Source: https://www.ropesgray.com/en/newsroom/alerts/2018/08/Distributors-Expose-Health-Life-Sci-Cos-To-FCPA-Risks
Timestamp: 2019-04-22 20:59:32+00:00

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This article by partner Mimi Yang, counsel Alison Fethke and associates Tina Yu, Grace Kim and Gabriella Stern was published by Law360 on August 14, 2018.
Health care and life sciences companies with operations in the United States and abroad face increased liability arising from their common reliance on third-party distributors in international markets. Third-party distributors are often responsible for the direct marketing and selling of a company’s products outside of the U.S. and provide value to multinational companies based upon their presence in local markets, including experience with local regulatory authorities, relationships with local businesses and established on-the-ground infrastructures and resources.
The U.S. Foreign Corrupt Practices Act and other nations’ anti-corruption laws specifically hold companies accountable for the actions of third parties, which may give rise to unanticipated material liabilities if companies do not adequately oversee third-party agents. Although all companies operating abroad should generally be aware of potential liability under the FCPA, health care and life sciences companies may be at even greater risk given the nature of their products, which often need regulatory approval, are paid for by government payors and may involve risk to patient health and safety.
These legal and enforcement changes showcase third-party misconduct as an area of increasing regulatory scrutiny. In 2017, corporate resolutions between health care and life sciences companies and the U.S. Department of Justice and U.S. Securities and Exchange Commission constituted 27.3 percent of all FCPA-related corporate resolutions, and global trends suggest that foreign authorities have increasingly been cooperating with U.S. authorities in FCPA enforcement efforts over the past five years.5 If the increase in U.S. anti-corruption enforcement against health care and life sciences companies operating abroad is any indication, companies should prepare for increased anti-corruption activity internationally. To avoid costly anti-corruption enforcement, health care and life sciences companies should vet and monitor their third-party distributors closely and revisit their internal controls and compliance programs regularly to safeguard against liability under the FCPA and the evolving constellation of local anti-corruption laws.
The DOJ and SEC have imposed direct liability upon companies based on improper activities of third-party distributors acting on the behalf of the companies. Exposure to risk is created by activities such as failing to adequately oversee third-party distributors or disregarding these distributors’ corrupt activities and relationships to further business goals. A number of recent enforcement matters illustrate the behaviors of and interactions between companies and their distributors that the DOJ and SEC deemed problematic under the FCPA.
In light of these enforcement risks, health care and life sciences companies engaging third-party distributors abroad should examine their compliance policies and internal controls using guidance from these agencies and industry best practices. The following sections outline some key considerations and safeguards that companies should take into account when implementing meaningful compliance controls over third parties.
The DOJ offered additional guidance in 2017 to assist multinational companies in developing effective global compliance programs. The guidance highlights elements and controls that multinational companies should consider to strengthen their compliance programs, such as establishing a business rationale for using third parties; developing mechanisms to guarantee that the contract terms with third parties clearly specify the services in which the third parties will be engaged; educating “relationship managers” about compliance risks with third parties; incentivizing compliance for third parties; developing a risk management process; strengthening due diligence protocols; and continuously auditing and improving anti-corruption policies and procedures.20 While it is important for companies to account for such guidance in structuring their compliance efforts, the SEC and DOJ have made clear that a checklist approach to implementing oversight of third-party agents is not sufficient for the establishment of an effective compliance program. Rather, a company subject to U.S. laws that operates abroad should tailor its safeguards against foreign corrupt practices to the specific risks that it encounters in its respective business.
Companies and their subsidiaries should know their third-party distributors well, understand the business rationale for the third-party distributors’ decisions and establish monitoring mechanisms to detect red flags and other activities prohibited by the various anti-corruption laws. For example, companies may audit distributor margins21 and conduct trend analysis and comparisons to identify suspicious trends in distributor payments. Companies may also monitor distributors’ interactions with health care professionals who may be considered government officials in some situations and subject to local anti-corruption laws. Further, companies should adopt measures that ensure sufficient oversight of third-party distributors and implement processes in which no single department, particularly sales departments that are more likely to be motivated by achieving sales targets, is unilaterally responsible for making final decisions. Finally, the integrity of these processes can further be protected using tools, such as decision matrices, that require approvals from multiple gatekeepers. Without these measures, unlawful payments to third parties can remain undetected for years.
