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Pharmaceutical Regulatory and Compliance Conference 2008 FCPA and the Practical Implications to Interactions with HCPs November 8, 2007
FCPA Overview • Roots in the 1970s • 400+ companies making questionable or illegal payments • $300+ million • Prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. • Since 1998 also applies to foreign entities who further a corrupt payment while in the US • The Department of Justice is the chief enforcement agency • Coordinate role played by the Securities and Exchange Commission (SEC). • Books and record requirements
FCPA – Five Elements • Who: Potentially any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. • Corrupt Intent: The person making or authorizing the payment must have a corrupt intent and the payment must be intended to induce misuse of an official position. • Payment: The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. Source: www.usdoj.gov/criminal/fraud/docs/dojdocb.html
FCPA Five Elements • Recipient: The FCPA applies to payments to any public official, regardless of rank or position. Also includes candidates and party officials. • Business Purpose: Payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. Source: www.usdoj.gov/criminal/fraud/docs/dojdocb.html
Facilitation Payments • Permits payments for routine items: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country. Source: www.usdoj.gov/criminal/fraud/docs/dojdocb.html
The Anti-Corruption Landscape • Clear consensus that corruption must be avoided. • OECD • EU Anti-Bribery Conventions • World Bank • Public opinion • