Agenda. 2

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1 Compliance Effectiveness and Adequate Procedures: International Fraud and Abuse and the Long Arm of U.S., UK and German Law Foreign Corrupt Practices Act, UK Anti-Bribery Act and German Anti-Bribery Law 19 May 2010 Dr. Erik R. Eglite, V.P. Chief Compliance Officer & Corporate Counsel, Lundbeck Michael Roberts, Senior Associate, Hogan Lovells International LLP Dr. Marc Bauer, Senior Associate, Hogan Lovells International LLP

2 Agenda FCPA: An Introduction German perspectives on FCPA and German Anti-Bribery Law UK perspectives on FCPA and new Anti-Bribery Act 2010 Compliance effectiveness and procedures: Exposure, risk management and recommendations 2

3 Compliance Effectiveness: Fraud and Abuse and Long Arm of U.S. Law-Foreign Corrupt Practices Act Dr. Erik R. Eglite Vice President, Chief Compliance Officer & Corporate Counsel Licensed United States Patent Attorney Licensed United States Court of Appeals Federal Circuit Licensed Pediatric Physician and Surgeon The Opinions expressed are those exclusively of the speaker and not those of Lundbeck

4 Foreign Corrupt Practices Act (FCPA) 15 U.S.C. 78dd, et seq. Enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, FCPA prohibits the willful use of the mails or any means of interstate commerce corruptly in furtherance of any offer, payment, or promise of value to foreign officials to influence or induce in order to secure any improper advantage.

5 Provisions-Two types Anti-Bribery Provision (15 U.S.C. 78dd-1, et seq.) Which prohibits corruptly paying, promising to pay anything of value to foreign officials in order to assist in obtaining business or securing any improper advantage DOJ has primary responsibility for enforcing the anti-bribery provision Accounting and internal controls Provisions FCPA requires companies whose securities are listed in the U.S. to meet its accounting provisions (15 U.S.C. 78m) Independent of anti-bribery provisions, FCPA requires the Company to keep accurate and detailed records of all payments and transactions of the corporation and devise and maintain an adequate system of internal accounting controls to accurately reflect the transactions and dispositions of that company SEC is the civil law enforcement authority that generally enforces the accounting provisions

6 Anti-Bribery provisions apply to Issuers; Any company whose securities are registered in the U.S. or which is required to file periodic reports with the SEC "Domestic concerns" includes any person who is a citizen, national, or resident of the United States; any corporation that has its principal place of business in the United States; or any corporation that is organized under the laws of a state of the United States or a territory, possession, or commonwealth of the United States. 78dd-2(h) (1) (B). Foreign nationals or businesses who take any action in furtherance of a corrupt payment while within the territory of the Untied States Regardless of whether the person is a resident or does business in the U.S.

7 Of note Issuers and domestic concerns may be liable for violating the anti-bribery provisions of the FCPA whether or not they took any action in the U.S. in furtherance of the corrupt foreign payment. A U.S. company or issuer can be liable for the conduct of overseas employees or agents, even if no money was transferred from the U.S. and no U.S. person participated in any way in the foreign bribery. FCPA covers "any person" which is defined as any person or entity other than an issuer or a domestic concern, including foreign person or companies and such person is subject to criminal liability if he commits an act in furtherance of a payment otherwise prohibited by the FCPA while in the U.S. or in U.S. territory.

8 Elements of anti-bribery provision: 1. Payment, offer, authorization, or promise to pay money or anything of value, directly, or through a third party; 1. Excessive gifts or entertainment 2. Any tangible services, objects, payments or facilities other than for purposes of promoting or demonstrating the company s products or services 3. Anything of value no de minimus exemption.

