Foreign Corrupt Practices Act and the Health Care Industry

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1 1 Foreign Corrupt Practices Act and the Health Care Industry ACC Health Law Committee April 5, 2011 Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL

2 FCPA ENFORCEMENT ACTIVITY DOJ SEC FCPA Prosecutions

3 TOP 10 FCPA-RELATED MONETARY SETTLEMENTS Siemens (2008) $800 KBR/Halliburton (2009) $579 BAE Systems (2010) $400 ENI/Snamprogetti (2010) $365 Technip (2010) Daimler (2010) $185 $338 (figures in millions) Alcatel-Lucent (2010) $137.4 Panalpina (2010) $81.9 ABB (2010) $58.3 Pride International (2010) $56.2

4 RECORD FINES AND PENALTIES Individual defendant sentences: Charles Paul Edward Jumet 87 months incarceration Nam Qouc Nguyen 16 months incarceration Jason Edward Steph 15 months incarceration An Quoc Nguyen 9 months incarceration Gerald Green 6 months incarceration Patricia Green 6 months incarceration Leo Winston Smith 6 months incarceration Frederick Bourke 366 days incarceration Jim Bob Brown 366 days incarceration Bobby J. Elkin 3 years probation Joseph Lucas 2 years probation Kim Anh Nguyen 2 years probation

5 FCPA Enforcement in the Health Care Industry Representative Enforcement Actions in the Health Care Industry: AGA Medical (kickbacks to Chinese physicians) DPC (improper commission payments to Chinese physicians and lab techs) HealthSouth (add-on FCPA charges for improper payments to Saudi officials to secure hospital management contract) Immucor (payments to director of public hospital in Italy) Micrus (inaccurately recorded payments to physicians in France, Turkey, Spain and Germany) Schering-Plough (charitable donation in Poland) Siemens (included charges for payments to officials in China and Vietnam) Syncor (improper commission payments to physicians in Taiwan and Mexico; improper hospitality provided to physicians in Western Europe)

6 FCPA Enforcement in the Health Care Industry Public Disclosure of Pending Investigations Astra Zeneca Pfizer Bausch & Lomb (providing free product through Spanish sub) Biomet Bio-Rad Laboratories Eli Lilly Medtronic Orthofix (Mexico) Philips (sale of medical equipment in Poland) SciClone Smith & Nephew Stryker Talecris Wright Medical Group Zimmer

7 KEY DEVELOPMENTS IN 2010 The Dodd-Frank Act includes a program providing bounties for FCPA whistleblowers The UK passed the UK Bribery Act of 2010, which criminalizes: Commercial bribery A companys failure to prevent bribery The SEC charged a company that is not a U.S. issuer with violating the FCPA (Panalpina case) Continued focus on the prosecution of individuals More aggressive, traditional law enforcement tactics employed Preview of 2011: Individual jury trials Challenges to foreign official interpretation

8 THE BASICS: The FCPAs Prohibitions and Essential Elements

9 TWO MAIN COMPONENTS: Anti-Bribery Provisions Books and Records and Internal Control Provisions

10 ANTI-BRIBERY PROVISIONS Applies to: Domestic concerns (private companies, LLCs, etc., and U.S. citizens); Issuers (basically, public companies); and Any person who, while in the U.S., commits an improper act Covers payments made by third parties with knowledge that the payment would be used to fund FCPA-illegal activity Extra-territorial jurisdiction

11 WHAT IS PROHIBITED? The anti-bribery provisions prohibit: Paying or offering to pay anything of value Directly or indirectly To a foreign official, or to any other person while knowing that all or part of the thing of value will be paid or offered to a foreign official Corruptly For the purpose of influencing the official in some official act or to secure any improper advantage In order to obtain or retain business

12 ANYTHING OF VALUE Examples: Cash or a cash equivalent Travel expenses and/or payment of personal expenses Services Golf outings or other entertainment unrelated to customary entertainment connected with a particular deal or contract Charitable donations Loans

13 FOREIGN OFFICIAL Any officer or employee of a foreign government or any department, agency, or instrumentality thereof Includes employees of state owned or controlled enterprises (SOEs) No distinction made as to rank or title (CEO as well as engineer or procurement manager, or even the janitor)

14 OBTAIN OR RETAIN BUSINESS FCPA only covers payments made for a business purpose Includes payments related to the renewal of contracts, the execution or performance of contracts, or the retention of existing business However: DOJ and SEC interpret this element very broadly Even unsuccessful bribery attempts are grounds for prosecution Monsanto (2005)

