No Doctoring the Books

Industry executives may be unfamiliar, however, with a less obvious interpretation of the statute that poses a more difficult compliance challenge. This challenge entails payments made to, or benefits provided to, physicians, technicians, or hospital administrators as part of a device or pharmaceutical company’s normal marketing and promotional efforts.

 Many industry executives are surprised to discover that under the broad interpretations of the FCPA adopted by U.S. enforcement agencies, these decision-makers can qualify as foreign officials if the decision-makers’ company is owned or controlled by a foreign government. In these circumstances, normal marketing and promotional activity directed at these persons potentially can create FCPA liability.

This is more than a theoretical concern. Recent government actions make it clear that medical device and pharmaceutical companies are squarely in the crosshairs of those charged with enforcing the FCPA. Senior Department of Justice (DOJ) officials publicly have stated that the DOJ intends to make FCPA enforcement in the pharmaceutical and medical device industries a top priority.

On November 12, 2009, Assistant U.S. Attorney General Lanny Breuer stated that “one area of criminal enforcement that will be a focus for the Criminal Division in the months and years ahead [is] the application of the Foreign Corrupt Practices Act... to the pharmaceutical industry."¹ He further noted that prosecution would not be limited to corporations but also would extend to the “investigation and prosecution of senior executives,” a remark that was echoed during the same conference by Assistant U.S. Attorney General Tony West, Chief of the DOJ’s Civil Division. West noted that he recently had testified before the Senate Judiciary Committee that “[i]n those cases where the facts and law allow us to pursue criminal cases against individuals responsible for illegal conduct, we will do so.”²

Furthermore, Charles McKenna, Chief of the U.S. Attorney’s Office for the District of New Jersey Criminal Division, informed attendees at a 2009 meeting of the American Bar Association’s program on medical device and pharmaceutical litigation that FCPA enforcement trailed only terrorism as a DOJ enforcement priority. It is clear, therefore, that both medical device and pharmaceutical companies and individuals working in the industry need to be aware of FCPA issues.³

Although the FCPA was enacted in 1977, the statute has seen unprecedented enforcement activity in the first decade of the 21st century. This enhanced attention has resulted in both repeated record fines (culminating in total FCPA fines exceeding $800 million paid by Siemens) and attention to numerous industries that traditionally had not seen enforcement activity. As discussed below, multiple companies in the pharmaceutical and life sciences area already have been the subject of enforcement activity and have paid large fines, including fines for payments to government-owned hospitals. Because the healthcare industry has been targeted for increased scrutiny and enforcement activity, pharmaceutical and medical device companies and their executives would be wise to enhance their FCPA compliance efforts. For example, in its most recent 10-K, Eli Lilly disclosed that the DOJ and SEC had expanded its FCPA investigation of Lilly’s subsidiaries. Lilly indicated that it had been subpoenaed by the SEC and that both the SEC and DOJ had asked the company to voluntarily provide information related to the activities of subsidiaries in “a number of other countries.”⁴ These requests follow SEC subpoenas that Lilly previously received regarding an FCPA investigation into activities by Polish subsidiaries of a number of pharmaceutical companies.

FCPA, Antikickback Statute Explained

The FCPA prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the United States, from paying or offering to pay, directly or indirectly, money or anything of value to a foreign official in order to obtain or retain business. These are the statute’s “antibribery provisions.”⁵ The FCPA also requires “issuers” (i.e., any U.S. or foreign companies with securities traded on a U.S. exchange or other­wise required to file periodic reports with the SEC) to keep books and records that accurately reflect business transactions. These entities also must maintain effective internal controls.⁶

The FCPA was enacted in response to a series of SEC investigations that resulted in over 400 U.S. companies admitting that they had made over $300 million in questionable or illegal payments to foreign government officials, politicians, and political parties.⁷ The law was enacted to halt such activity and “to restore public confidence in the American business system.” The legislation is jointly enforced by the DOJ and the SEC. Proof of a U.S. territorial connection is not required for either government agency to implicate U.S. companies and citizens in FCPA violations. Indeed, FCPA violations can, and often do, occur even if the prohibited activity takes place entirely outside of the United States.

The antibribery provisions apply to more than just straight bribes paid to foreign government leaders to secure a government contract type of scenarios. Both the DOJ and the SEC broadly interpret several elements of the antibribery provisions, such as the terms anything of value, foreign official, and obtain or retain business. More specifically:

Anything of Value.The FCPA term anything of value is poorly defined in the statute, and the statute’s legislative history is not particularly helpful, either. The term has been construed broadly and includes not only cash or cash equivalents but also discounts, gifts, the use of materials, facilities, or equipment, entertainment, drinks, meals, transportation, lodging, insurance benefits, and the promise of future employment.⁸ There is no minimum value associated with the anything of value element, and even payments of less than one hundred dollars have formed the basis for an enforcement action. The perception of the recipient and the subjective valuation of the thing conveyed often are key factors considered in determining whether anything of value has been given to a foreign official.

Some examples of recent FCPA matters that involved the provision of nonmonetary benefits include action against Lucent Technologies, which agreed in 2007 to resolve allegations that it had violated the FCPA in connection with travel and entertainment practices involving employees of state-owned telecom customers. The thing of value that supported the violation was Lucent’s funding of approximately 315 trips involving over 1000 employees of Chinese state-owned telecom companies. The trips featured a disproportionate amount of sightseeing, entertainment, and leisure.⁹ In a June 2004 FCPA enforcement action against Schering-Plough the SEC alleged that a donation to a charity that provided no tangible monetary benefit to the foreign official was sufficient to confer something of value on the official. The commission apparently reached its decision on the theory that the foreign official welcomed the donation and hence “valued” it.¹⁰

Recent domestic enforcement activity under the federal Antikickback Statute (AKS) and analogous state laws also is illustrative. The AKS is familiar to most healthcare companies because it prohibits individuals or entities from knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce referrals of items or services covered by Medicare, Medicaid, or any other federally funded program.¹¹ The AKS emphasis on the elements of a quid pro quo exchange makes the statute comparable to the antibribery provisions of the FCPA. This focus thus provides insight into the interpretation and potential enforcement theories of the FCPA by the DOJ, which can bring enforcement actions under both laws.

Most AKS and similar state law enforcement actions based on nontraditional benefits also could support FCPA prosecutions had they been provided to physicians employed by state-controlled health systems. For example, in 2007, 14 Illinois radiology centers settled charges filed by the Illinois attorney general for allegedly paying kickbacks to doctors in exchange for referrals.¹² The Illinois AG alleged that the radiology centers entered into sham lease agreements with doctors under which the doctors paid a reduced rate for MRI and CT scans, charged the patient’s insurance carriers a higher rate, and then pocketed the difference. Similarly, in a 2009 settlement, NeuroMetrix agreed to pay $3.7 million as part of a deferred prosecution agreement based on allegations that it paid kickbacks to physicians in the form of free disposable biosensors for use with the NeuroMetrix’s NC-stat System to encourage physicians to recommend the device to colleagues.¹³ If these actions had occurred in a foreign country and been made to physicians who worked in state-owned healthcare systems, there is little doubt that the DOJ would consider these actions to violate the FCPA.

Foreign Official. The antibribery provisions defineforeign official to include, in pertinent part, “any officer or employee of a foreign government or any department, agency or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality. . . .”¹⁴The enforcement agencies broadly interpret this term to include not only traditional government officials but also employees of state-owned or state-controlled entities under the theory that state-owned entities are instrumentalities of the foreign government. Even if a foreign company is not wholly-owned by a foreign state, it still may be considered an instrumentality of the foreign government if it exercises substantial control over the entity. FCPA enforcement actions and other enforcement agency pronouncements instruct that once a foreign company, such as a hospital or laboratory, is deemed an instrumentality of a foreign government, every single employee of the entity, regardless of rank or title, will be considered a foreign official. This interpretation applies regardless of how local law may characterize the employee.

