ACC Health Law & Int l. Legal Affairs Committee Jan. 11, 2017 Global Anti-Corruption & Trade Compliance in the Health Care Sector Jamie Lietner Chief Compliance Officer LivaNova PLC Christopher Swift Partner, Government Enforcement Group Foley & Lardner, LLP
Overview Key Enforcement Trends Growing Liability Risks & Healthcare Sector Penalties Anti-Corruption Laws Foreign Corrupt Practices Act, United Kingdom Bribery Act, etc. Anti-Corruption Compliance Challenges Business Courtesies, Promotional Expenses, Facilitation Payments, etc. Restrictive Trade Measures Economic Sanctions, Export Controls, etc. Managing Third Party Risk Vicarious Liability, Identifying Red Flags, etc.
Key Enforcement Trends
FCPA Enforcement Trends FCPA enforcement is second only to fighting terrorism (2010) At least 75 companies are currently targets of pending DOJ investigations, and observers suspect that federal regulators are targeting 77 more Healthcare is a priority enforcement area Between 2002 and 2015, the DOJ and SEC targeted at 19 healthcare companies for alleged FCPA violations, with particular focus on the pharmaceutical and medical device sectors Growing focus on smaller entities The SEC characterized its 2014 settlement with Smith & Wesson as a wake-up call for small and medium-sized business that want to enter high-risk markets and expand their international sales Greater emphasis on corporate officers and directors The DOJ s Yates Memorandum encourages federal prosecutors to place greater emphasis on individual wrongdoing in corporate enforcement actions Enforcement can target corporate officers and directors who are willfully blind to illegal conduct, even if they do not participate in it
FCPA Enforcement Trends Mead Johnson Nutrition (July 2015) SEC enforcement action targeting improper payments to Chinese hospitals and doctors intended to promote the sale of infant formula to expectant mothers $12.03 Million in civil penalties, interest, and disgorgement Bruker Corporation: (December 2014) SEC enforcement action targeting improper payments to Chinese Government officials and employees of Chinese state-owned enterprises ( SOEs ) Conduct included covering business and leisure travel, concealing illegal payments through collaboration agreements, and lax internal financial controls $2.4 Million in civil penalties, interest, and disgorgement (with voluntary self-disclosure) Bio-Rad Laboratories, Inc. (November 2014) DOJ and SEC enforcement action targeting improper payments to foreign government officials in Russia, Vietnam, and Thailand $54.95 Million in fines, including $40.77 Million in civil penalties, interest, and disgorgement and another $14.25 in criminal penalties
FCPA Enforcement Trends Stryker Corporation (October 2013) SEC enforcement action targeting the payment of bribes to doctors, hospitals, and government officials in Argentina, Greece, Mexico, Poland, and Romania to win business $13.28 Million in civil penalties, interest, and disgorgement Eli Lilly & Company (December 2012) SEC enforcement action targeting improper payments to foreign government officials in Russia, China, Brazil, and Poland to win business with government agencies $29.4 Million in civil penalties, interest, and disgorgement Pfizer, Inc. / Wyeth Pharmaceuticals, Inc. (August 2012) SEC enforcement action targeted improper payments to foreign government officials in Bulgaria, China, Croatia, the Czech Republic, Italy, Kazakhstan, Russia, and Serbia Illegally recorded bribes as expenses for promotional activities, travel, entertainment, conferences, freight, advertising, and even clinical trails $59.2 Million in civil penalties, interest, and disgorgement, including $26.34 Million for Pfizer and $18.9 Million for Wyeth
Trade Enforcement Trends Restrictive trade measures are an instrument of U.S. foreign policy Requirements constantly evolve and expand in response to changing global events (e.g., the Syrian civil war, Russia s invasion of Ukraine, nuclear negotiations with Iran, etc.) Agencies view these issues through a national security lens Stronger inter-agency cooperation means that law enforcement agencies now benefit from closer coordination with the U.S. intelligence community Civil and criminal penalties exceed those imposed under the FCPA The $8.9 billion DPA with BNP Paribas is more than ten times greater than the largest DPA under the FCPA. Penalties between $1 million and $100 million are now commonplace. Penalties between $1 million and $100 million are commonplace These changes target companies outside the financial sector, including companies involved in exporting medical devices Exceptions for certain medical and pharmaceutical products are narrowly tailored and often misunderstood, particularly by foreign subsidiaries
Trade Enforcement Trends Overlapping anti-corruption and international trade violations are commonplace Economic sanctions and export control violations frequently coincide with bribery, corruption, fraud, and money laundering. Many U.S. Government enforcement agencies have concurrent or overlapping jurisdiction Failure to address related risks on a comprehensive basis can result in several agencies pursuing enforcement actions at the same time Foreign affiliates can cause domestic headaches The U.S. Government construes economic sanctions, export controls, and other restrictive trade measures broadly to capture activities undertaken by foreign-incorporated affiliates Foreign dealers and distributors present credible risks Third parties present many of the same risks that arise with foreign subsidiaries and affiliates, only without the same degree of oversight and control
Anti-Corruption Laws