9 Elements of anti-bribery provision cont.: 2. To any foreign official, political party, candidate official of a public international organization while knowing that the payment or promise to pay will be passed on;

10 Elements of anti-bribery provision cont.: 3. With the use of an instrumentality of interstate commerce (telephone calls, facsimile transmissions, wire transfers, s, mail or interstate travel) by any person (whether U.S. or foreign) or an act outside the U.S. by a domestic concern or U.S. person, or an act in the U.S. by a foreign person in furtherance of the offer, payment or promise to pay;

11 Elements of anti-bribery provision cont.: 4. For the corrupt purpose of influencing an official act or decision inducing that person to do or omit to do any act in violation of his lawful duty, securing an improper advantage, or inducing that person to use his influence with a foreign government to affect or influence any government act or decision;

12 Elements of anti-bribery provision cont.: 5. In order to assist the company in obtaining or retaining business for or with or directing business to any person

13 Corrupt intent The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position/capacity to direct business wrongfully to the payer or to any other person. FCPA does not require that a corrupt act succeed in its purpose. The offer, promise or authorization of a corrupt payment can constitute a violation of the statute Eighth Circuit in a jury instruction defined "corrupt" as "an act is corruptly done if done voluntarily and intentionally, and with a bad purpose of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means." U.S. v. Liebo, 923 f. 2d 1308 (8 th Cir. 1991)

14 Foreign Officials may be defined broadly Can include a director of a regional health fund U.S. SEC v. Schering-Plough Corp. Doctors and laboratory workers at state-owned hospitals Syncor (a company based in California). Syncor violated the anti-bribery, books-andrecords, and internal-controls provisions of the FCPA Syncor s foreign subsidiaries in Taiwan, Mexico, Belgium, Luxembourg and France made a total of 600K in illicit payments to doctors employed by hospitals controlled by foreign authorities. According to the Commission, these illicit payments were made with the purpose and effect of influencing the doctors' decisions so that Syncor could obtain or retain business with them and the hospitals that employed them. The Commission charged that the payments were made with the knowledge and approval of senior officers of the relevant Syncor subsidiaries, and in some cases with the knowledge and approval of Syncor's founder and chairman of the board.

15 Permissible Payments 1. Routine Government Action "Facilitating" payments which are made to expedite or to secure the performance of a routing governmental action Obtaining business permits, licenses, or other official documents Processing governmental papers Providing police protection, mail pick-up or scheduling inspections Telephone service, power and water supply, loading cargo, protecting perishable goods from deterioration etc. To qualify as a "facilitating" payment Payment must not be used to influence a foreign official to award or continue business; duties of foreign official receiving payment must be ministerial or clerical; task should not involve matters in which he has discretion; and payment is legal and customary in that country

16 Affirmative defenses 2. Payments that are lawful under the written laws and regulations in the country in which they were made - need written law or regulation affirmatively authorizing the activity - "traditional" or "common" payment is not sufficient 4. Payments that constitute a "reasonable and bona fide expenditure" 1. Bona fide expenditures such as travel, lodging meals etc. 2. No corrupt purpose and must be directly related to promotion, demonstration, or explanation of products or services.

17 Accounting Provisions Issuers (and only issuers) must make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and devise and maintain a system of internal accounting controls (GAAP) Bribes that are not recorded in the company s books and records, or records that are falsified or otherwise obscure the true purpose of a payment, will constitute a FCPA violation. Misrepresentation, concealment, falsification, circumvention, and other deliberate acts resulting in inaccurate financial books and records are unlawful

18 Accounting Provisions cont. Issuers must devise and maintain a system of internal accounting controls that is capable of detecting and preventing improper payments to foreign officials and utilizes accepted methods of accounting For Criminal Liability you must have knowledge May be held criminally liable for knowingly falsifying any records or circumventing or failing to implement a system of internal accounting controls Knowledge may be established by willful blindness or conscious disregard Good faith accounting errors should not give rise to criminal liability

19 Criminal and Civil Penalties under the FCPA Corporations Criminal Penalties. A corporation can be fined up to $2 million for each criminal violation of the FCPA, and up to $25 million for "willful" violations. 15 U.S.C. 78ff(a). Under the Alternative Fines Act, the government may impose a fine equal to twice the benefit the defendant sought from making the corrupt payment. 18 U.S.C. 3571(D). The sentencing of corporations for FCPA violations is determined under Chapter Eight of the U.S. Sentencing Guidelines. See U.S. Sentencing Guidelines, ch. 8. The FCPA also provides for civil penalties for up to $10,000 for each violation. In addition, in an SEC enforcement action, the court may impose an additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (ii) a specified dollar limitation, based on the egregiousness of the violation, ranging from $50,000 to $500,000.

