Pharmaceutical and medical device companies operate in a stringent regulatory environment. Every aspect of product research, development, manufacture, import, export, pricing, sale and marketing in Australia and in any foreign country is tightly regulated and, to some extent, will involve interaction with government officials.
With the pressures of globalisation and increasing competition within the industry, there has been a need to implement anti-corruption legislation in key markets in order to deter corrupt practices by entities seeking to gain a competitive edge.
Companies and individuals conferring benefits to foreign officials for improper purposes may be liable under domestic and foreign laws governing the bribery of a foreign public official. The US, UK and Australia have anti-corruption laws criminalising the bribery of foreign public officials that have extra-territorial application. In this article, we examine these laws and what they mean for pharmaceutical and medical devices companies in Australia and overseas.
The Foreign Corrupt Practices Act 1977 (FCPA) was enacted in the US to enforce Securities and Exchange Commission (SEC) accounting requirements and prohibit the bribery of foreign officials. Under the FCPA, it is an offence for a company or individual to “corruptly” offer, pay, promise to pay, or authorize the payment or giving of, anything of value to a “foreign official” for the purpose of “obtaining or retaining business or securing any improper business advantage”.1
The FCPA captures bribery of foreign government officials by US individuals and corporations that occur outside the US, but which has some connection with the US. This means that any foreign or US company issuing securities on the SEC, any individual who is a citizen, resident, or national, and any company or other business entity either organised under US laws or having its principal place of business in the US, is subject to the FCPA.2
The penalties for non-compliance with the FCPA vary based on whether the perpetrator is a company or an individual. Companies can be criminally fined up to $2 million per offence whilst individuals (including officers and directors of companies) can be fined up to $100,000 and/or imprisoned for up to five years. Note also that additional civil penalties may be imposed and that under the Alternative Fines Act,3 the fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment.4
Compliance with the FCPA is of particular importance to pharmaceutical and medical devices companies which have the relevant nexus to the US. The Department of Justice (DOJ) and the SEC can investigate the pharmaceutical and medical device industries for any suspected violations of the FCPA.5 In this regard, the DOJ and SEC have investigated international payments made by pharmaceutical and medical device companies for consulting, hospitality, licensing agreements, charity and clinical trials.
It is relevant to consider the wide ambit of what constitutes a “foreign official” under US law. While the health ministry, customs officials and staff of government agencies immediately come to mind, pharmaceutical and medical device companies should be aware that the definition of “foreign officials” can extend, for example, to doctors, pharmacists and lab technicians who are employed by state-owned facilities.6 The ubiquitous engagement of healthcare professionals by pharmaceutical and medical device companies can therefore make the industry uniquely vulnerable to FCPA liability. The DOJ is increasingly scrutinising the relationship between healthcare professionals and pharmaceutical and medical companies, especially in light of the fine imposed on Johnson & Johnson of a total of US$70 million for bribing public doctors in Poland, Romania and Greece and paying kickbacks in Iraq to illegally obtain business in April 2011.7
In a quarterly report filed with the SEC in November 2011, Pfizer stated that it has recently reached agreement-in-principle with the DOJ and the SEC to resolve a foreign bribery investigation concerning “potentially improper payments made by certain Pfizer and Wyeth subsidiaries in connection with certain sales activities outside the US.”8 In another SEC filing in November 2011, AstraZeneca disclosed that AstraZeneca UK Limited’s Representative Office in Belgrade, Serbia was served with a criminal indictment relating to allegations that local employees of AstraZeneca made allegedly improper payments to physicians at the Institute of Oncology and Radiology of Serbia.9 Clearly, the DOJ and the SEC’s crackdown on the pharmaceutical industry has considerable force.
Compliance is not only a matter of adequately training and monitoring employees, especially sales representatives, under the FCPA, but also under the Code on Interactions With Healthcare Professionals published by PhRMA10 (particularly section 5) and applicable overseas codes of practice.
The False Claims Act11 allows a private individual (a whistleblower) to sue in the name of the US government against an organisation for acting or failing to act in relation to fraud. Such Qui Tam actions allow the private individual (usually employees or former employees) to receive a proportion (15-30%) of the amount recovered by the government.