15 EXCEPTIONS & AFFIRMATIVE DEFENSES Limited nature of exceptions A payment does not violate the FCPA if its purpose is to expedite or secure the performance of a routine governmental action ordinarily and commonly performed by a foreign official Emerging best practice prohibition of facilitating payments except where the health and safety of an employee is involved

16 EXCEPTIONS & AFFIRMATIVE DEFENSES (cont.) Affirmative Defenses (i.e., company bears the burden of establishing the elements) Payments lawful under the written laws and regulations of the foreign country Custom is not the same as written laws and regulations Reasonable and bona fide expenditures directly related to the promotion or demonstration of product or services or the execution or performance of a contract

17 BOOKS & RECORDS AND INTERNAL CONTROL PROVISIONS Apply to: Issuers only, but SEC takes the view that they also apply to any affiliate whose financial results appear in the consolidated financial statements of the issuer Require: Books, records, and accounts must be kept in reasonable detail to accurately and fairly reflect transactions and disposition of assets; and Internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are executed in accordance with managements authorization and are accurately recorded

18 BOOKS & RECORDS AND INTERNAL CONTROL PROVISIONS (cont.) Regulators do not need to prove an underlying antibribery violation Failure to describe what actually occurred is a violation Recent enforcement actions involved improper payments disguised as: commissions consulting fees advertising and promotions transportation expenses cost of goods sold processing fees miscellaneous expenses

19 COMMON ISSUES: AGENTS & DISTRIBUTORS U.S. companies are not insulated from FCPA risks by doing business in foreign countries through third parties such as agents or distributors Rather, the FCPA also prohibits payments to thirdparties if the company knows or has reason to know that all or part of the payment will be given to a foreign official Regulators do not need to prove that the third-party acted on the companys direct orders or even that a company actually knew the intermediary engaged in prohibited conduct

20 THIRD-PARTY PAYMENT PROVISIONS Willful Blindness = Knowledge

21 RED FLAGS In the event a third-party ends up making an improper payment, a due diligence file that shows a thorough investigation and no red flags will be the companys best defense against an enforcement action by the U.S. government, or, at the very least, the best argument for mitigating any fine or penalty

22 COMMON ISSUES: THE PERILS OF HOSTING CUSTOMER VISITS Travel expenses can be paid, provided done in good faith and not with corrupt intent or expectation of a favor Travel and accommodations must be reasonable and directly related to a legitimate business purpose Issuers books and record must accurately reflect value and purpose of travel Best practices Any side trips should be modest and incidental Expenses should be paid only for attendee (i.e., not spouse or relatives) No per diem should be given Written notification of trip should be given to government/ organization that employs the recipient Delegation members should be picked by foreign government, not company

23 COMMON ISSUES: MEALS & ENTERTAINMENT Companies may provide meals and entertainment, if in good faith, without corrupt intent, and with no expectation of a favor Must be directly related to legitimate business purpose Must be reasonable in value If an issuer, books and records must accurately reflect the value and nature of all meals and entertainment Best practices: Should be in accordance with generally accepted business standards Company personnel should be in attendance Should be properly documented Whenever entertaining government officials, should have procedures to have cleared by compliance officer/gc

24 COMMON ISSUES: CHARITABLE CONTRIBUTIONS Companies may provide gifts or contributions to charities, if in good faith, without corrupt intent, and with no expectation of a favor Even though payment is not made directly to a government official, if the contribution is urged by official as quid pro quo for business or approval, could be a violation Case in point: Schering-Plough $76,000 paid over four years to charity operated by government official Best practices: Due diligence before charitable contributions Special care where government official has position with charity Public disclosure of contribution Following donation, confirmation that donation used for intended purpose

25 FCPA ISSUES & THE REGULATORS Internal investigation is a no-brainer The self-disclosure issue Dealing with outside auditors Deferred prosecution and non-prosecution agreements Promise of continuing cooperation with investigations and continuing reporting Agreement to commit no additional violations for fixed period of time Usually provide for monetary penalties Usually require upgraded compliance and risk-management programs and appointment of compliance monitor Appointment of compliance monitors More nuanced view; not default provision in settlements

26 FCPA COMPLIANCE What the regulators expect Requirements of an effective compliance program Risk-based compliance efforts key

27 ASSESS FCPA RISK FCPA compliance risk is a combination of Who (public vs. private customers) What (large public projects vs. producing widgets) Where (the countrys corruption reputation) How (use of third parties) Focus on all variables Recent FCPA enforcement actions instruct that while compliance efforts should focus on high-risk situations, business leaders must be alert to the risks present in all countries in all situations

28 CORRUPTION PERCEPTION INDEX (2009)