20 Criminal and Civil Penalties under the FCPA Individuals Criminal Penalties. An individual faces a maximum term of imprisonment of five years for each FCPA violation, and 20 years for "willful" violations of the FCPA. 15 U.S.C. 78ff(a). An individual can be subject to a criminal fine of up to $100,000 for each violation of the FCPA, and up to $5 million for "willful" violations. 15 U.S.C. 78ff(a), 78-ff(c)(2). Under the Alternative Fines Act, the government may impose a fine equal to twice the benefit the defendant sought by from making the corrupt payment. 18 U.S.C. 3571(D).

21 Criminal and Civil Penalties under the FCPA Individuals Civil Penalties. As with corporations, the government may bring a civil action seeking a fine of up to $10,000 for each violation of the FCPA. In an SEC enforcement action, the court may impose an additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (ii) a specified dollar limitation, based on the egregiousness of the violation, ranging from $5,000 to $100,000. The SEC may also seek to prohibit an individual defendant from serving as an officer or director of a public company. A company cannot indemnify an officer, director, stockholder, employee, or agent for fines imposed for violations of the FCPA. 15 U.S.C. 78dd-2(g)(3).

22 German perspectives on FCPA and German Anti-Bribery Law Dr. Marc Bauer, Senior Associate, Hogan Lovells International LLP

23 German anti-bribery/corruption provisions Sec. 331 (1) Criminal Code passive bribery by public official "A public official... who demands, allows himself to be promised or accepts a benefit for himself or for a third party for the exercise of an official duty shall be liable to imprisonment of up to three years or a fine" Sec. 333 (1) Criminal Code active bribery of an public official by third party 23

24 German anti-bribery/corruption provisions (continued) Sec. 332 Criminal Code passive corruption by public official "A public official... who demands, allows himself to be promised or accepts a benefit for himself or for a third person for the exercise of an unlawful official duty shall be liable to imprisonment of up to three years or a fine" Sec. 334 Criminal Code active bribery of an public official by third party Sec. 299 Criminal Code bribery in the private sector Hot topic in the pharmaceutical sector re private practice physicians (nonpublic officials) 24

25 Public official An official or employee in a state-owned/controlled public institution Clinic physician Clinic pharmacist Members of public health funds/public organisations NOT: employees in privately owned clinics/doctors in private practice Sec. 299 Criminal Code! 25

26 Employers' consent Reduces considerably the risk of criminal offences Secs. 331/333 (3) Criminal Code "The offence shall not be punishable if... the competent public authority authorises the acceptance of the benefit" Not applicable to secs. 299, 332, 334 Criminal Code 26

27 Comparison German Criminal Law 1. "Benefit" FCPA 1. Offer/Grant of "Anything of Value" 2. "Official"/ "Judge" 2. Foreign "Official", "Political Party" or "Candidate" 3. "Direct" or "indirect" (third-party) benefit 4. "For official duty" 5. "Intent" 3. "Directly or indirectly" 4. Purpose "to obtain, retain or direct business" 5. "Corrupt Intent" 27

28 Comparison (continued) German Criminal Law 6. "Private" bribery illegal, but not in focus until now 7. Records on employer s consent 8. No facilitation payments exception but employer s consent 9. Extra-territorial reach FCPA 6. Books & Records requirement 7. Exception: e.g. facilitation payments 8. Extra-territorial reach 28

