Legal: Foreign Policy

Drug companies doing business abroad—and who isn't?—face a special risk of running afoul of stepped-up enforcement of anticorruption laws. Travel alert: When in Rome, don't!
Jun 01, 2007

R. Christopher Cook
Pharma is caught in the cross-hairs of a government-enforcement initiative. The industry can take some comfort in the fact that it's not alone—all multinational companies, including those in the drug industry, are increasingly at risk of being investigated and prosecuted for engaging in corrupt foreign practices. Why the increased scrutiny? It's not based on anything so seedy or so simple as a surge in the occurrence of bribery and corruption worldwide. Rather, it's the fruit of tougher anticorruption laws and stepped-up enforcement in the United States and Europe—as well as post-Sarbanes-Oxley requirements that companies self-disclose violations. Under the federal Foreign Corrupt Practices Act, which is the government's Stradivarius in this area, offending companies face fines of up to $2 million per violation and offending individuals face jail terms of up to five years per violation. For pharma, the stakes are high and the temperature is rising.

Jonathan B. Leiken
Companies that make or sell pharmaceuticals on a global scale run a special risk. The reason: Pharmas sell directly to hospitals and physicians in foreign countries where healthcare is routinely owned or controlled by the government. Both US and foreign officials have made clear that they will punish companies for payments made to physicians to influence government or hospital purchasing decisions. The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have done precisely that in several big cases recently: Diagnostic Products Corporation's foreign subsidiary made improper payments to state-owned hospitals in China, resulting in a criminal conviction for the company, a $2 million criminal penalty, and a $2.7 million civil fine; Micrus Corporation made improper payments to physicians at government-owned hospitals in France, Turkey, Spain, and Germany, resulting in a $450,000 civil penalty and a deferred prosecution agreement from DOJ; Schering-Plough's Polish subsidiary made improper payments to a local charity headed by a government official, resulting in a $500,000 civil penalty; and Syncor's foreign subsidiaries in Taiwan, Mexico, Belgium, Luxembourg, and France made improper payments to physicians at government-owned hospitals, resulting in $2.5 million in civil penalties. Just last year, Bristol-Meyers Squibb announced an SEC inquiry into its German pharmaceutical subsidiaries. And with market growth in India, China, Brazil, and other nations increasingly outstripping that of the developed world, more and more firms are going global—and straight into the crosshairs.

Know the Laws—and Your Own Weak Links

Drug companies with global ops can reduce their risk by putting their house in order. First, a firm should establish clear policies to detect and prevent violations of the Foreign Corrupt Practices Act's antibribery provisions. Companies should also identify the functions most likely to be danger areas as well as the specific employees most in need of compliance—for instance, staff in business development or with access to funds for entertaining or marketing prospective customers or business partners. And most important, management must educate the entire crew about the new procedures, monitor compliance, facilitate reporting, and investigate and respond to violations of law as they are discovered.

An effective anticorruption compliance program depends on high-quality risk assessment. A company first must authorize oversight and consistency responsibilities—usually to the general counsel or a compliance officer or committee (with the assistance of outside counsel as necessary). In turn, these folks must master not only the Foreign Corrupt Practices Act's application to pharma but also all anticorruption laws in the foreign countries in which the company operates.

Once the relevant legal boundaries are determined, a list of fairly obvious questions follows: Which employees interact with physicians and hospitals in foreign countries? How are the company's products marketed there, and what methods are used to develop business relationships? What degree of independence does the company give to operations and agents there? What controls are in place to ensure that all expenditures for marketing or business development are documented?

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