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An internal audit of payment practices in Eastern Europe has revealed payments for elaborate travel for government health authorities and state-employed physicians in exchange for approval and prescription of your products. What is the first thing you should do? Lawyer Mara Senn offers some advice.
It is a pharmaceutical executive’s worst nightmare: an internal audit of payment practices in Eastern Europe, triggered by a whistleblower report, has revealed that payments for elaborate travel for regional government health authorities and state-employed physicians in exchange for approval and prescription of your pharmaceutical products may have occurred. As your general counsel has previously informed you, under the doctrine of respondeat superior the corporation itself can be held criminally liable for the actions of its employees working within the scope of their duties. You also know that the U.S. Securities and Exchange’s (“SEC”) Director of Enforcement has recently given a speech focusing on these very issues at CBI’s Pharmaceutical Compliance Congress. What is the first thing you should do?
Preliminary issues to consider
Here are some of the primary concerns in such a situation:
• The scope of the problem.
• Possible violation of Foreign Corrupt Practices Act (FCPA) and other countries’ bribery laws.
• Potential SEC disclosure obligations.
• Public and investor relations impacts.
• Duty to protect whistleblower.
• Duty to preserve corporate assets and to stop any ongoing conduct.
• Compliance with internal company policies and procedures.
The most important issue is getting your arms around the scope of the problem, since that will determine most of the other issues. Facts need to be gathered as soon as possible. But who should do the investigation? Given the possible high stakes and the importance of legal considerations, in this hypothetical, it is advisable to have the legal function run the investigation - this will ensure that it gets the necessary focus it deserves and will protect legal communications as privileged. Given less serious facts, involvement of the legal department may not be necessary.
Whether to use outside counsel
The next issue is whether outside counsel should be brought in. Use of outside counsel is expensive and can be disruptive. On the other hand, if this ultimately involves government enforcers, they will see the involvement of outside counsel as ensuring that the investigations has been conducted independent of the interests of the company. Outside counsel can also bring a higher level of expertise, especially in a cross-border investigation that can raise complicated data privacy, employment and cultural issues. And it can help preserve internal counsel’s client relationships.
In order to make this important decision and to make other decisions regarding this situation, it is important to advise all of the key stakeholders. In addition to informing the legal department, the company should advise the board - or a relevant subcommittee of the board, the communications staff and the human resources department. The board needs to be apprised of possibly large corporate risks. Because of the involvement of a whistleblower, the possibility of a public disclosure, and the sensitivity of the issue, the communications point person should be alerted and be ready to spring into action if necessary. In addition, human resources departments are usually adept at dealing with whistleblowers - they can help make sure that the company does not engage in improper action towards the whistleblower and ensure that the whistleblower is not retaliated against.
Carrying out the investigation
Whoever is ultimately in charge of the investigation should come up with an investigation plan. This should include decisions like whether the investigation should be overt or covert. Some advantages to keeping the investigation covert at the initial stages include preventing spoliation of evidence, preventing disruption to business, and preventing publicity. The plan should also include a process for preserving and collecting documents, and interviewing witnesses.
Once the investigation has been completed, it is important to determine what remedial actions need to be taken, if any. This could include employment actions, changes in compliance, and strengthening of internal controls. It is important to consider what could have prevented the problem in the first place and put safeguards in place to prevent and detect the recurrence of any such issue in the future.
Special issues in cross-border investigations
Cross-border investigations raises some thorny issues that are not always present in domestic investigations. These include:
• Interviewing a non-English speaker: Cross-border investigations often involve people who speak little to no English as central players. To avoid misunderstandings, to understand nuances, and to put the interviewee at ease, try to offer non-native speakers the opportunity to have a translator attend an interview.
• Asking a non-English speaker to sign forms: If interviewees sign a form as part of the interview, such as a data collection consent form, be sure to have a copy in the interviewee’s native language to minimize confusion and resistance.
• Different legal regimes outside the U.S.: Try to consult local counsel about the following, which can create problems during the course of the investigation:
Data Privacy Laws
• Cultural Pitfalls
• Labor Requirements
• Attorney-Client Privilege Rules: Many foreign jurisdictions do not recognize the attorney-client privilege between in-house counsel and company employees. Therefore, external counsel or possibly U.S.-based in-house counsel should be used in non-U.S. interviews to preserve the privilege.