Proof of the breadth of which the term foreign officialis construed is provided by cases where payments made to physicians or lab technicians are considered to violate the FCPA based on employment by a company at least partially owned by a foreign government. For example, in United States v.DPC (Tianjin) Ltd., DPC pleaded guilty to an FCPA violation based on payments of illegal commissions given to physicians and laboratory personnel employed by government-owned hospitals in the People’s Republic of China. DPC, too, was subjected to a large fine of $1.6 million and agreed to the appointment of an FCPA monitor, among other remedial measures. In SEC v. Micrus Corporation, an FCPA violation was premised on payments to physicians in various foreign countries.¹⁵And in United Statesv.Syncor Taiwan Inc.,Syncor Taiwan made illicit payments totaling at least $400,000 to doctors who controlled the purchasing decisions for the nuclear medicine departments of certain hospitals, including some hospitals owned by the government of Taiwan, for the purpose of obtaining or retaining business with those hospitals.¹⁶Syncor Taiwan pleaded guilty and was fined $2 million dollars by the DOJ.

Obtain or Retain Business. Theobtain or retain businesselement of an antibribery violation also has broad application and can be satisfied even if the improper payment to a foreign official does not lead to a government contract. Courts have held that Congress, by passing the FCPA, intended to prohibit a wide range of improper payments, not just those that directly influence the acquisition or retention of government contracts. Several recent FCPA enforcement actions concern improper payments to a foreign official to secure special tax or custom treatment, to secure government licenses or permits needed to do business in a foreign jurisdiction, or otherwise to secure an improper advantage over competitors. For example, in United States v. Kay, the Fifth Circuit Court concluded that making improper payments to a foreign official to lower corporate taxes and custom duties could satisfy the obtain or retain business element of an FCPA antibribery violation by providing an unfair advantage to the payor over competitors.¹⁷ The court found “little difference” between paying a bribe to secure a contract and a situation where a contract is gotten lawfully but then followed by a bribe to ensure the contract can be completed profitably.

In the healthcare context, a broad variety of payment situations can satisfy this standard. These could include payments made for regulatory approvals, such as payments to secure the right to sell a drug in a country, or to secure favorable licensing terms. They could also involve payments made to healthcare providers, such as payments designed to persuade them to use a medical device, to steer testing to certain laboratories, or to prescribe a certain drug. Similar payments have been the predicate for millions of dollars of FCPA penalties in recent years.

Third-party Payment Provisions.U.S. companies are not insulated from FCPA risk by doing business in foreign countries through third parties such as agents, consultants, distributors, or joint venture partners. The antibribery provisions contain broad third-party payments provisions under which the actions of foreign subsidiaries and other third parties can result in FCPA liability to a parent company or the entity engaging the third party. These provisions apply if improper payments are made to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to a foreign official.”Throughout this article, third party refers to agents, consultants, distributors, and joint venture partners.

Under the FCPA, knowledge is defined broadly and is present when one knows that an event is certain or likely to occur. Failure to investigate suspicious circumstances can be sufficient to violate this standard, because failing to take note of an event that reasonably should have roused suspicion, or being willfully blind, also can constitute knowledge.

Agents, distributors, and other third parties are frequent sources of FCPA violations. Some examples include:

The medical devices and pharmaceutical industries are particularly susceptible to FCPA problems arising from the use of intermediaries. Agents frequently are used in these industries as a means of navigating complicated government licensing regimes and procurement hurdles. It is also very common for pharmaceutical companies and medical device manufac­turers to use local distributors and to establish joint ventures, both to spread risk and to provide foreign companies with sufficient incentive to commit significant resources to increasing sales and obtaining necessary government approvals. The frequent use of agents, distributors, and other third parties, and the often-diminished control that U.S. companies have over such actors, can lead to tricky FCPA issues even for companies with the best intentions.

FCPA Recordkeeping Requirements

The FCPA’s recordkeeping requirements have two main stipulations. The first is that books, records, and accounts be kept in reasonable detail that accurately and fairly reflect transactions and dispositions of assets. The second requires that a system of internal accounting controls:

In many instances, improper payments to a foreign official to obtain or retain business result not only in antibribery violations but also in recordkeeping ones, given that improper payments often are falsely characterized on a company’s books and records as miscellaneous expenses, commissions, and so forth. In some cases, the SEC has chosen to proceed under an accounting-based theory when its real target appeared to be substantive antibribery violations. The commission likely took this approach because a books and records charge was easier to prove or because a company preferred to settle on that basis. Also relevant is the government’s view that the presence of effective internal controls should be sufficient to prevent many violations of the FCPA’s antibribery provisions, which in effect turns violations of the antibribery provisions into accounting violations as well.