Foreign Corrupt Practices Act The FCPA specifically prohibits: Offering, promising, or giving anything of value To a foreign government official With the intent to influence an official decision Or to secure an improper business advantage Improper payments must generally have a Business Purpose Includes offers, promises, and payments to foreign government officials that are related to renewing contracts, performing contract, or retaining existing business Notable examples from the healthcare sector include: Influencing government procurement processes Winning contracts or access to non-public bid tenders Influencing government litigation or enforcement actions Obtaining licenses, authorizations, or exceptions to regulations Evading taxes, tariffs, or import requirements
Foreign Corrupt Practices Act Anything of Value is construed broadly Cash, cash equivalents, gifts, meals, and services Golf outings and other entertainment Paying travel expenses or other personal expenses Making charitable donations or providing jobs for relatives Gifts or payments of any size can violate the FCPA if the other elements are met Foreign Official is also construed broadly Any officer or employee of a foreign government agency Any foreign political party official or candidate for public office Any employees of State-Owned Enterprises ( SOEs ) Any employee of State-controlled hospitals, clinics or universities, Including physicians The FCPA makes no distinction between an official s title, role, or rank
Foreign Corrupt Practices Act In addition to prohibiting bribery, the FCPA also requires publicly-traded healthcare companies to: Maintain books and records that accurately and completely reflect transactions and the disposition of assets in reasonable detail Establish and maintain effective internal accounting controls designed to monitor and prevent potential bribery and corruption These requirements apply to foreign-incorporated affiliates, including subsidiaries and joint ventures Publicly-traded healthcare companies should use Generally Accepted Accounting Principles ( GAAP ) for these internal controls, even if foreign accounting standards apply Failure to maintain adequate controls can violate the FCPA books and records provisions, even if no bribes actually occur Foreign partners may be reluctant to apply U.S. law or adopt GAAP standards, especially if this recordkeeping is viewed as burdensome or complicated
United Kingdom Bribery Act The United Kingdom Bribery Act ( UKBA ) is broader than the FCPA Prohibits all forms of Official Bribery, including improper payments to foreign government officials and British Government officials Also prohibits all forms of Commercial Bribery, including proper payments and inducements made to private sector parties Healthcare companies can become subject to the UKBA whenever they have a link to the United Kingdom Includes any subsidiaries, joint ventures, employees, or agents located in the United Kingdom, as well as any transactions, payments, or other activities that implicate the United Kingdom The Downside: Bribes and other corrupt conduct that implicates British parties could violate both the FCPA and the UKBA, leading to greater liability exposure The Upside: Although the UKBA is broader, the British Government tends to be less aggressive than its counterparts at the DOJ and SEC
Other Anti-Bribery Laws Other countries have adopted similar anti-bribery laws: Clean Companies Act (Brazil) Corruption of Foreign Government Officials Act (Canada) Anti-Unfair Competition Act (China) National Anticorruption System (Mexico) Other national laws may also apply Local laws will almost always prohibit official corruption, even if local customs and business practices indicate otherwise Take a Global Approach Complying with the FCPA and UKBA will address much of the same conduct that local anticorruption laws cover Adopting a globally harmonized approach to anti-bribery and corruption will reduce confusion while making your compliance program easier to manage
Anti-Corruption Compliance Challenges
Business Courtesies Business Courtesies may be viewed as improper inducements Includes gifts, meals, entertainment, or travel that Healthcare companies provides to Government Officials, prospective clients, and others In countries with national or public health services, the Government Officials may also include physicians, nurses, hospital administrators, and others Healthcare companies can provide some Business Courtesies as long as they meet certain standards: The business courtesies are reasonable in value The business courtesies are offered in good faith The business courtesies are directly related to a legitimate business purpose The business courtesies are never offered, promised, or provided with corrupt intent or with the expectation of a quid pro quo
Business Courtesies Business Courtesy best practices Healthcare companies should not provide excessive business courtesies, or provide such courtsides too frequently Business courtesies should be transparent, such that the recipient does not need to hid the fact that they received them Gifts should usually have the company logo or some similar identifying feature that makes them difficult to re-sell or re-use in the marketplace All business courtesies should be accurately recorded in the company s books and records with a description of the cost, date, recipient, and business purpose Never provide cash gifts, gift cards, stored value cards, or other fungible cash equivalents Monitor use (and potential abuse) of customer incentive programs
