corruptionIntroduction

The Foreign Corrupt Practices Act (FCPA) was ratified in 1977 to prohibit companies from bribing foreign officials to obtain or retain a business relationship. The FCPA applies to companies in the United States as well as publicly traded international companies. The Security and Exchange Commission (SEC) and the Department of Justice (DOJ) are equally responsible for ensuring that the FCPA is enforced.

There are 2 provisions of the FCPA: antibribery and accounting. The anitbribery provision prohibits companies from making monetary payments with the intent to influence, whether directly or indirectly, a “foreign official, public international organization official, political party or official, or any candidate for office.” The accounting provision requests that accurate records of a company’s transactions are kept to develop and maintain adequate internal accounting. This provision applies to anyone who has registered securities in the United States and foreign companies that trade on the United States exchanges.

Background

Recently, the DOJ was forced to increase efforts to ensure that pharmaceutical and biotech companies were not in violation of the FCPA. Pharmaceutical and biotech companies are continuously confronted with potential FCPA risks due to the level of involvement the government has at all times on international trade. Therefore, under the law, pharmaceutical and biotech companies should implement compliance programs to ensure all that parties involved are fully aware of corporate and individual risk associated with international trading.

This recent FCPA enforcement increase has significantly impacted the pharmaceutical and biotech industries. Investigations known as “industry sweeps” are becoming more frequent. Industry sweeps are government regulated investigations into the possible“likelihood of patterns” developing within the industry as a whole in the wake of discovering FCPA violations. Companies become vulnerable for FCPA risk when frequent interactions with foreign governments take place. FCPA regulators will intensely monitor custom officials that participate in the importing and exporting of pharmaceutical drugs and products.

The World Health Organization predicts that within the next 3 years the pharmaceutical market will be worth $100 billion more than today. However, the potential for FCPA violations including “fraudulent acts, corrupt practices, and compliance concerns” also increases with monetary gains, heightened competition, and global expansion. The FCPA has had an enormous impact on the manner in which American pharmaceutical firms conduct international business. Without compliance protocol and employee education regulations, companies may become vulnerable to corruption. In order create and maintain a solid anticorruption compliance program, a corporation must address the risk of noncompliance and how to avoid corrupt business.

Issue

How can pharmaceutical and biotech companies carefully assess their risk for corruption?

Rule

Pharmaceutical and biotech companies can assess their risk for corruption if:

  1. the company’s sales team is educated on how to properly conduct business without the threat of compliance violation
  2. third party subsidiaries and intermediaries are monitored for corruption and agree to participate in training programs to properly learn how to follow anticorruption compliance regulations for each region.

Analysis

Pharmaceutical and biotech companies must implement and enforce up-to-date polices that are applicable to the ever-changing international trading markets. The first step is to develop a strategic program to train invested parties on regional compliance. Individual compliance polices for culturally different regions would eliminate the issues that arise from international trade between foreign subsidiaries with different business ethics and practices.

In March 2011, the SEC focused their attention on Johnson & Johnson for failing in regional compliance. The J&J corporation was accused of bribing doctors overseas with the intent to solicit product contracts. To avoid further scrutiny, J&J agreed to pay penalty fees that exceeded $70 million. To avoid such penalties in the future, companies like J&J must meticulously monitor their employees and partner subsidiaries. Properly screening for fraudulent practices will lower the risk for parent companies to violate the FCPA.

Pfizer has also been closely watched recently by SEC for corrupt practices. Pfizer and its subsidiary Wyeth were charged with presenting unlawful payments to “publicly employed regulators and heathcare professionals” in Eastern Europe. As a result of Pfizer’s lack of corruption monitoring of its subsidiary, the firm was legally responsible for a combined penalty of over $60 million in fines. Companies, especially sales teams, are challenged daily with risk of FCPA violations and should be instinctively aware of ways to avoid such risky confrontations.

Conclusion

Awareness, compliance, and regulation training for employees will assist in limiting penalties if improper business acts occur. Creating regional compliance programs is the most methodical defense against FCPA violations. The strategy of creating and/or adopting compliance programs that can be easily understood by all levels of employment, third parties, subsidiaries, and intermediaries will limit a company’s threat of corrupt practices and avoid massive fines in the future.

For more information on this issue, contact the Kulkarni Law Firm.