Given the SEC and DOJ’s emphasis on conducting adequate due diligence, companies should be especially vigilant in conducting diligence of third-party distributors prior to starting business relationships. Some helpful tools to conduct more effective diligence include performing public reputation checks and checks to determine if the distributors are connected to politically exposed persons; requiring third-party distributors to complete and attest to a due diligence questionnaire containing questions about whether the company has an accounting system that can detect fraud and other controls that can prevent misconduct; for health care and life sciences products, conducting debarment checks against government payer databases; and requesting certifications from third parties that state that they understand and will adhere to the company’s anti-corruption policies and procedures as well as applicable laws and regulations. Further, while it is essential to conduct diligence at the start of a distributor relationship, it is also necessary to update such diligence periodically. The scope and depth of an appropriate diligence plan will depend on several factors, such as the industries and countries in which a company operates. Nevertheless, companies should engage in risk-based due diligence to adjust the degree of scrutiny as problematic activities are detected.
Companies should train employees, particularly those who interact with third-party distributors on a regular basis, to identify potential red flags relevant for the areas where they operate. Useful topics include guidance on when health care professionals could be considered government officials and whether supplying gifts or entertainment to health care professionals could be considered improper payments under applicable local laws or trade association ethical standards. Employees should be retrained periodically, ideally at least annually. When possible, companies would conduct these trainings live and in the local language, to provide employees an opportunity to ask questions and fully comprehend the material.
One effective approach involves the presentation of case studies, through which trainees can actively participate in analyzing common risk areas they might encounter in their day-to-day activities. Such training is particularly important for companies that operate internationally and may find it difficult to monitor the daily activities of third-party distributors centrally. Companies could provide similar trainings to third-party distributors directly, through summits and other distributor events, to create an opportunity for senior management to retrain their distributors and communicate to them the importance of avoiding corrupt behavior.
While this is perhaps indicative of other issues such as a general lack of awareness towards compliance, the Analogic case also highlights authorities’ emphasis on the effectiveness of a compliance program. Companies should customize trainings to address the specific needs and situations of each jurisdiction, the unique risks that a company might encounter when conducting business internationally, and should include guidance on specific steps employees at all levels of the corporation may take when improper behavior is detected. In particular, passive distribution of knowledge on corruption-related issues is insufficient; rather, the company will need to have demonstrated that its employees have internalized the trainings and policies, and that the company has taken on an active role in monitoring and preventing third-party misconduct.
Companies should establish institutional commitment at the outset and foster a top-down culture of compliance to demonstrate their commitment to avoiding corrupt practices. They should widely distribute, and periodically redistribute, their policies and procedures that prohibit bribery to employees at all levels of the company. In addition to implementing training programs for employees, companies should raise awareness at the executive/leadership level of the importance of complying with the FCPA and other anti-corruption laws, and of establishing open lines of communication with employees regarding suspected noncompliance with these laws.
Senior management should take particular care to foster an environment in which employees feel the company encourages reporting of concerns. As nonmanagement employees are often responsible for maintaining third-party relationships and serve as gatekeepers, they may be the first to know if corrupt practices are occurring. Thus, companies should ensure that these employees are aware of the available channels of communication to report red flags, which can include anonymous hotlines, in addition to open-door policies with senior managers involved with compliance matters and the compliance department.
Both domestically and abroad, health care and life sciences companies must maintain strong compliance systems to safeguard against corrupt practices. However, the path to global compliance can be challenging, particularly when third parties are involved. Companies’ inability to exercise adequate oversight and control over third-party distributors creates risk, in particular when operating in environments of which they have little knowledge and jurisdictions that are associated with a high risk of corruption. In spite of these and other hurdles, health care and life sciences companies have an obligation to implement safeguards against prohibited activities using what resources they do have.
1 Bribery Act 2010, c. 23, § 1(2) (Eng.).
2 Lei No. 12.846, de 1 de Agosto de 2013, DIARIO OFICIAL DA UNIAO [D.O.U] de 2.8.2013, Capitulo II, art. 5, sec. III (Braz.).
3 Id. at Capitulo II, art. 5, sec. II.
4 Zhonghua Renmin Gonghegue Fan Bu Zhengdang Jingzheng Fa (Xiudìng) (中华人民共和国反不正当竞争法 (修订)) [Anti-Unfair Competition Law of the People’s Republic of China] (promulgated by the Standing Comm. Nat’l People’s Cong., Nov. 4, 2017, effective Jan. 1, 2018) (China).
5 Mark F. Mendelsohn et al., FCPA Enforcement and Anti-Corruption Year in Review, HARV. L. SCH. F. CORP. GOVERNANCE AND FIN. REG. (Feb. 11, 2018), https://corpgov.law.harvard.edu/2018/02/11/fcpa-enforcement-and-anti-corruption-year-in-review/.
