FCPA Enforcement Trends: A Spotlight on the Unique Risks Faced by the Life Sciences Industry

Transcription

1 CBI FCPA Compliance Events January 31, 2017 Miami, Florida FCPA Enforcement Trends: A Spotlight on the Unique Risks Faced by the Life Sciences Industry

2 2 Panelists John Kelly Partner Bass Berry & Sims PLC Washington, DC Maria Villanueva Sessions Latin America Compliance Zimmer Biomet Miami, FL Glenn Pomerantz Partner BDO USA, LLP New York, NY Christian Perez Font Chief Compliance Officer OPKO Health Miami, FL

3 OVERVIEW OF ANTI-CORRUPTION REGULATIONS 3

4 4 Foreign Corruption & Healthcare In the last decade, there has been a surge in FCPA enforcement, especially in the healthcare sector.... The most significant challenges of compliance with the FCPA in the healthcare industry arise out of the fact that many foreign hospitals, clinics, laboratories, and medical providers are state-owned or state controlled, which sweeps them into the FCPA s jurisdictional reach. Korkor, Samer and Saleem, Nicole, Ohio State Law Review, Enforcement of the Foreign Corrupt Practices Act in the Healthcare Industry and Foreign Bribery s Adverse Consequences for Patients, Volume 74, 2012.

5 5 Overview: FCPA Enacted in 1977, the FCPA prohibits bribery of foreign officials. Two key components: Anti-Bribery Provisions. The FCPA prohibits the giving or offering directly or indirectly of gifts, payments, or anything of value to foreign government officials to secure an improper benefit Accounting Provisions. The FCPA requires issuers to maintain accurate books and records and reasonably effective internal controls Joint enforcement by U.S. Department of Justice ( DOJ ) and U.S. Securities and Exchange Commission ( SEC )

6 6 Overview: FCPA, Anti-Bribery Provisions Elements (1) Offer, Promise, or Payment (2) Of Anything of Value (3) To a Foreign Official (4) Made with Corrupt Intent (5) To Assist in Obtaining or Retaining Business

7 7 Overview: FCPA, Accounting Provisions Books and Records Provisions Maintain books, records, and accounts in reasonable detail that accurately reflect the transactions and dispositions of their assets No materiality threshold Internal Controls Provisions Devise and maintain a system of internal accounting controls to provide reasonable assurance that transactions are authorized by management and financial statements are in conformity with GAAP Designed to detect and prevent violations

8 The FCPA Strikes back A look at 2016 Enforcement and Trends

9 9 The FCPA Strikes Back 27 companies paid about $2.48 billion to resolve FCPA cases 2015: 11 companies paid $133 million 2014: 10 companies paid $1.56 billion Four 2016 Resolutions Make Top 10 List Odebrecht / Braskem ($3.5 billion) VimpelCom ($795 million) Teva Pharmaceutical Industries ($519 million) Och-Ziff ($412 million)

10 Enforcement Trends Continued focus on Healthcare/Life Sciences/ Medical Device Industry: 9 FCPA enforcement actions in 2016 SciClone (February $12.8 million; SEC resolution) Olympus (March 1, $22.8 million DOJ resolution) Nordion (March 4, $375,000 SEC resolution) Novartis (March 23, $25 million SEC resolution) Analogic (June 21, $14.8 million DOJ/SEC resolution) AstraZeneca (August 31, $5.5 million SEC resolution) Nu Skin (September 20, $766,000 SEC resolution) GSK (September 30, $20 million SEC resolution) Teva (December 22, $519 million DOJ/SEC resolution) Healthcare & Life sciences sector saw the most enforcement actions in Since 2011 either the DOJ, or SEC has brought an FCPA enforcement action against at least one company in the healthcare sector

11 Enforcement Trends Increased focus on geographical regions in addition to specific industries (i.e. Healthcare/Life Science/Medical Device) Geographical regions of note: China (most number of actions in 2016) - 16 out of 31 FCPA enforcement actions brought in 2016 involved allegations of misconduct in China Latin America (second most number of actions in 2016) - 11 out of 31 FCPA enforcement actions brought in 2016 involved allegations in Latin America

12 Enforcement Trends Increased multi-jurisdictional cooperation and enforcement in anti-corruption Includes parallel investigations as well as information sharing Increased investigations, prosecutions involving U.S. and non-u.s. companies as well as individuals Proliferation of anti-corruption laws (and enforcement) in foreign jurisdictions E.g., Brazil Clean Company Act

13 Enforcement Trends Increased Focus on Internal Controls:. Payment red flags include: Cash payments/ Petty cash Cash pooling schemes One-time vendors Unusually high commission and discounts Unusual contract terms Re-directed payments Pressure exerted for payments to be made urgently or ahead of schedule Fictitious travel agent payments Facilitation payments Lack of transparency into transactions Payment descriptions that do not correspond to the appropriate account General manager override Direct payments to government-related parties for research and/or symposia