The creativity with which the SEC can proceed, and the extent to which FCPA liability can arise in unexpected ways, is reflected by the July 31, 2009, settlements entered into by two former executives for Nature’s Sunshine Products. The SEC charged that employees of a Nature’s Sunshine subsidiary used third-party brokers to transmit approximately $1 million to Brazilian customs agents to, among other things, avoid product-registration requirements. What is most notable about the settlement is that the SEC did not even allege that the executives parti­cipated in or knew about the bribery scheme. Rather, culpability was premised on their violation of the “control person” provision of the Securities Exchange Act because of inadequate supervision of the subsidiary’s activities.

Unique Challenges

In the Justice Department’s view, increased FCPA enforcement in the healthcare industry is an obvious and necessary expansion of the considerations that inform AKS enforcement. Recent AKS settlements that target medical device and pharmaceutical companies illustrate the effectiveness of the government’s fraud and abuse enforcement program.²²The Justice Department is making good use of its healthcare fraud expertise by creating special teams composed of certain members of its healthcare fraud unit and members of its FCPA unit.

The Justice Department seems well-poised to aggressively investigate and prosecute healthcare companies for FCPA violations. This is because the antikickback laws present many of the same compliance challenges presented by the FCPA—most obviously, oversight of sales and marketing practices and the potential to use payments to steer business in violation of the laws. As Assistant Attorney General Lanny Breuer observed: “[T]he types of corrupt payments that violate the FCPA because they are given to obtain or retain business in other countries are not any different than the items of value that would violate the Antikickback Statute if given within the United States—cash, gifts, charitable donations, travel, meals, entertainment, grants, speaking fees, honoraria, and consultant arrangements, to name a few.”¹ Similarly, the various model codes of ethics, including Eucomed Guidelines on Interactions with Healthcare Professionals, the International Federation of Pharmaceutical Manufacturers & Associations Code of Pharmaceutical Marketing Practices, and the Medical Device Technology Companies Code of Conduct also contain useful guidance and information regarding industry standards for dealing with some of these same issues raised by the FCPA.

Although the AKS and FCPA provisions can raise overlapping issues, the FCPA raises additional concerns because of the breadth of its provisions and its application to foreign situations.²³ This means that even companies that have AKS compliance programs in place do not necessarily have all the tools that they need to ensure that they have up-to-date FCPA compliance programs. Some of the significant and unique challenges that the FCPA raises for medical device companies include:

Avoiding FCPA Exposure

In light of the current climate, medical device companies should review their corporate compliance programs to ensure that they are sufficiently robust. Generally, an effective FCPA compliance program should be risk-based, meaning that it should be tailored to detect and monitor a company’s activities where the risk is greatest. This assessment first should identify internal potential areas of risk, for example, the extent to which the company relies on relationships with distributors, resellers, agents, and other third parties. A company also should take into account the foreign locations in which a company is operating and consider additional procedures for countries that have a history of corruption.(Each year, the Transparency International Corruption Perception Index ranks countries on a scale of 1 to 10, with a 1 representing perceptions of highly corrupt and a 10 representing perceptions of highly clean.) Finally, the level of regulation in foreign countries should be taken into account to determine the level of interaction that company representatives will have with foreign officials.

Every company should give careful consideration to the following points when designing, implementing, or updating its FCPA compliance program:

Risks Can Be Minimized

As recent enforcement activity underscores, the DOJ and the SEC have publicly indicated that the medical device and pharmaceutical industries are receiving special attention and are likely sources of future FCPA enforcement actions. While companies cannot eliminate the potential for FCPA violations entirely, conducting an appropriate risk assessment—and using the results to implement a tailored version of the compliance measures described above—can minimize the FCPA risks inherent to device and pharmaceutical manufacturers alike.

References

1. Lanny Breuer, Assistant Attorney General, Criminal Division, Department of Justice, Keynote Address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available athttp://mainjustice.virtual.vps-host.net/2009/11/12/criminal-division-chief-breuers-fcpa-pharma-speech/.

