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![Page 1: Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act Paris, France - 28 May 2008 Ted Acosta Ernst &](https://reader035.fdocuments.in/reader035/viewer/2022062517/56649eaa5503460f94baffd1/html5/thumbnails/1.jpg)
Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
Paris, France - 28 May 2008
Ted AcostaErnst & Young+1 212 773 [email protected]
Tom SuddathReed Smith LLP+1 215 851 [email protected]
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Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
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Session Outline
► Environment and Pharma “Model”► Nexus to government► Industry practices most-scrutinized or implicated► The Foreign Corrupt Practices Act► Current trends in enforcement► Thoughts on compliance
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Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
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Environment
► Drugs save lives and drug companies want to succeed in business by saving lives and earning an honest profit
► Emerging markets play a big role in the growth of the top companies, and present a fertile ground for new companies
► A highly competitive market for products and relationships► Strong dependability on business relationships► Marketing and sales-driven cultures (after science)► Employee compensation often largely based on sales targets► Low salaries in public health care in many countries► Underfunding of public institutions in many countries► Low salaries across the board in some markets► Not enough internal resources to monitor► Attitudes about “how business is done in the market”
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Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
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Environment (continued)
► Dispersed sales forces with available resources ► Growing resentment of the industry due to rising cost of products► Media coverage of activities and political issues around
“corruption” ► Attention by government authorities around the world► Competitor complaints are a common enforcement tool► Initiatives by top multinationals on “compliance”► Multiple laws and practices across markets► Industry association guidance (i.e., codes of conduct)► Whistleblower proliferation► Strong dependability on government persons (approvals,
reimbursement, prescriptions)
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Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
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Pharmaceutical and Medical Device Model
► Interactions with government agencies and officials► Research and manufacturing ► Registration to approval► Importation and distribution► Promotion of products► Post-market safety and “pharmacovigilance”
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Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
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Pharmaceutical and Medical Device Model(continued)
► Transacting with the government agencies and officials► Selling products► Samples► Tender bids► Pricing negotiations► Fee-for-service arrangements► Philanthropic and other funding► Value-added services
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Nexus to Government “Employees” or “Officials”
► Physicians and other HCPs► Hospital personnel► Ministry of Health and regional officials: registration,
tender, reimbursement, product surveillance ► Consultants, vendors► Local definition of “civil servant”► Public vs. private capacity► Use of third parties► Spouses and relatives► Other government officials: political parties, customs,
plants
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Industry Practices Most Scrutinized or Implicated Free value provided to customer/influencer individuals
and entities
Gifts— Cash— In-kind: equipment, supplies, products and merchandise, brand
reminders, promotional items
Funding— Direct: philanthropic donations, grants, educational sponsorships
(individual or entity), patient assistance programs, research (clinical, outcome studies)
— Indirect: value-added (diagnostic services, nursing, patient education), professional advancement, business development, practice management, marketing/staffing support, reimbursement advice and assistance, speaking/writing skills training, formal education
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Industry Practices Most Scrutinized or Implicated Free value provided to customer/influencer individuals
and entities (continued)
Product samples Registered and permitted Distinguished from free products/merchandise
Business courtesies— Hospitality and meals— Entertainment— Travel and out-of-pocket expenses
Price Concessions— Discounts, rebates— Product returns and chargebacks
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Industry Practices Most Scrutinized or Implicated Fee-for-Service Arrangements
Clinicians and influencers: Individual health care providers (HCPs), health care institution personnel (such as administrators), as well as individuals employed by government agencies and institutions or otherwise serving in a government official capacity — Speaker, including speaker training— Writer, including assistance— Preceptorship and O/R visit (i.e., sales agent education)— Consultant— Market research feedback— Clinical trial investigator
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Industry Practices Most Scrutinized or Implicated Fee-for-Service Arrangements (continued)
Entities— Facilities fees, including use of space for training— Inventory management, market share analysis— Lease of space— Research site— Services rendered by employees (speaking, consulting, etc.)
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Industry Practices Most Scrutinized or Implicated Tender process
► Keeping track of tenders► Nature of “ancillary” transactions (e.g., donations)► Timing in relation to a tender decision ► Totality of transactions involving the tendering entity ► Totality of spend on such transactions► Bid tampering► Distributor involvement in tender process► Dealings with persons from the tendering entity► Involvement from the tendering entity
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Industry Practices Most Scrutinized or Implicated Third-party: distributors
► Do you know your third-parties?► Reputation, background, financials, policies, training
► Who within the company deals with the third parties?► Do you know exactly what they do for your company?