6 Press Release, U.S. Sec. Exch. Comm’n, SEC Charges Medical Device Manufacturer with FCPA Violations (June 21, 2016), https://www.sec.gov/news/pressrelease/2016-126.html; see also Press Release, U.S. Dep’t of Justice, Analogic Subsidiary Agrees to Pay More than $14 Million to Resolve Foreign Bribery Charges (June 21, 2016), https://www.justice.gov/opa/pr/analogic-subsidiary-agrees-pay-more-14-million-resolve-foreign-bribery-charges.
7 See generally Cease and Desist Order, In re Analogic Corp., Exchange Act Release No. 78,113, 114 SEC Docket 8 (June 21, 2016), https://www.sec.gov/litigation/admin/2016/34-78113.pdf. See also Press Release, U.S. Sec. Exch. Comm’n, SEC Charges Medical Device Manufacturer with FCPA Violations (June 21, 2016), https://www.sec.gov/news/pressrelease/2016-126.html.
8 Press Release, U.S. Dep’t of Justice, Analogic Subsidiary Agrees to Pay More than $14 Million to Resolve Foreign Bribery Charges (June 21, 2016), https://www.justice.gov/opa/pr/analogic-subsidiary-agrees-pay-more-14-million-resolve-foreign-bribery-charges. See also Press Release, U.S. Sec. Exch. Comm’n, SEC Charges Medical Device Manufacturer with FCPA Violations (June 21, 2016), https://www.sec.gov/news/pressrelease/2016-126.html. The FCPA includes a “books and records” provision, which requires companies to maintain their internal records in a manner that accurately reflects their transactions, including the transactions of third parties working on a company’s behalf. Foreign Corrupt Practices Act of 1977, Pub. L. 95-213, 91 Stat. 1494 (1977), 15 U.S.C. §§ 78m(b)(2)(A)).
9 Press Release, U.S. Sec. Exch. Comm’n, SEC Charges Medical Device Manufacturer with FCPA Violations (June 21, 2016), https://www.sec.gov/news/pressrelease/2016-126.html.
10 See generally Cease and Desist Order, In re Analogic Corp., Exchange Act Release No. 78,113, 114 SEC Docket 8 (June 21, 2016), https://www.sec.gov/litigation/admin/2016/34-78113.pdf.
11 See Press Release, U.S. Sec. Exch. Comm’n, SEC Charges Medical Device Manufacturer with FCPA Violations (June 21, 2016), https://www.sec.gov/news/pressrelease/2016-126.html.
12 SEC v. Teva Pharm. Indus., No. 1:16-cv-25298, 10 (S.D. Fla. Dec. 22, 2016), https://www.sec.gov/litigation/complaints/2016/comp-pr2016-277.pdf.
13 Id. at 14–15 (S.D. Fla. Dec. 22, 2016), https://www.sec.gov/litigation/complaints/2016/comp-pr2016-277.pdf. See also Press Release, U.S. Dep’t of Justice, Teva Pharmaceutical Industries Ltd. Agrees to Pay More than $283 Million to Resolve Foreign Corrupt Practice Act Charges (Dec. 22, 2016),https://www.justice.gov/opa/pr/teva-pharmaceutical-industries-ltd-agrees-pay-more-283-million-resolve-foreign-corrupt.
14 Statement of Facts, Serious Fraud Office v. Rolls-Royce PLC , EWCC (QB) 36, .
16 Serious Fraud Office v. Rolls-Royce PLC , EWCC (QB) 36, .
18 Bribery Act of 2010, c. 23, § 7(2) (Eng.).
19 U.S. DEP’T OF JUSTICE AND U.S. SEC. EXCH. COMM’N, A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT 22, 23 (Nov. 12, 2012), https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf.
20 U.S. DEP’T OF JUSTICE, EVALUATION OF CORPORATE COMPLIANCE PROGRAMS (Feb. 2017), https://www.justice.gov/criminal-fraud/page/file/937501/download.
21 While a margin audit is an example of a tool that companies can use to identify suspicious trends in distributor payments, companies should not conduct or utilize margin analysis as a means of collusion or concerted effort to fix prices, in contravention of applicable antitrust laws.
22 Cease and Desist Order, In re Analogic Corp., Exchange Act Release No. 78,113, 114 SEC Docket 8 (June 21, 2016), https://www.sec.gov/litigation/admin/2016/34-78113.pdf.

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