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Attorneys: J&J’s Improper Payments Point to Need for Enhanced Compliance Plans

Last month, Johnson & Johnson Inc. (J&J; New Brunswick, NJ) voluntarily disclosed to the U.S. Department of Justice and the Securities and Exchange Commission that some of its subsidiaries outside the United States made improper payments in connection with the sale of medical devices in two small-market countries. The company reported that the actions were contrary to its internal policies and that the payments might fall within the jurisdiction of the Foreign Corrupt Practices Act.

In making this announcement, the company reported that Michael J. Dormer, worldwide chairman for medical devices and diagnostics for J&J, had retired from the company. In his resignation letter, Dormer indicated that, by virtue of his position, he had ultimate responsibility for the subsidiaries that were the subject of the disclosure.

In light of Dormer's departure, all worldwide businesses within the company's medical devices and diagnostics segment now report to Nicholas J. Valeriani, worldwide chairman for medical devices and diagnostics for J&J. In addition to the medtech segments for which he was already responsible, Valeriani will now have responsibility for the businesses previously overseen by Dormer.

McAnaney

"This situation demonstrates the continuing maturation of the compliance process in the healthcare field, spurred by exposure to both the False Claims Act and Sarbanes-Oxley Act," says Kevin McAnaney, an attorney who specializes in healthcare fraud and abuse issues. "The Foreign Corrupt Practices Act (FCPA) wasn't even on anyone's radar three years ago, and now it is a regular component of the compliance auditing of the large global players. More importantly, the disclosure puts manufacturers on notice that they cannot ignore their foreign business practices. The J&J disclosure clearly establishes that FCPA should be a component of an effective compliance plan. Companies that ignore it will be considered to be not meeting the industry standard."

Cook
Cook: Medtech manufacturers at risk.

R. Christopher Cook, a partner at Jones Day (Washington, DC), says medical device manufacturers can draw three lessons from investigations and announcements such as those recently made by J&J. "First, all multinational companies face an increased risk of enforcement actions arising from improper payments to foreign government officials," he says. "Second, companies that manufacture and sell medical supplies--devices, equipment, and pharmaceuticals--are in greater danger than most other companies. Third, this is an area in which deliberate implementation of anticorruption policies and procedures can substantially reduce a company's risk."

Cook says that announcements related to improper payments to foreign officials are on the rise despite the fact that Western companies seem to be doing an increasingly effective job of self-policing their foreign operations. He attributes the rise to the following factors.

o U.S. and European authorities have increased enforcement of anticorruption laws.

o European countries have implemented strong anticorruption legislation in line with the U.S. Foreign Corrupt Practices Act.

o Authorities in the post-Sarbanes-Oxley climate are demanding that companies self-disclose violations when they occur.

"Multinational healthcare manufacturers should consider three broad steps to reduce the risk of violating anticorruption laws," Cook says. "First, they should identify the risks, including the specific individuals in the company who most need to be aware of the law and the ways to comply with it. Second, the companies should create policies and procedures adequate to detect and prevent violations of the Foreign Corrupt Practices Act. Third, and most importantly, management must implement those policies and procedures in an effective manner to educate employees, communicate the company's expectations, monitor and audit compliance with the law, facilitate reporting by employees with information, investigate reported noncompliance, and respond appropriately to violations of the law as they are discovered."

Cook notes that implementing such policies and procedures can be daunting, difficult, and expensive. The employees such programs affect often are located in distant locations where cultural taboos against bribery are not as strong as in the United States, and they may speak different languages.

"Companies should keep in mind the two primary purposes of the compliance program," Cook says. "First, the program needs to be effective in the real world, actually reducing the risk that an employee or agent will pay a bribe, whether through ignorance, self-interest, or a misguided notion of helping the company. Second, the program must stand as a testament to the company's good-faith efforts to detect and prevent violations of the law. Thus, the company needs to document carefully all of the efforts it undertakes so that, in the event that an employee or agent pays a bribe notwithstanding the compliance program's best efforts, the organization can demonstrate the steps it took to obey the law."

© 2007 Canon Communications LLC

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