Corporate Compliance Programs Are Often Inadequate To Avoid Foreign Corruption Investigations, DoJ Official Says

Pharmaceutical companies have spent a vast amount of resources bolstering their compliance programs in the wake of government investigations of their domestic marketing practices. But their procedures may be insufficient to detect corruption and bribery abroad.

Hank Bond Walther, acting deputy chief in the Department of Justice's Fraud Section, said a corporation's compliance program may look great on paper but companies need to conduct due diligence on the individuals and companies they work with in other countries for the program to work.

"You would be surprised how many sophisticated companies go into countries with little to no due diligence in place," Walther stated at a meeting on the Foreign Corrupt Practices Act and Anti-Corruption for Life Science Companies.

The FCPA meeting, held in New York City May 17-18, was sponsored by the American Conference Institute. Speakers focused on issues and trends in enforcing the FCPA, which prohibits U.S. companies from bribing foreign officials for government contracts and other business.

"Just because a U.S. parent company or U.K. parent company has a compliance program in place, if it is not well executed and it doesn't trickle down to all the entities it should," the company may face problems, Walther noted.

Don't Rely On Competitors' Vendors

Walther said "the next bad thing" that the department sees a lot of is companies coming into a country and choosing distributors solely because they are used by their competitors.

"To the extent you have a dirty distributor, that makes our lives easier because one distributor can give up several companies at one time," Walther said.

Karen Popp, a partner at Sidley Austin, asked if DoJ could share the information it collects about distributors so companies could avoid those that are problematic. Walther said that would not be possible since the department usually finds out that a distributor is bad news because it is a target of an investigation.

The DoJ and Securities and Exchange Commission both announced last year that they were focusing on the pharmaceutical and medical device industries.

Walther noted that DoJ is investigating several companies in several countries but said he would not specify who they are. Some companies have reported in SEC filings that they are under investigation for potential FCPA violations, including Lilly, Bristol-Myers Squibb and AstraZeneca (¹ (Also see "SEC, DoJ Beef Up Investigation of Corporate Bribery & Corruption Overseas" - Pink Sheet, 31 Aug, 2009.)).

The government is also taking a new approach to these investigations. "There is a new dynamic going on within the FCPA world," Walther said. It is the result of DoJ working more closely with its foreign counterparts and getting help from industry insiders to build broad cases.

In the past, Walther said, companies would do their own internal investigation and report their findings to the Justice Department, which would resolve the case with the company. That is happening much less often today as more cases are being generated by whistleblowers.

In addition, Walther said one case may grow to cover multiple companies or an entire industry if an executive in one company faces criminal charges and gives up information on his or her competitors.

DoJ Wants List of Contacts, Distributors

Walther was asked what he wants to hear from pharma companies when the department questions them about what is going on in particular countries.

"What we don't want to hear is 'We have a compliance program. Let me send you a copy. We do everything our outside counsel tells us,'" Walther stated. "Almost every sophisticated company now has a compliance program. The issue is what are you doing with it?"

Walther said DoJ wants to know a company's government contacts - from seeking approval for a product to dealing with tender committees to being involved in marketing and sales. "You lose a lot of credibility when your outside counsel comes in" and doesn't know the answer to basic questions like what distributors you use, he said.

Company Investigations Abroad Are Difficult

Gary Giampetruzzi, Pfizer's assistant general counsel and head of government investigations, noted that FCPA issues were particularly difficult to address when the company engages in an acquisition or merger.

"Where do you tie it off in an M&A context?" he asked. "It may look like [inefficient] controls in an area, some spend that's a little out of whack. But you don't have a flat-out allegation this fraud occurred. You don't have an e-mail that suggests you have a problem."

Giampetruzzi noted that Pfizer has done due diligence in 25-plus markets on the ground and 80 to 100 markets overall. In such a situation "you've got to pick and choose when you call in the resources and hit them hard" and when there might simply be deficiencies that you can bolster.

Giampetruzzi also questioned the appropriate time to launch an investigation. He noted that he recently got involved in a case in Southeast Asia where there is preliminary evidence of wrongdoing and the business is eager to get out and control the situation.

He said it was unclear whether in such a situation a company should wait to take action until it has forensic evidence in hand so it does not tip off the bad actors.

Clinical Trials May Be Subject Of FCPA Probe

The meeting also focused on another potential target of FCPA investigations: clinical trials. Steven Michaels, counsel at Debevoise & Plimpton, said that although there have been no settlements in this area companies need to get ahead of the curve in compliance.

He cited a speech that Lanny Breuer, assistant attorney general of DoJ's criminal division, gave in November indicating the broad scope of FCPA investigations.

Breuer said that "foreign officials" covered by the FCPA may include doctors, pharmacists, lab technicians and other health professionals employed by state-owned facilities.

"Indeed," Breuer said, "it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a 'foreign official' within the meaning of the FCPA."

Michaels pointed out red and yellow flags that could indicate a clinical trial was being used as a vehicle for a corrupt payment: the marketing department chooses the clinical trial coordinator and team; there is evidence a physician was chosen to be an investigator based on his or her prescribing behavior; payments are made to individuals instead of institutions; and the study data is not publishable.

He recommended that companies follow the Pharmaceutical Research and Manufacturers of America's October 2009 guidelines on clinical trials and the Organization for Economic Cooperation and Development's February 2010 Good Practice Guidance on Internal Controls, Ethics and Compliance.

DoJ Joining Forces With Industry

In a keynote address, DoJ's Kathleen Hamann, a trial attorney in the FCPA division of the fraud section, noted that industry has made a lot of progress in combating foreign corruption. But she said bribery is continuing. "It's like a balloon," she said. "If you squeeze it in one place it gets bigger in another."

Hamann noted three main areas where bribery occurs: at the regulation stage when companies are seeking approval of a product; during the tendering and listing process; and in payments to physicians and hospital staff to get them to prescribe a drug.

She said people are very creative in how they generate money to pay small bribes, from making false invoices to fabricating false companies and making donations to nonexistent charities. She emphasized the need for government and industry to work together.

"Prosecution alone won't stop corruption," Hamann said. "We rely on industry. We are starting a dialogue where we share our information with you and get information from you to identify pressure points."

- Brenda Sandburg ( ² [email protected] )