► Distribution, other services
► Do you have contracts for ALL of these services?► How do you monitor transactions?► Is there a true right to audit?► How much does the business “depend” on the third party?► What requirements do you place on compliance training?
► Bringing distributors to in-house training
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Industry Practices Most Scrutinized or Implicated Employee travel and entertainment (“T&E”)
reimbursement► Occupational fraud theme: Use of reimbursement for questionable
purposes► Home made or purchased receipts and invoices► Altered or irrelevant receipts and invoices► Arrangements with vendors for fraudulent► Passing through of customer expenses
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Industry Practices Most Scrutinized or Implicated Congresses and meetings (particularly “non-local”)
► What is the event? Who sponsors it? Where is it?► Who decides to sponsor physicians? Why?► Who selects the physicians sponsored? How and how many?► How is this discussed with the physician?► Who pays for what and how?► Who approves these transactions? Level of documentation?► Who examines the program as against “purpose of sponsorship.”
length of stay, number of physicians?► What if third-parties are involved: hospital employer, government
agency, travel agent► How do you verify compliance with rules: before and after?
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Industry Practices Most Scrutinized or Implicated Vendors (any entity or individual)
► Who are they? If an entity, who are the principals?► What do they do? Is there a written agreement?► Who selected them?► Who approved them?► What kind of due diligence exists for becoming a vendor?► Are payments and contracted items/services examined, monitored,
audited?
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Industry Practices Most Scrutinized or Implicated Value-added services
Point of view: Bringing value to customers► Diagnostic equipment► Nurses services► Professional development► Patient education
► Patient information
► Reimbursement services and advice
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What is the Foreign Corrupt Practice Act (FCPA)?
► United States law that prohibits attempts to gain a foreign business advantage in through bribery or other improper inducements
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What is the FCPA?
► Two prongs to the statute:
► Anti-Bribery
► Books and Records
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FCPA as an Anti-Bribery Statute: What is Prohibited?
► FCPA makes it unlawful to ► provide a payment or gift ► offer or promise to pay or make gift
► Directly or indirectly to► Foreign government officials► Foreign political parties or officials
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FCPA as an Anti-Bribery Statute: What is Prohibited?
► Or through an intermediary knowing that the payment or gift will be passed on
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FCPA as an Anti-Bribery Statute: What is Prohibited?
► If the purpose of payment or gift is to► Influence official act or decision► Induce official to act or not act
► In order to ► Obtain or retain business► Secure an improper advantage over the competition► Obtain favorable or preferential treatment from the government
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FCPA as an Anti-Bribery Statute: Who is a Foreign Official?
► Foreign government officials are broadly defined:► Not limited to high level officials► Not limited to what are commonly considered “government”
employees
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FCPA as an Anti-Bribery Statute: Who is a Foreign Official?
► Foreign government officials:► Traditional government employees► Employees of government-owned or government-controlled entities► Persons acting officially on behalf of a government► Private persons who are “advisors”► Relatives of officials (indirect payments)
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FCPA: Liability Through Third Parties
► Liable if covered entity or person knows or should know improper payments are being made by third parties
► “Willful blindness” is not a defense► Third parties include
► Agents► Consultants► Distributors► Lobbyists► Joint venture partners
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FCPA as a Books and Records Statute: Accounting Obligations
► Books and Records► Duty to make and keep books and records which in reasonable
detail, accurately and fairly reflect transactions
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FCPA as a Books and Records Statute: Accounting Obligations
► Internal Controls► Duty to devise and maintain system of accounting controls
sufficient to provide reasonable assurance that all transactions are authorized and consistent with GAAP
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FCPA as a Books and Records Statute: Accounting Obligations
► Liability for Books and Records Violations► U.S. companies are liable for books and controls of subsidiaries
and controlled affiliates► Does not necessarily need to relate to bribery of foreign officials--
any books and records or internal control violation can qualify► Substantial criminal sanctions► Individuals may face $5 million fine and 20 years imprisonment
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Defenses to the FCPA
► Two affirmative defenses:► Alleged bribery scheme was lawful under written laws of the
recipient’s country► Alleged bribery scheme was a reasonable and bona fide
expenditure related to promotion, demonstration, or explanation of products or services, or related to the execution or performance of a contract