Promotional Expenses Promotional Expenses are payments related to the legal promotion of a company s business This includes the expenses that Healthcare companies incur when inviting a foreign government official or employee of an SOE to attend a conference or participate in a promotional event Promotional Expenses best practices: Avoid reimbursements. All promotional expenses should be paid directly to the service provider (e.g., the hotel, airline, or conference center) rather than the government official All promotional expenses should be paid in a transparent manner, such that the recipient does not need to hide the payments made on their behalf All promotion expenses should be reasonable and directly related to the company s legitimate promotional efforts All promotion expenses should be accurately recorded in the company s books and records with a description of the cost, date, recipient, and business purpose
Charitable Contributions Charitable contributions can violate the FCPA and other anti-bribery laws if they are offered, promised, or provided as a quid pro quo Include contributions requested by foreign government officials or employees of SOEs in exchange for securing approvals, business, or contracts Also includes any contributions including the provision of services that healthcare companies offer or make with corrupt intent or the expectation of an improper reward Charitable contribution best practices: Conduct reasonable due diligence on the charity (including medical and humanitarian charities), especially when foreign government officials are affiliated with the organization Confirm that each contribution was used for a legitimate charitable purpose Publicly disclose the charitable contribution to ensure transparency Accurately record all charitable contributions in the company s books and records with a description of the cost, date, recipient, and charitable purpose
Facilitation Payments Facilitation Payments are payments made to government officials to expedite or facilitate routine administrative action Obtaining approval for visa or work permits Securing licenses or other authorizations to conduct business Connecting to public utilities (electricity, telephone, gas, etc.) Facilitation Payments are difficult to distinguish from bribes We typically recommend prohibit such payments unless there is an imminent threat to the health and safety of their employees Employees making facilitation payments should always ask foreign government officials for written documentation showing all required government fees All facilitation payments should be accurately recorded in the company s books and records with a description of the cost, date, recipient, and purpose
Restrictive Trade Measures
Economic Sanctions Most U.S. economic sanctions programs prohibit: Engaging in commercial or financial transactions with designated countries, governments, entities, or persons Marking payments, entering into contracts, or holding any property in which is sanctioned country or party has an interest Dealing with any company or entity that is at least 50 percent owned or controlled by one or more sanctioned parties (or 33 percent for certain sanctioned Russian entities) Other U.S. sanctions programs target specific issues or areas Transactions involving certain financial institutions or debt instruments (Iran and Russia) Transactions involving certain sectors and industries (Iran and Russia) Conducting business in certain disputed regions (Crimea) Travel bans, asset freezes, and more
Economic Sanctions Comprehensive Sanctions Prohibit most transactions with a particular country or territory, including persons residing there Examples include Cuba, Iran, Sudan, and the occupied Ukrainian region of Crimea Regime-Based Sanctions Prohibit transactions with designated governments, officials, and the various entities they control Examples include Belarus, North Korea, Syria, Venezuela, and Zimbabwe. List-Based Sanctions Target Terrorist Groups, Weapons Proliferators, Narcotics Syndicates, and other Specially Designated Nationals (SDNs) The U.S. Treasury Department designated over 10,000 corporations, organizations, individuals, and vessels under these programs Bottom Line: effecting sanctions screening must be entity-based, not just country-based
Export Controls International Traffic in Arms Regulations (ITAR) Controls defense articles on the U.S. Munitions List (USML) and items specially designed for military use and related technical data Covers defense services, including designing, developing, repairing, servicing, or using defense articles. Products, services, and data governed by the ITAR are controlled for all foreign countries. ITARcontrolled items cannot be exported or shared without U.S. State Department authorization Export Administration Regulations (EAR) Controls dual-use commercial items that can be modified for military use or other harmful purposes Covers most commercial products, software, technology, and technical data exported outside the United States. These controls depend on four factors: What is the item? Where is it going? Who will use it? How will it be used?
Export Controls International Traffic in Arms Regulations (ITAR) Controls defense articles on the U.S. Munitions List (USML) and items specially designed for military use and related technical data Covers defense services, including designing, developing, repairing, servicing, or using defense articles. Products, services, and data governed by the ITAR are controlled for all foreign countries. ITARcontrolled items cannot be exported or shared without U.S. State Department authorization Export Administration Regulations (EAR) Controls dual-use commercial items that can be modified for military use or other harmful purposes Covers most commercial products, software, technology, and technical data exported outside the United States. These controls depend on four factors: What is the item? Where is it going? Who will use it? How will it be used?
