Act (FCPA) that allege the drug maker’s subsidiaries overseas bribed foreign officials in Russia, China, Brazil and Poland. The settlement totaled $29 million after an investigation of activities reaching as far back as 1994, assessed largely in part for “marketing service” agreements, which paid distributors and government officers in Russia millions of dollars to purchase Lilly drugs.

SEC alleges that Lilly hadn’t stopped using these marketing agreements five years after the company became aware of the potential FCPA violations the agreements represented. With the SEC and Department of Justice’s stated intent to focus on how the pharma industry behaves abroad, it’s safe to say this is a taste of settlements to come.

Included in these charges are allegations that Lilly paid $2 million to a third party entity owned by a government official in Russia and approximately $5.2 million to an offshore entity owned by a person with close ties to a key member within Russian parliament. Other specifics included the doctoring of company expense reports to hide the unauthorized purchase of gifts for Chinese government-employed medical professionals, bribes to government health officials in Brazil to facilitate $1.2 million in sales to state-run institutions, as well as payments of $39,000 to the charitable organization of a regional public health authority in Poland, in order to curry favor of Lilly’s drugs for government reimbursement.

The drug maker, first notified of the probe in 2003, neither denied nor confirmed the allegations. In its dealings with Russia, Lilly’s subsidiary, according to the SEC, had no idea who they’d secured so-called marketing agreements with beyond the knowledge of an address and bank account information.

Pfizer and J+J’s settlements also come to mind as examples of the industry’s growing exposure to FCPA investigations. According to Paul Enzinna, Partner at Brown & Rudnick, “The SEC and DoJ have recently realized that pharma companies are of interest for the fact that they interface with state-run health care organizations and government officials abroad, often with the goal of gaining access for their drugs, and that it’s time to look closer.” Enzinna concedes that a widespread cultural acceptance of bribery compounds the issue of corruption practices between foreign nations and drug companies. “Unfortunately, while the DOJ hopes to create a level playing field between countries, this period of transition between bribery and no bribery will prove particularly problematic for these companies.”

While the cost of FCPA-related pharma settlements has been relatively small so far, compared with False Claims Act settlements, for example, it’s likely that these cases will continue to be brought forward and may begin to target specific employees under the Responsible Corporate Officer Doctrine. “DoJ has long been saying that they don’t want companies to treat this as a cost of doing business. They want to have some real deterrents, and think the best way to do that is by putting individuals in jail,” says Enzinna.

Alongside personal culpability is the issue of due diligence. The claim that Lilly remained silent for five years following its discovery of corrupt practices points to another concern that the SEC will likely move to punish. Given that Teva, Baxter, GlaxoSmithKline and others have received notice from federal investigators probing overseas business practices, the US government is in a position to take advantage of the opportunity to address some of the behaviors that, while illegal here, are also standard operating procedure in many countries around the world.