• Other Local Legal Requirements
Local Enforcement Actions: Be aware of the approach that the local enforcement agencies typically take, such as dawn raids. This will allow the company to anticipate possible involvement of the local enforcers, can help to alert the investigation team and/or local operations, and will hopefully minimize disruption.
Security Risks: The investigation team should be aware of potential security and health issues that exist in the location of the interviews and document collections. The company should take reasonable precautions to ensure the safety and health of their team. In some instances, it may be more cost effective to send the interviewees to another location or to conduct phone or video interviews.
Whistleblower Issues: Although U.S. whistleblower protections may not apply in foreign jurisdictions, it is a best practice to ensure that whistleblowers are not retaliated against, no matter where they are located. Federal sentencing guidelines provide for a reduction in the sentencing calculation for companies with an effective compliance and ethics program in place at the time of an offense (§ 8C2.5(f ) (1)) which, according to the guidelines, includes having and publicizing a system for employees or agents to report “potential or actual criminal conduct without fear of retaliation.” § 8B2.1(b)(5)(C).
Whether to self-report
During the investigation, the company must determine whether to self-report to the government any violations discovered. There is no affirmative legal duty whatsoever to report any crimes to the government. Whether to do so is a very complicated calculus.
Although the corporate sentencing guidelines provides for a lower fine if a company self reports, in practice it is not clear that self-reporting benefits corporations. If a corporation does not self-report, there is a relatively low probability of detection. The involvement of a whistleblower increases that probability. SEC filing disclosure obligations may also support self-reporting. And the board may insist on disclosure.
If no self-reporting has occurred, but the government later launches an investigation into the company, full cooperation at that point may garner as much cooperation credit as if a company had self-disclosed in the first place. Recently, a federal prosecutor admitted that he did not see a significant difference in government response to self-disclosing on the one hand, and waiting until the government launches its own investigation, and then fully cooperating. Receiving similar cooperation credit is much more likely if the company has attempted to fully remediate any problems at the time that the issue is discovered.
If a company does self disclose, there is a possibility that the government will request anti-corruption investigations in more countries than the company initially undertook. In addition, producing documents to the government and giving them access to witnesses may lead to additional investigations into issues like sanctions, antitrust and tax.
• Be prepared: This sort of situation could arise at any time. Ideally, a company should have an investigation procedure in place ahead of time. This ensures that the correct players are notified and know what to do. It also prevents merely improvising on the spot, which can result in missed opportunities.
• Don’t Forget Public and Investor Relations: Given the speed of the 24-hour news cycle, it is important that those responsible for communications with the public be kept in the loop.
ª Protect the Whistleblower: Sometimes companies can get into more trouble retaliating against or muzzling a whistleblower than for the reported conduct in the first place. The SEC has just launched multiple investigations into various companies for including “clauses that impede employees from telling the government about wrongdoing at the company or other potential securities-law violations” or “require employees to agree to forgo any benefits from government probes.”
• Carefully Consider Whether To Self-Report: While the government touts the benefits of self-disclosure, it may be more prudent to fix the problem, not self-report and then fully cooperate if the government comes knocking at your door.
Mara Senn is Partner at Arnold & Porter LLP, Washington, DC.
 Andrew Ceresney, FCPA, Disclosure, and Internal Controls Issues Arising in the Pharmaceutical Industry, CBI’s Pharmaceutical Compliance Congress, March 3, 2015, available at http://www.sec.gov/news/speech/2015-spch030315ajc.html#.VP2-QnzF_7o.
See generally Mara V.J. Senn and Michelle K. Albert, “How to Conduct an Anti-Corruption Investigation: Developing and Implementing the Investigation Plan (Part Two of Two)” The FCPA Report, Vol. 3, No. 1, Jan. 8, 2014.
 Rachel Louise Ensign, SEC Probes Companies’ Treatment of Whistleblowers, Wall St. J., Feb. 25. 2015.