The life sciences industry faces unique anti-corruption challenges associated with doing business in jurisdictions around the world with complex regulations and deep public sector involvement in the provision of health care services.
Unlike many multinationals, life sciences companies must contend with government involvement in nearly every aspect of business from research and development, to approval and production, all the way through distribution and final sale. Anti-corruption enforcement from U.S. and foreign agencies is trending upward and there are indications these trends will continue.
The Department of Justice and Securities and Exchange Commission’s joint enforcement of the Foreign Corrupt Practices Act (FCPA) remains the predominant enforcement mechanism of international anti-corruption law.
Between 2016 and 2020, U.S. enforcement agencies brought nearly 50% more FCPA-related actions than in the preceding five years. Life sciences companies continue to be a major target for U.S. enforcement, second to only the oil and gas industry.
Since 2011, the DOJ and SEC have brought enforcement actions against 23 life sciences companies resulting in $1.7 billion in total fines, penalties, and disgorgement.
The life sciences industry has seen a flurry of recent FCPA enforcement activity. In 2020, DOJ and SEC brought four actions against U.S. and international pharmaceutical and medical device companies for $500 million in total fines, penalties, and disgorgement, and imposed future reporting obligations.
In one of the largest actions, Cardinal Health settled an SEC investigation into a Chinese subsidiary acquired in 2010, relating to improper payments made to health care workers.
Cardinal’s subsidiary held marketing accounts for a European dermocosmetic company whose products it distributed. This company directed Cardinal’s subsidiary’s employees, who used account funds to make payments to government health care professionals and employees of state-owned companies who influenced purchasing decisions. Cardinal agreed to pay $8.8 million to resolve the alleged violations of the FCPA’s books and records and internal accounting controls provisions.
In another action, Herbalife Nutrition Ltd. resolved a joint DOJ-SEC investigation into books and records violations in connection with its operations in China between 2006 and 2016.
Herbalife employees paid Chinese authorities with decision-making authority to approve licenses in 2006, and continued such payments over a 10-year period to encourage sales, totaling $25 million in entertainment and gifts to Chinese officials. Herbalife agreed to pay $123 million to resolve the investigations.
Corruption Risks in Life Sciences
Paying bribes to drive sales remains the primary corruption risk to life sciences companies. Because of government involvement in health care procurement in most of the world, health care professionals responsible for pharmaceutical procurement and prescription are typically considered “foreign officials” for the purposes of the FCPA.
Like enforcement of the anti-kickback statute in the U.S., payments made to doctors and administrators to induce the purchase or sale of drugs abroad may fall under the FCPA’s bribery provisions. Mischaracterizations of any payments to these individuals may implicate the FCPA’s accounting provisions even where bribery cannot be proven.
Price Controls and Regulatory Approvals
Many countries regulate the sale of pharmaceuticals through price controls and virtually all require some level of regulatory approval before domestic sale is permitted. The regulatory bodies that control pharmaceutical sale prices and approvals vary by jurisdiction, but often involve individuals considered foreign officials. Interactions with and payments to these individuals, including via third party agents, must be scrutinized to avoid potential bribery allegations.
Life sciences companies have dramatically increased the number of clinical trials conducted overseas in recent years, creating both an opportunity for, and avenue to, facilitate bribery. Clinical trials abroad are often supervised by local medical personnel, who are often considered foreign officials. These individuals may be susceptible to bribery in return for approval. The clinical trials themselves may also be unnecessary efforts with the true intention of marketing the company’s products to foreign officials.
High-Risk Avenues for Corrupt Payments
The usual suspects for potential bribery risks apply to life sciences companies: excessive payments to consultants, brokers, distributors, or third-party agents; gifts, hospitality, entertainment, and travel expenses to politically exposed persons; and contributions to charities or businesses associated with foreign officials.
Life sciences companies should also be aware of the potential for:
- Mischaracterized speaker fees and honoraria;
- Falsified or overpriced storage contracts;
- Inflated invoices to customers or channel partners;
- Joint ventures with enterprises associated with foreign officials;
- Misused or falsified marketing and promotional expenses;
- Falsified reimbursement requests or cash distributions;
- Excessive margins or discounts for distributors or channel partners; and
- Research grants or regulatory investigator costs.
Expectations for 2021 and Beyond
We expect increased resources and attention to anti-corruption efforts both from the U.S. and abroad for the foreseeable future. Life sciences companies can expect to see:
- Expanded use of the accounting provisions of the FCPA to penalize companies for suspected corrupt conduct where DOJ cannot bring a bribery charge;
- Increased use of non-FCPA mechanisms, including money laundering, mail fraud, and wire fraud statutes to target corrupt conduct outside the scope of the FCPA;
- Increased enforcement from non-U.S. enforcement agencies, including increased cooperation and information sharing between those agencies;
- Higher regulator expectations of corporate compliance program design and efficacy, and implementation of robust internal remediation measures where misconduct is (or should have been) identified; and
- Increased whistleblower activity and higher whistleblower awards.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
W. Warren Hamel, a partner at Venable, chairs the firm’s Investigations and White Collar Defense Practice. He conducts internal investigations and defends individual, corporate, and nonprofit clients in white collar and environmental criminal defense and civil enforcement litigation.
Nick A. Mongelluzzo, an associate at Venable, helps clients navigate civil and criminal government enforcement actions, and advises with conducting internal corporate investigations.