► These affirmative defenses are narrowly construed
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Defenses to the FCPA
► One exception for facilitating or expediting payments:► Such “grease” payments are permissible if the purpose is to
expedite or secure the performance of a routine, non-discretionary governmental action by the payee
► Should be of limited value► Governmental action includes
► issuing licenses and permits► processing customs paperwork► providing police protection
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FCPA Penalties
► Criminal penalties► Maximum $2 million fine for companies► Maximum $100,000 fine and five years imprisonment for
individuals► Companies may not indemnify convicted officers, directors,
employees, agents, or stockholders for payment of any fine
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FCPA and Its Impact on the Pharmaceutical and Medical Device Industry
► Red Flags► Inflated or unusually large commissions or bonus payments to employees or third
party representatives who interact with government officials► Requests for large amounts of payments in cash or in bearer instruments► Payments through a third party or to an account in an offshore or unrelated third
country► False invoices or over-invoicing► Lack of transparency in expenses and accounting records► A consultant, agent, or business partner whose qualification includes a personal
relationship with government officials► Apparent lack of qualifications or resources, on the part of the consultant,
distributor, representative, or joint venture partner, to perform the services offered
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Current Trends
► Enforcement of the FCPA has dramatically increased in recent years
► 38 enforcement actions in 2007► 15 enforcement actions in 2006
► Increased number of voluntary disclosures
► Increased cooperation among multi-national prosecutors► Recent FCPA enforcement actions show that companies
without effective compliance programs incur the highest penalties
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Current Trends
► U.S. Government is seeking more intrusive remedies:► Government-imposed monitors► Monitors may be given
► access to records, including real-time access to calendars of top officials
► ability to impose changes to FCPA-related compliance processes
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Current Trends
► Fines and disgorgement payments are increasing► Titan (2005) – more than $28 million in fines/disgorgement► Vetco International (2007)- $26 million total criminal penalty for 3
subsidiaries ($12 million for one subsidiary with a prior FCPA conviction)
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Current Trends
► Titan Corp. (2005)• Paid $3.5 million over 3 years to its agent in Africa, a business advisor to
country’s president, in effort to secure telecom contract• Payments recorded as consulting services• Titan pled guilty to 3 felonies; paid $13 million fine; entered into SEC
consent; disgorged $15.5 million; retained a monitor
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Current Trends
► Vetco International (2007)• Four Vetco subsidiaries authorized agent to make multiple payments (totaling $2.1
million) to Nigerian Customs Service to procure preferential customs treatment for deepwater oil drilling equipment
• Three of the subsidiaries pleaded guilty to anti-bribery violation and conspiracy: $26 million total fine (largest to date in DOJ prosecution)► $12 million paid by one subsidiary with prior FCPA conviction
• Deferred prosecution agreement for one subsidiary: consented to DOJ prior approval of appointments of ► Executive Chairperson► Majority members of Compliance Committee (including chair)► Compliance Counsel
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Thoughts on Compliance
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Compliance: Know the business
► Profiling► Country indices/scores/reputation► Business culture of the market; political and economic environment► History of the operations; past audits► Local business model and drivers► Involvement of the government (regulator, customer, interested
party)► Local efforts by industry associations► Local enforcement efforts► Overall sales goals; strategy and tactics► Knowing management► Linking to region: issues and resources
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Compliance: Know the product
► The label (and its local restrictions) and registration► The influencer, decision-maker, buyer, user, recipient► The brand plan and sales tactics► The reimbursement scheme► The sales channel (tenders, formularies, distribution, pricing and
discounting)► The horizon: new indications; known other uses; timeline-launch to
patent expiry► The medical affairs piece: post-market, scientific exchanges► Congresses► Programs: consignment; rotations► Competitive products
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Advanced Issues in Promotion, Inducements and Corrupt Practices, including Foreign Corrupt Practices Act
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Compliance: Transparency
► Transparency of transactions and accounting formalities► Supporting documentation
► Specificity required► Knowing the local practices and vulnerabilities
► Reliable approvals► Trending and monitoring► Price concessions
► Off-invoice, non-trade discounts
► Petty cash
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QUESTIONS
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Ted AcostaErnst & Young+1 212 773 [email protected]
Tom SuddathReed Smith LLP+1 215 851 [email protected]