14 Enforcement Trends Individual Prosecutions - 27 individuals charged in individuals entered into criminal guilty pleas for violations of the FCPA (Compared to 4 in 2015 and 6 in 2014) 2 additional individuals were criminally charged with FCPA violations (Compared to 2 in 2015 and 6 in 2014) 15 individuals settled civil FCPA charges brought by the SEC in 2016 (Compared to 2 in 2015 and 6 in 2014) Issued in September 2015, the Yates Memorandum signaled a renewed focus on individual prosecutions for corporate wrongdoing

15 Enforcement Trends April 5, 2016 DOJ announced a one-year pilot program aimed at encouraging companies to voluntarily self-disclose potential FCPA violations Under the program, companies will provide extensive cooperation in exchange for reduced penalties. 5 published declinations under the FCPA Pilot Program in 2016: Akamai Nortek Johnson Controls HMT LLC NCH Corp. HMT LLC and NCH Corp. were declinations with disgorgement, a new category of resolution Both privately-held companies, so no related SEC resolutions

16 RISK AREAS: LATIN AMERICA 16

17 17 Cultural Considerations Certain cultures are more tolerant of gift-giving and of receiving bribes and consider payment of bribes as a normal part of doing business Characteristics of cultures more accepting of gift-giving Prevalence of informal rules governing everyday life and business relationships Weaker rule of law (courts not independent) Lack of transparency and accountability in government Recent study on Latin America s corruption levels Found that an average of 20% of the region s people reported having been asked to pay a bribe by a policeman or another public official within the past year (compared to 5% in the U.S. and 3% in Canada)

18 18 Reliance on Third Parties If a third-party is legally considered an agent of an entity, the government may hold the company liable for the actions of its agent

19 19 Reliance on Third Parties The use of third party is particularly common in Latin America For example, Wal-Mart executives in Mexico allegedly used middlemen known as gestores to pay bribes to Mexican government officials, in order to obtain building permits, among other things The gestores are alleged to have charged a fee of 6% of the bribe, worked closely with the company executives, and provided coded invoices. The bribes were allegedly disguised as legal fees in Wal-Mart s books. The Wal-Mart investigation is ongoing after at least 5 years of investigation by the DOJ/SEC As of October 2016, Wal-Mart reported having spent $791 million in connection with bribery allegations

20 20 Regional Anti-Corruption Laws Increased prevalence of strengthened anti-corruption laws i.e. Brazil Clean Company Act - The act was signed into law in August of 2013 and implemented on January 29, It demonstrates Brazil s significant commitment to the rule of law i.e. Mexico's new National Anti-Corruption System The act was signed into law in July 2016, marking strong anti-corruption efforts in Mexico Increased enforcement by local agencies and coordination with other enforcement bodies i.e. Odebrecht / Braskem (Brazil, U.S. and Swiss authorities)

21 RISK AREAS: LIFE SCIENCES 21

22 Healthcare Enforcement Actions

23 23 Third Parties Partnerships with foreign hospitals and healthcare providers create FPCA risk A high percentage of foreign hospitals or other healthcare facilities are state-owned entities, making them instrumentalities of a foreign government Employees of state-owned entities qualify as foreign government officials Therefore, payments to employees or representatives are subject to FCPA scrutiny Companies can be liable not only for payments it makes to these foreign government officials, but also for payments a partner or other third party makes on behalf of the entity

24 24 Third Parties: Risk Areas Fee for Service Arrangements o HCPs/Key Opinion Leaders (KOLs) o Advisory Boards o Clinical Investigators o Speaker Programs/ Roadshows /Roundtables Consultants (Law, Regulatory, Customs, Business, Security) Educational Grant/ Sponsorships Recipients Distributors Sale Agents/Representatives Custom Agents/Freight Forwarders Travel Agents Meeting Planners/Franchises Anyone who interacts with governmentaffiliated organizations

25 25 Clinical Trials Increasing percentage of clinical trials occurring overseas, including in high-risk markets Many clinical investigators will be deemed foreign government officials, creating increased FCPA scrutiny Recall that any person working for a public healthcare system will be considered a foreign official for FCPA purposes Biomet Settlement: In March 2012, medical device manufacturer, Biomet, entered into a $22.8 settlement with DOJ to resolve allegations that it violated the FCPA by making improper payments to doctors in connection with clinical trials and by improperly recording these payments as entertainment expenses

26 26 Entertainment & Hospitality Travel, hospitality, and other benefits provided in the normal course of business can create FCPA risk Such hospitality may be in connection with: Promotional activities Continuing medical education, Scientific or medical research, Clinical trials Post-market studies Whether a sponsored event is related to scientific exchanges or promotional activities is often unclear