2. Tony West, Assistant Attorney General, Civil Division, Department of Justice, Address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available at www.namfcu.net/press/remarks-of-assistant-attorney-general-tony-west/.

3. Charles McKenna, Chief, Criminal Division, U.S. Attorney’s Office for the District of New Jersey, Panelist, “Current Issues in Medical Device and Pharmaceutical Litigation,” (Nov. 12, 2009).

4. Eli Lilly & Co., Annual Report (Form 10-K), at 15 (Feb. 22, 2010).

5. 15 U.S.C. §§ 78dd-1-3 (2000).

6. 15 U.S.C. § 78m(b)(2)(A).

7. Layperson’s Guide to FCPA, available at http://www.justice.gov/criminal/fraud/fcpa/.

8. See id. §§ 78dd-1(a) (issuers), 78dd-2(a) (domestic concerns).

9. See Release, Department of Justice, “Lucent Technologies Inc. Agrees to Pay $1 Million Fine to Resolve FCPA Allegations” (Dec. 21, 2007).

10. See SEC v. Schering-Plough Corp., Litigation Release No. 18,740 (June 9, 2004).

11. 42 U.S.C. § 1320a-7b(b). The Federal Employees Health Benefits Program is excluded from the Act’s coverage.

12. Press Release, Illinois Attorney General, “Attorney General Madigan Settles MRI Kickback Case for $1.2 Million” (Jan. 14, 2009).

13. Release, Department of Justice, “Neurometrix Agrees to Deferred Prosecution for Illegal Kickbacks Paid to Physicians” (Feb. 9, 2009).

14. See 15 U.S.C. §§ 78dd-1(f)(1) (issuers), 78dd-2(h(2) (domestic concerns).

15. See SEC v. Micrus Corp., Litigation Release No. 17,887 (Dec. 10, 2002).

16. Release, Department of Justice, “Syncor Taiwan, Inc. Pleads Guilty To Violating The Foreign Corrupt Practices Act” (Dec. 10, 2002).

17. See United States v. Kay, 359 F.3d 738, 743-56 (5th Cir. 2004)

18. Throughout this article, “third party” refers to agents, consultants, distributors, and joint venture partners, and other entities authorized to act in some fashion on behalf of the U.S. company.

19. See SEC v. Bobby Benton, Litigation Release No. 21,335 (Dec. 14, 2009).

20. See SEC v. Halliburton Co. and KBR, Inc., Litigation Release, Release No. 20,897A (Feb. 11, 2009).

21. See 15 U.S.C. § 78m(b)(2).

22. For example, see Department of Justice Release, “Boston Scientific Pays $22 Million to Settle Claims that its Guidant Subsidiary Used Post-Market Studies to Pay Kickbacks to Physicians” (Dec. 23, 2009) ($22 million settlement);Department of Justice Release, “Oklahoma Hospital Group Pays U.S. $13 Million to Settle False Claims Act Allegations” (Dec. 22, 2009).

23. Greg Husisian, The Foreign Corrupt Practices Act: Risk-Management and Compliance Strategies For Life Sciences and Pharmaceutical Companies (2009), available athttp://www.fcpaenforcement.com/index.aspx.

24. Mike Koehler, A Malady in Search of a Cure—The Increase in FCPA Enforcement Actions Against Healthcare Companies, 38 U. Mem. L. Rev. 261, 263 (2008).

25. Although due diligence is not affirmatively required by the FCPA, as the DOJ and the Department of Commerce noted in a 2002 joint release, “[t]o avoid being held liable for cor­rupt third-party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reput­able and qualified partners and representatives.” Department of Justice and Department of Commerce, “Foreign Corrupt Practices Act: Antibribery Provisions” (Mar. 15, 2002).

David W. Simon is a partner with Foley & Lardner LLP and a member of the government enforcement, compliance, and white collar defense and the securities enforcement and litigation practices. He may be reached at [email protected]. Erin J. Holland is an associate with Foley & Lardner and a member of the firm’s government enforcement, compliance and white collar defense practice. She may be reached at [email protected]. Gregory Husisian is of counsel with Foley & Lardner and a member of the firm’s government enforcement, compliance, and white collar defense, the securities enforcement and litigation, and the appellate practices. He may be reached at [email protected].