There has been much debate surrounding the provision of incentives to whistleblowers. Some believe that incentives are necessary to compensate whistleblowers for the risk of losing their jobs and reputation (which would jeopardise the prospects of future employment) and the risk of being “blacklisted”, vilified and demoted within the company. However, others have argued that the provision of incentives could give rise to fabricated claims12 and could also frustrate company efforts to manage compliance internally and rely on internal mechanisms to investigate fraud.13 However, Howse and Daniels14 reported that studies of employee attitudes generally indicated that employees were inclined to report wrongdoing internally before reporting such information to external authorities, as long as they did not fear internal retaliation.15 Nevertheless, external whistleblowing might be an attractive alternative in cases where employees feel that internal whistleblowing mechanisms could be used to allow wrongdoers at senior levels to identify troublemakers and afford them the opportunity to destroy, conceal or tamper with evidence.
The provision of incentives to whistleblowers has attracted considerable attention in the US. Enforcement actions involving the pharmaceutical industry have consistently been the most successful from year to year.16 Recoveries from fraud against federal health care programs were more than $2.4 billion in the 2011 fiscal year and in the same period, the US government recovered nearly $2.2 billion in civil claims against pharmaceutical companies.17
The Bribery Act 2010 (BA), which is broader than the FCPA and the Australian Criminal Code, constitutes one of the strictest anti-bribery regimes in the world. The BA came into effect on 1 July 2011 and contains offences of giving or receiving a bribe, bribery of a foreign public official, and a new strict liability offence for companies that ‘fail to prevent’ bribery by their employees or agents. That is, a company will automatically be guilty of an offence of ‘failing to prevent bribery’ by an employee or agent even if the company was unaware of the bribe. Penalties under the BA include an unlimited fine and 10 years imprisonment.
The Ministry of Justice has released The Bribery Act 2010 Guidance18 (Guidance) which details the types of policies and procedures that regulators expect to be implemented and clarifies the UK Government’s policy on aspects of the legislation.
All UK companies and individuals are subject to the Act as is any foreign company or individual who commits an element of an offence in the UK. The new offence of ‘failing to prevent’ bribery will apply to any corporation or business entity that ‘carries on a business or any part of a business’ in the UK. The Guidance indicates that in order to ‘carr[y] on a business or any part of a business’ in the UK, a company will need to maintain a ‘demonstrable business presence’ in the UK and states that the mere listing of securities on a UK stock exchange will not, of itself, fall within the scope of the BA.19 The UK’s Serious Fraud Office has indicated that it will minimise any perceived disadvantage to UK companies and actively seek to prosecute foreign companies with operations in the UK.20
Ultimately, the precise extent of the BA’s extra-territorial effect will be a question for the UK courts to resolve. In the meantime, it would be prudent for Australian and other non-UK companies with operations in the UK to ensure that their internal policies and procedures adequately mitigate the risk of contravening the BA.
Unlike the equivalent provisions of the Australian Criminal Code or the US FCPA, the BA contains no exception or defence for ‘facilitation payments’ made to expedite or secure the performance of a “routine government action.”21 In Australia, allowable ‘facilitation payments’ must not relate to any decision to award new business or to continue an existing business, or any decision related to the terms of the new or existing business. The ‘facilitation payment’ must be of minor value and must be documented. Facilitation payments have always been illegal under English law and remain so under the BA. The Australian Government is currently reviewing the treatment of facilitation payments, among other things, with a view to abolishing the defence under Australian law.22
In relation to private sector bribery (also known as gifts, hospitality and entertainment), the Guidance states that transparent, proportionate and reasonable “bona fide hospitality and promotional or other business expenditure which seeks to improve the image of a commercial organisation, to better present products and services, or establish cordial relations” is not intended to be criminalised under the BA.23 However, the Guidance emphasises the need to consider the surrounding circumstances, including the seniority of the person who receives the hospitality and the norms in the industry.24 The standard of reasonableness in the case of the pharmaceutical industry is likely to be judged by reference to the Association of the British Pharmaceutical Industry’s Code of Practice for the Pharmaceutical Industry (Code). A breach of clause 19 of the Code, which provides that the level of subsistence offered to healthcare professionals “must be appropriate and not out of proportion to the occasion” may mean that an offence has been committed under the BA.
