2007 represented the busiest year to date for enforcement of the Foreign Corrupt Practices Act (FCPA) by U.S. government authorities. The 38 enforcement actions brought last year by the Department of Justice, Criminal Division (DOJ) and the Securities and Exchange Commission (SEC) more than doubled the previous record of 15 set in 2006. Press reports indicate that cooperation with non-U.S. anti-bribery enforcement agencies is on the rise, sometimes subjecting companies to dual enforcement actions in the United States and other countries.
Global healthcare companies are particularly susceptible to violations of the FCPA due to the number of customers and business partners (including physicians, among others) employed by public health care systems in other countries. As many such individuals qualify as non-U.S. “public officials” under the FCPA, any payment made to these persons in order to inappropriately influence their decisions concerning new or existing business may be considered an illegal bribe in violation of the FCPA.
U.S. authorities increasingly are pursuing industry-wide investigations. For example, five orthopedic implant manufacturers (Biomet, Inc.; Medtronic, Inc.; Smith & Nephew plc; Stryker Corp.; and Zimmer Holding, Inc.) recently received letters from the DOJ and SEC requesting information concerning payments to government-employed physicians in foreign countries. This increased emphasis on the healthcare sector likely will continue into 2008 and beyond.
Overview of the FCPA
The FCPA’s anti-bribery provisions apply to a broad range of entities and individuals, including:
- Corporations and other business organizations formed under the laws of the United States;
- Individuals who are citizens or residents of the United States;
- Companies and individuals who take any action in furtherance of an FCPA violation in the United States; and
- Companies with securities registered in the United States or that otherwise are required to file reports with the SEC (issuers).
The anti-bribery provisions make it illegal to pay, offer, authorize or promise to pay anything of value to non-U.S. officials (broadly defined) to obtain or retain business. The FCPA also contains accounting and recordkeeping provisions that require issuers to: (1) keep accurate and reasonably detailed books and records, and (2) maintain internal accounting controls aimed at preventing and detecting FCPA violations.
The FCPA contains a narrow exception for so-called “grease” payments to facilitate or expedite performance of a “routine governmental action,” such as processing customs documentation, providing phone service, or loading and unloading cargo. However, any action involving discretionary decision making, such as selecting which goods or services to purchase, would not be covered under this exception. While there is no bright-line test for determining what is a permitted grease payment, it is commonly understood that such payments should be of limited value. Of course, the payments must be permitted under local law, and there are circumstances in which facilitating payments might be forbidden by the foreign country's law even if they would not otherwise be prohibited by the FCPA.
The FCPA also contains two affirmative defenses. One permits payments that are “lawful under the written laws” of the foreign country; it is not sufficient that such payments are merely “accepted practice” in the country. The other covers certain limited “reasonable and bona fide expenditures, such as travel and lodging expenses . . . directly related to (A) the promotion, demonstration, or explanation of products or services; or (B) the execution or performance of a contract with a foreign government or agency thereof.” These exceptions and defenses are very narrowly construed and should not be relied upon without the advice of counsel.
Violations of the FCPA may lead to substantial criminal and civil penalties. Under the anti-bribery provisions, companies are subject to a criminal fine of up to $2 million per violation, while individuals may face criminal fines of up to $100,000 per violation and five years’ imprisonment. Criminal violations of the books and records provision carry an even steeper penalty, as a company may be subject to a fine of up to $25 million, while individuals may face up to a $5 million fine and 20 years’ imprisonment. Also, the SEC may seek to impose civil penalties of up to $10,000 per violation. Under the Alternative Fines Act, the actual fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Additional penalties may include injunctions, forfeiture of assets, disgorgement of profits, and suspension (or in some cases debarment) from doing business with the U.S. Government.
Summary of Recent FCPA Enforcement against Healthcare Companies
As noted above, in recent years U.S. enforcement actions have targeted the healthcare sector. Recent settlements of FCPA enforcement actions in the healthcare sector include:
- In December 2007 Akzo Nobel N.V., a Dutch pharmaceutical company with American Depository Receipts traded on a U.S. exchange, announced a settlement with the SEC and DOJ in connection with improper payments made by two of its subsidiaries to Iraqi government officials under the United Nations oil-for-food program. The subsidiaries allegedly made approximately $280,000 in improper payments in the form of “after-salesservice fees” to facilitate sales of pharmaceuticals to Iraq. Akzo Nobel agreed to pay approximately $2.9 million in combined fees and penalties to the U.S. Government, in addition to a fine of over $500,000 to Dutch authorities. Note that neither Akzo nor the subsidiaries at issue is a U.S. entity; nonetheless, the FCPA applied to their activities, and the U.S. Government pursued an enforcement action against them.
- In June 2005 DPC Co. Ltd. (Tianjin), a Chinese entity, pled guilty to violating the FCPA and paid a $2 million criminal fine. Its U.S. parent, Diagnostic Products Corporation, paid a $2.8 million fine, an amount equal to the company’s net profit in China, plus interest. Tianjin paid a total of $1.6 million to Chinese physicians and laboratory workers at government-owned hospitals in exchange for agreements that hospitals would procure Tianjin’s products and services. The company referred to the payments in internal documents as “commissions,” which typically represented between three and ten percent of the sales.
- Micrus, a U.S. medical device company, paid more than $105,000 to doctors at state-run hospitals in several countries. In exchange, these hospitals purchased Micrus’ products known as embolic coils. These payments were made by officers, employees, agents and salesmen of Micrus and were disguised in corporate books as stock options, honoraria and commissions. An additional $250,000 was comprised of payments for which Micrus did not obtain the necessary prior administrative or legal approval in accordance with the laws of the foreign jurisdiction. In March 2005 Micrus settled an FCPA investigation by agreeing to pay $450,000 in civil penalties and adopting an internal FCPA compliance program. Micrus also agreed to abide by certain FCPA compliance obligations for at least two years, as a condition of a Department of Justice deferred prosecution agreement.
In addition to the aforementioned pending cases involving Biomet, Medtronic, Smith & Nephew, Stryker and Zimmer Holding, a number of other healthcare companies -- including Johnson & Johnson, AstraZeneca, Siemens, and others -- currently are under investigation by the DOJ and SEC for potentially improper payments prohibited by the FCPA. In most of these cases investigators have requested documents pertaining to payments made to government-employed physicians to influence the purchasing of medical products.
Avoiding FCPA Violations
Companies can take steps to reduce the risk of violations of the FCPA. First, a company should conduct an internal assessment to identify potential areas of risk under the FCPA, including various aspects of foreign operations such as use of, and/or relationships with, distributors, resellers, agents, representatives, joint venture partners and customers.
Second, a company should review its existing compliance policies and procedures to ensure that they address bribes and other improper payments to non-U.S. officials. Special importance should be given to analyzing financial relationships with physicians in countries with a large public health system. Ongoing FCPA training and monitoring procedures are a necessary part of all corporate compliance programs.