29 UK perspectives on FCPA and new Bribery Act 2010 Michael Roberts, Senior Associate, Hogan Lovells International LLP

30 UK Record Existing UK legislation dates back to nineteenth century Public Bodies Corrupt Practices Act 1889 Prevention of Corruption Acts 1906 and 1916 "Riddled with uncertainty and in need of rationalisation" (Law Commission Report) Despite the UK signing up to the OECD Convention, before 2009 no corporate had ever been prosecuted for an overseas corruption offence BAE Systems embarrassment 30

31 Catch Up Renewed vigour on part of SFO, following appointment of Richard Alderman as Director Conscious attempt to emulate aggressive style and approach of US authorities Already successful prosecutions of Mabey & Johnson and Innospec, plus civil settlements with Balfour Beatty and AMEC One individual recently sentenced to 12 months' imprisonment for improper payments to Greek healthcare professionals (despite cooperation) 31

32 New Record Aon FSA Penalty 5.25m Mabey & Johnson Criminal Conviction 6.6m AMEC Civil Recovery Order 5m Balfour Beatty Civil Recovery Order 2.25m Innospec Criminal Conviction $12.7m (plus $27.5m) Robert Dougall Criminal Conviction 12 months BAE Systems UK/US Settlements 30m (plus $400) 32

33 Bribery Act 2010 Finally received Royal Assent on 8 April 2010 (just before Parliament was dissolved) Expected to come into force in June and October 2010 Represents radical reform of the existing law In many respects, the Bribery Act is more stringent than the US FCPA Will apply to worldwide activities of any corporate conducting business in the UK 33

34 Corporate Liability Bribery Act imposes strict liability on corporates Where a bribe is paid on the company s behalf by an employee, agent or subsidiary the corporate itself is automatically guilty of a criminal offence This is subject to a defence of "adequate procedures" But the burden of proof is on the company to show compliance Concept of "adequate procedures" similar to Federal Sentencing Guidelines, but formal guidance still awaited 34

35 Long-Arm Jurisdiction Corporate offence applies to any company or partnership carrying on business in the UK No need for a UK listing or for any nexus between the offending conduct and the UK The offence covers the worldwide activity of the company s employees, agents and subsidiaries SFO has said it will use this extraordinary jurisdiction to ensure a "level playing field" for UK plc. 35

36 Basic Offences Applies to both public and private sectors Bribery Act covers receipt as well as payment of bribes Basic bribery offences very broad, and do not specifically require a corrupt or dishonest state of mind For foreign public officials, liability turns on the "written law" applicable to the official Otherwise, the crux of the offence is an intention to induce or reward "improper performance" of the recipient's function 36

37 Basic Offences (continued) No defence for promotional expenditures Facilitation payments illegal, but unlikely to be prosecuted Sentences increased to up to 10 years imprisonment and/or an unlimited fine English Court has already signalled that fines should correspond to those imposed in the US (R v Innospec, 2010) As yet unclear what impact Innospec will have on approach of SFO (which had favoured civil settlements and "plea bargains") 37

38 Compliance effectiveness and procedures: Exposure, risk management and recommendations

39 USA

40 DOJ Trends November 12, 2009 Asst. Attorney General DOJ Criminal Division Chief Lanny A. Breuer announced at Tenth Annual Pharmaceutical Regulatory and Compliance Congress in Washington, D.C. that DOJ has outlined an aggressive FCPA enforcement agenda focused squarely on pharmaceutical and medical device companies in the months and years ahead. He advised that under the extensive reach of the FCPA many health care providers in foreign countries could be considered "foreign officials". According to Mr. Breuer, a significant focus of this new enforcement effort will be the investigation and prosecution of senior executives.

41 DOJ Trends Mr. Breuer stated that not only will the DOJ continue to pursue vigorously violations of FCPA buy he fully expects increased cooperation with foreign law enforcement partners. Currently there are over 120 active FCPA investigations underway within the DOJ and SEC Mr. Breuer advised companies who are potential targets of FCPA to ensure that they have a rigorous FCPA compliance policy and that is faithfully enforced.