27 27 Customs Clearance Process A significant number of enforcement actions focus on corrupt payments made to expedite the logistics process and/or to secure customs clearance. Delays at customs can be particularly problematic when dealing with perishable drugs or other goods Risk areas include: Reliance on third parties, including freight forwarders, carriers, and customs brokers Bribes of small monetary value (liquor, cigarettes, cash) are customary (and expected) in many markets

28 28 Customs Clearance Process Red flags as they pertain to logistics and customs clearance include: Use of customs brokers (or other third parties) without conducting appropriate pre-contracting due diligence Poor customs controls, which allow for discretionary processes and fees Ambiguous shipping and/or customs invoices Non-routine fees classified as expediting administrative or processing Cash-based economies Reliance on facilitation payment exception oftentimes problematic in this context

29 29 Regulatory Approvals Regulatory approvals, including licensing and permitting. Securing approvals to conduct clinical trials or other business operations is subject to enhanced FCPA scrutiny Risk Areas include: Frequent interactions with government officials with discretionary authority Securing licenses or permits is often critical to a business unit s operation or continuing operations (e.g., building permit, utilities) Often done through a third-party intermediary

30 REPRESENTATIVE ENFORCEMENT ACTIONS (2016) 30

31 Olympus Dual Anti-Kickback Statute and FCPA resolution with the DOJ in March 2016 Olympus is the biggest distributor of endoscopes and related medical equipment in the US and sells the devices around the world Olympus agreed to pay $22.8 million and entered into a three-year DPA to resolve criminal FCPA allegations Alleged misconduct involved the company s Latin America unit Company provided cash, free or discounted equipment, medical education travel, among other things of value, to doctors working at government hospitals and clinics Company executives kept a spread sheet of the illegal payments and linked them to sales and revenues Separately, Olympus agreed to pay $612 million plus interest to resolve parallel criminal and civil investigations into alleged violations of the Anti-Kickback Statute and the False Claims Act. The bulk of the fine to resolve Anti-Kickback and False Claims Act violations Consulting payments, foreign travel, lavish meals, millions of dollars in grants and free endoscopes 31

32 32 Odebrecht / Braskem In December 2016, Odebrecht and Braskem agreed to global settlement of $3.5 billion to U.S., Swiss, and Brazilian regulators The largest-ever global foreign bribery resolution First FCPA resolution arising from Brazil s Operation Car Wash Odebrecht and Braskem were accused of making hundreds of millions of dollars in bribery payments to foreign government officials all over the world According to the charging documents, from 2001 to 2016, Odebrecht paid $788 million in bribes in connection with more than 100 infrastructure and public works projects around the world, including in Angola, Argentina, Brazil, Colombia, the Dominican Republic, Ecuador, Guatemala, Mexico, Mozambique, Panama, Peru, and Venezuela, to obtain benefits of at least $3.3 billion. Brakem is accused of participating in the schemes from 2002 to 2014, paying approximately $250 million to pay bribes to secure benefits of approximately $465 million. Good example of cross-border cooperation and enforcement

33 33 Teva Pharma In December 2016, Teva, agreed to pay more than $519 million to resolve FCPA violations with DOJ and the SEC Teva is the world s largest manufacturer of generic pharmaceutical products Between 2002 and 2012, Teva is alleged to have made corrupt payments to high-ranking ministry of health officials in Russia and Ukraine to influence the approval of drug registrations and to state-employed physicians in Mexico to influence the prescription of products. Teva agreed to a deferred prosecution agreement and to retain a corporate compliance monitor for three years.

34 34 Embraer In October 2016, Brazilian-based aircraft manufacturer Embraer S.A. agreed to pay $205 million to resolve bribery allegations with DOJ, SEC and Brazilian authorities According to the charging documents, Embraer paid millions of dollars in bribes to win government aircraft contracts around the world Embraer entered into a three-year DPA to resolve the case. The company agreed to a criminal penalty of over $107 million, to continue to cooperate with the investigation, to enhance its compliance program, and to retain an independent corporate compliance monitor for three-years

35 35 Rolls Royce On January 17, 2017, Rolls Royce agreed to $800 million global resolution to settle bribery allegations with authorities in the U.S., the U.K., and Brazil Rolls Royce is U.K.-based manufacturer and distributor of power systems for the aerospace, defense, marine and energy sectors From 2000 to 2013, the company is accused of paying bribes to foreign officials in 12 countries through third parties in exchange for confidential information and obtaining contracts

36 LATAM UPDATES 36

37 37 Brazil Brazil Clean Company Act, effective January 29, 2014 Subjects Brazilian companies and those companies operating in Brazil to civil and administrative sanctions for bribing Brazilian or foreign government officials Prohibits facilitation payments Provides leniency but not an affirmative defense for internal controls, voluntary disclosure, and cooperation Brazil is a signatory to the OECD Anti-Bribery Convention Ranks 79 th out of 176 on Transparency International's 2016 Corruption Perceptions Index

