2. INCREASED GOVERNMENT SCRUTINY AND
ENFORCEMENT OF FCPA
• Efforts coordinated by the Department of Justice (DOJ) and the Securities and
Exchange Commission (SEC)
• FCPA enforcement has become a high priority for both agencies
• Between 2008 and 2013, U.S. government collected nearly $4 billion in civil and
criminal penalties compared to $300 million in the previous five years
• Focus on third-party relationships such as M&A, joint ventures and similar
activities as source of FCPA violations
3. DRUG AND DEVICE INTERACTIONS WITH THIRD
PARTIES AND THE FCPA
• Greater focus by governmental agencies on activities of third parties (e.g.,
distributors, agents, consultants, clinical investigators, joint venture
partners) requires effective due diligence
• While enforcement efforts continue and cost of settlements increase,
effective monitoring by life sciences companies is frequently lacking
4. RECENT ENFORCEMENT ACTIONS: FOCUS ON
THIRD PARTIES
Date Company
Total Fines and
Penalties
Alleged Bribes
Made Through
Third Parties?
April 2011 Johnson & Johnson $70 million
February 2012 Smith & Nephew $22.2 million
March 2012 Biomet $22.8 million
July 2012 Orthofix International $7.4 million
August 2012 Pfizer/Wyeth 1. $60 million
December 2012 Eli Lilly $29.4 million
October 2013 Stryker $13.2 million
November 2014 Bio-Rad $55 million
5. THE SEC HAS STATED ITS FOCUS
“A healthy compliance program should also include third-party agent due
diligence. In addition to using third-party agents, many pharmaceutical
companies use distributors. This creates the risk that the distributor will use
their margin or spread to create a slush fund of cash that will be used to pay
bribes to foreign officials. Because of this added layer of cash flow, companies
frequently improperly account for bribes as legitimate expenses.
To properly combat against these abuses, a compliance program must
thoroughly vet its third-party agents to include an understanding of the
business rationale for contracting with the agent. Appropriate expense
controls must also be in place to ensure that payments to third-parties
are legitimate business expenses and not being used to funnel bribes to
foreign officials.”
- Andrew Ceresney, Director, Division of Enforcement (emphasis added)
6. DUE DILIGENCE IN THE M&A PROCESS
• Due diligence must be expanded to identify and analyze past activities by the target
entity that may increase risk of FCPA violations
• Broad scope of government oversight and lack of a de minimus or materiality
standard requires prioritization of FCPA due diligence
• Are there compliance programs in place that meet U.S. standards?
• What is the reputation of the target company and the jurisdiction for acceptance of
corrupt business practices as “the cost of doing business”?
• What type of internal controls are in place at the target company?
7. • Does the target company operate solely with its own employees or are additional
parties (e.g., agents, intermediaries) utilized in negotiating and consummating
business relationships with other parties, particularly government officials?
• How are routine interactions with the local government (e.g., permits, licenses,
applications) handled? What oversight is in place regarding these activities?
• Are HCPs engaged in activities for the target company? Are they considered
government employees under local law? Are contracts in place for all activities
undertaken on behalf of the company?
8. FCPA RISK AND JOINT VENTURES
• Apart from M&A activity, actions taken by a joint venture can lead to FCPA
violations
• BMS-Chinese joint venture
• Are there adequate internal controls in place regarding all aspects of business
operations, particularly any HCP relationships where value is transferred?
• What type of monitoring procedure is in place to identify and respond to “red
flags”?
• Are reviews of internal documents dealing with high-risk interactions standard?
9. COMPLIANCE PROGRAM AND THIRD PARTY RISKS
• KPMG/Singapore Management University study surveyed anti-bribery and
corruption compliance programs across 64 countries and a range of industries,
including life sciences.
• Some key findings:
• Only 29 percent had right-to-audit over third parties; only 41 percent of those
with audit rights exercised those rights
• Auditing was reported to be the most challenging issue
• While 8 of 10 responders had formal compliance programs, only 58 percent
included monitoring and auditing rights
• 60 percent of responders indicated M&A was part of their growth strategy; only
45 percent included compliance as part of due diligence
10. CONCLUSION
• Government enforcement of FCPA is increasing as are settlements
• Need for effective monitoring and auditing functions as part of any FCPA
compliance program
• Lack of effective internal controls may serve as an independent violation of FCPA
• Training of personnel within the U.S. and abroad are necessary (particularly where
functions are centralized)