This area of law is further complicated by the fact that there are differences in the scope of the Code and the BA. The broader application of the BA means that the BA can capture situations that the Code does not. Thus, when doing business in the UK, care must be taken to scrutinise hospitality arrangements to ensure compliance with both the Code and the BA.
In Australia, the offence of bribing a foreign public official is contained in Division 70 of the Criminal Code, which is in Schedule 2 of the Criminal Code Act 1995 (Cth). Section 70.2 of the Criminal Code captures a broad range of conduct, whereby a person offers or pays a benefit to a foreign public official with the intention of influencing that person in the conduct of their duties. The offence is based on intent and applies regardless of the outcome of the bribe or the alleged necessity of the payment.
The offence applies where the conduct occurs wholly or partly in Australia, or wholly or partly on board an Australian aircraft or an Australian ship.25 The offence also applies to conduct committed wholly outside Australia where the person who is alleged to have committed it is:26
• an Australian citizen
• a resident of Australia, or
• an Australian company.
From 20 February 2010, the Crimes Legislation Amendment (Serious and Organised Crime) (No. 2) Act 2010 amended the Criminal Code by raising the penalties for bribery of foreign public officials. The penalties for individuals are a fine of up to $1.1 million and/or up to 10 years imprisonment27 whereas the penalty for a body corporate includes:
• a fine of up to $11 million
• three times the benefit flowing from the conduct, or
• if that benefit cannot be determined, 10 % of annual turnover.
In addition to criminal penalties, any benefits obtained by foreign bribery can be forfeited to the Australian Government under the Proceeds of Crime Act 2002 (Cth). These penalties are more severe than the penalties under the FCPA (where the maximum penalty is two times the benefit received) and are intended to reflect the serious nature of such offences and act as a deterrent.
There is a regulatory gap in Australia for uncovering fraud and anti-competitive behaviour amongst the members of the Australian pharmaceutical and medical device industry. The Criminal Code only provides for bribery offences of Commonwealth public officials and foreign officials, but does not extend to the bribery of members of the industry, such as doctors and pharmacists, like the US FCPA (for employees of state-owned facilities) and the UK BA. The Medicines Australia Code of Conduct goes some way to ensuring transparent and ethical dealings within the industry, but there is a need to improve existing laws to facilitate access to information to investigate and prosecute bribery within the Australian pharmaceutical and medical device sector.
The legal and regulatory environment in which pharmaceutical and medical device companies operate and the globalised structures of such companies presents unique obstacles to complying with domestic and foreign anti-corruption legislation and various Codes of Practice.
Operating in this complex area of law, pharmaceutical and medical device companies should be aware that the engagement of healthcare professionals (whether through sponsorships, the provision of educational events or provision of gifts and entertainment) can not only fall foul of the Medicines Australia Code of Conduct (and the equivalent overseas Codes of Practice) but can also be an offence under the Criminal Code, the BA or the FCPA. Companies should ensure that they have robust anticorruption policies and internal controls in place which take account of the relevant legislation and Codes of Practice. More importantly, these policies should be regularly reviewed and enforced.
Pharmaceutical and medical device companies must train and monitor the actions of subsidiaries, agents, employees and contractors in order to reduce the risks of contravening domestic and foreign anti-corruption laws and applicable Codes of Practice. Anti-corruption policies ought to include a requirement for prior written authorisation by an officer of the company for any payment to a foreign official, and ought to prescribe legally scrutinised documentation and contractual terms for the engagement of agents and contractors. This is in addition to undertaking a thorough due diligence process before so engaging third parties in order to mitigate the risks of breaching domestic and foreign anti-corruption laws.
It is important to be aware that even a company with thorough anti-corruption policies and procedures may fail to prevent a foreign bribe given the strict legal tests. However, having in place such policies and procedures and evidence to demonstrate a company’s enforcement of its policies will stand the company in better stead in the event of legal or regulatory action.