38 Key Aspects of Clean Company Act Application and Jurisdiction Prohibited Conduct Bribery Bid Rigging Tampering with Governmental Investigations Strict Liability Joint and Several Liability Piercing the Corporate Veil

39 Key Aspects of Clean Company Act Successor Liability Third Parties Penalties Compliance Mechanisms and Regulation Leniency Agreements Statute of Limitations

40 40 Argentina Corruption is regulated by the Argentine Criminal Code (corruption generally) and the Law regarding Ethics in the Practice of Official Duty (addressing public officials) October 2016 a series of anti-corruption law was proposed that would heavily punish companies found guilty of bribing public officials (under current law, only individuals are prosecuted) Historically low enforcement by local authorities Note: Following the Ralph Lauren FCPA enforcement action and resolution involving bribes to Argentine customs officials, Ralph Lauren wound down operations in the country Argentina is a signatory to the OECD Anti-Bribery Convention Ranks 95 th out of 176 total countries on Transparency International s 2016 Corruption Perception Index

41 41 Chile Criminal code and the Criminal Corporate Liability Law penalizes bribery of domestic and foreign government officials Came into force in 2002 and amended in 2009 to become more stringent criminalizes the act of offering, promising, or paying a bribe Law provides credit for corporate compliance programs and, uniquely, allows for corporate entities to have their compliance programs certified Chile is a signatory to the OECD Anti-Bribery Convention Ranks 24 th out of 176 total countries on Transparency International's 2016 Corruption Perception Index

42 Peru Criminal code penalizes bribery of domestic and foreign government officials Significant developments/modifications to anti-corruption laws in April 2016 Introduction of corporate liability for transnational bribery October Civil death by corruption law bars public officials convicted of corruption from holding a position in government January 2017 Extended corporate liability to bribery of domestic public officials or servants (effective. Jan. 1, 2018) Peru is working to become a party to the OECD Anti-Bribery Convention (The Peru Country Program launched in 2014 aims to complete its accession process in 2017) In October 2016 the newly elected Kuczynski government declared that the OECD accession process was at least 70% complete. Ranks 101st out of 176 total countries on Transparency International's 2016 Corruption Perception Index

43 43 Mexico Recent legal developments give rise to the most far-reaching anticorruption enforcement system to date in Mexico In April 2015, Mexico s Congress passed a broader anti-corruption law Strengthened oversight of public officials Created a Special Anticorruption Prosecutor position with investigative powers Gave additional powers to Mexico s Federal Audit Office and the Public Administration Ministry Created special court to oversee corruption-related issues The General Law on Administrative Accountability (new anti-bribery law) : - A company may be subject to liability and sanctioned for misconduct carried out by employees and third parties who acted on the company s behalf to obtain benefits for the company - Corporate liability may be reduced if the authorities determine the company had sufficient anti-corruption compliance policy In July 2016, Mexican President approved the laws of Mexico's new National Anti-Corruption System The objective is to coordinate the efforts of all Mexican governmental bodies at the federal, state, and municipal levels that are involved in anticorruption enforcement. Ranks 123rd out of 176 total countries on Transparency International's 2016 Corruption Perception Index

44 May the FCPA be with you

45 QUESTIONS 45

46 HYPOTHETICALS 46

47 47 Hypo #1 Your company s new marketing director for Latin America announces a new conference for physicians to take place at a resort in Costa Rica, where physicians, who will be invited from across Latin America, will be trained on the uses and benefits of your new product. Issues 1. Level of travel (e.g., coach v. first class). 2. Spouses invited? Who is paying for them? 3. Other travel expenses meals, etc.? 4. What training materials provided? 5. Is attendance monitored?

48 48 Hypo #2 An internal audit review reveals monthly checks being paid to a physician through an account titled research. The sales rep tells you that this physician is being paid as part of a research protocol relating to one of your drugs. Issues 1. Do you receive any results/work product from physician? a. Of any value? b. Demonstrate any independent work? 2. How was the amount calculated? a. Is it a set fee or variable? b. Does it correlate in any way to his prescription volume?

49 49 Hypo #3 Your company was just awarded a contract to supply your newest product to all of the government-owned hospitals in a Latin American Country. A compliance review of the deal reveals that a third-party agent was used to facilitate the bidding process, and the agent was paid 18% of the deal amount. No other information about the agent is available in the file. Issues What Do You Do? 1. Find as much info. as possible from sales rep/country manager. 2. What diligence was done on agent? a. Former govt official? Connections? 3. How was compensation determined? Market value compared to other deals? 4. If problems, do you disclose? Unwind the deal?