42 FCPA Areas of Exposure Advisory boards Research and educational grants Clinical trials Sponsorship of events Consulting Charitable contributions Gifts, Meals, Entertainment, Travel and other Hospitalities Agents used for drug licensing and approval Promotional speakers

43 FCPA Areas of Exposure cont. Risk of FCPA violations increase when third-party agents are introduced CROs-multi-site trials in numerous countries Principal Investigators Monitors IRBs Advisors and other Agents Attorneys Sales and Marketing Agents Promotional visits; discounting arrangements; rebates; detailing; travel arrangements; promotional speakers; and formulary placement Accountants Liaisons/Lobbyists/Representatives of company Sponsor is responsible and accountable for actions of agents

44 Managing Risk Develop domestic and foreign anti-corruption Fraud and Abuse policies and procedures Have them endorsed from the highest levels Comply with all applicable local laws. (Remember payments that are lawful under the written laws and regulations in the country in which they were made are appropriate and an affirmative defense): Directive 2004/27/EC Title VIII EFPIA Country Codes IFPMA Code ABPI Code MHRA Blue Guide PAAB Code Contractually require all third-party agents to comply with your policies and procedures, which include complying with all applicable laws, rules and regulations including FCPA, OECD Anti-Bribery Convention, UK Bribery Act 2010.

45 Managing Risk cont. Conduct training on policies and procedures Monitor and audit company and third party activities Developing Effective Lines of Communication Respond to Detected Offenses and Develop Corrective Action Initiatives Develop internal controls, record keeping and accounting systems capable of detecting, preventing and reporting improper payments to foreign officials Screen potential employees and agents

46 UK

47 What are "adequate procedures"? "...this is not a one size fits all approach. It is not intended to prescribe the anti-bribery measures to be taken" (MoJ Explanatory Notes) "The defence... is such that it would allow a company to adopt a proportionate approach, with small firms in low risk sectors able to argue adequate systems on 'light touch' grounds, for example demonstrating that anti-bribery principles have been fully communicated to its workforce" (Impact Assessment, February 2009) 47

48 SFO Guidance A clear statement of an anti-corruption culture fully and visibly supported at the highest levels in the corporate A Code of Ethics Principles that are applicable regardless of local laws or culture A policy on gifts and hospitality and facilitation payments A policy on outside advisers/third parties including vetting and due diligence and appropriate risk assessments A policy concerning political contributions and lobbying activities 48

49 SFO Guidance (2) Training to ensure dissemination of the anti-corruption culture to all staff at all levels within the corporate Regular checks and auditing in a proportionate manner A helpline within the corporate which enables employees to report concerns A commitment to making it explicit that the anti-bribery code applies to business partners Appropriate and consistent disciplinary processes 49

50 Designing an effective compliance programme Risk Assessment: bottom up analysis Tone comes from the top But local implementation is key Make it easy to speak up Annual review and certification 50

51 Germany

52 Key elements of compliance programmes Compliance-Officer Clear policies and guidelines Contract management Documentation follow-up Compliance-hotlines (whistle-blowing/helpline) Training Compliance Audits 52

53 Compliance Officer German Civil Supreme Court [BGH] Judgement of 17 July 2009 "... regularly has the responsibility under criminal law to prevent criminal offences related to the business of the company [Garantenpflicht] " 53

54 Compliance Officer (continued) Responsibilities Investigation of facts Legal and risk evaluation Report to management NOT Actions against employees Management or HR External notifications (e.g. public prosecutor) 54

55 Recommendations Raise awareness for compliance issues at all levels within the company Implement clear approval processes (allocate responsibilities) Implement clear policies, guidelines, check-lists, templates Consultation and control through compliance team 55

56 Thank you very much! 56