26 Restrictive Trade Measures Restrictions Iran Cuba Russia Burma Territorial Sanctions Yes Yes Some No Regime-Based Sanctions Yes Yes Some No Sector-Based Sanctions Yes No Yes No List-Based Sanctions Yes Yes Yes Yes Extraterritorial Sanctions Suspended Yes No No Restrictions on U.S. Dollar Transactions Yes No No No ITAR Restrictions & Arms Embargos Yes Yes Yes Yes EAR Dual-Use Controls Yes Yes Yes Yes Restrictions on U.S. Export Licensing Yes Yes Yes Some Import Bans Yes Some No Some Travel Bans Yes No Yes No
Managing Third Party Risks
Vicarious Liability Companies can become liable for anti-corruption and trade compliance violations committed by third-party customers and partners Many FCPA, economic sanctions, export controls, and other trade-related enforcement actions implicate third-party conducts U.S. enforcement agencies do not need to prove that third parties were acting on a company s behalf. All that matters is that the company knew or should have known about the transaction. Companies deemed to be willfully blind to third party conduct can be held liable even if they did not have actual knowledge of the illegal acts Trade Compliance best practices: Conduct risk-based due diligence on foreign agents, consultants, and other intermediaries, especially in high-risk countries and regions Memorialize third-party relationships in contacts with clear terms and conditions prohibiting illegal exports, re-exports, or other prohibited transactions Ensure that third-party dealers and distributors operating in foreign countries comply with U.S. requirements, even if local law imposes less rigorous standards Obtain and exercise audit rights to ensure that third parties are not making improper payments
Red Flags Trade Compliance Business Partner Risks: Business Partners, end-users, or other parties to the transaction have dealings with Sanctioned Countries (e.g., Crimea, Cuba, Iran, North Korea, Sudan, and Syria). Business Partners have names and/or addresses that are similar to those associated with Sanctioned Persons or other entities on Restricted Party Lists. Business Partners conduct business with the Iranian or Russian defense, energy, or financial industries, or operate in other countries with Sanctioned Industries. Business Partners attempt to act as agents for undisclosed parties and refuse to provide information regarding those parties. Business Partners are evasive or unclear about whether the products they are purchasing are for domestic use, export, or re-export.
Red Flags Trade Compliance Transactional Risks: Business Partners are reluctant to provide accurate or complete information about the name, nature, or location of their business(es). Business Partners request that an item be shipped to them in an unusual fashion, or request other unusual terms of sale. Business Partners order products and services that are inconsistent with their business purpose, facilities, or level of technical sophistication. The ultimate consignee listed on the airway bill or bill of lading is a freight forwarding firm, a trading company, a shipping company, or a bank. Business Partners attempt to route payments through a third party that is not related to their business, or through a third country that is not involved in the transaction.
Red Flags Anti-Corruption Country-Based Risks: Third parties operate in countries that are known for corruption or have high Corruption Perception Index ( CPI ) scores Third parties operate in sectors where bribery and corruption are commonplace (e.g., construction, defense, energy, etc.) Third parties are reluctance to provide accurate information about the name, nature, or location of their business Third parties lack the skill, experience, or connections necessary to conduct business in the foreign country where they will be operating Third parties are reluctant or unable to develop specific business plans or market strategies in the foreign countries where they will be operating
Red Flags Anti-Corruption Foreign Government Risks: Third Parties have a history of providing bribes, kickbacks, or other illegal inducements to Government Officials and other parties Third Parties possess business, family, or other connections with Government Officials, political candidates, or political parties Third Parties fail to provide accurate information about their ties to Government Officials, political candidates, or political parties Third Parties conduct business with SOEs or other government-controlled entities (e.g., hospitals, clinics, universities, public utilities, etc.) Third Parties attempt to conceal their dealings with government entities and/or SOEs from their business partners
Red Flags Anti-Corruption Foreign Party Risks: Third Parties issue invoices or seek commissions that are above the normal rates for the types of services that they provide Third Parties give vague, false, misleading, or substantially incorrect information in any commercial or financial transaction Third Parties make or receive payments via checks, money orders, and other means with no clear connection to their business Third Parties refuse to comply with the Healthcare company s compliance policies or to certify to their compliance with the FCPA and other anti-corruption laws Third Parties refuse to allow Healthcare companies to inspect books and records related to their business
Questions? Christopher Swift, JD, PhD Foley & Lardner, LLP Washington Harbour 3000 K St., NW Suite 600 Washington, DC 20007-5109 Tel: (202) 295-4103 E-mail: cswift@foley.com ATTORNEY ADVERTISEMENT. The contents of this document, current at the date of publication, are for reference purposes only and do not constitute legal advice. Where previous cases are included, prior results do not guarantee a similar outcome. Images of people may not be Foley personnel. 2017 Foley & Lardner LLP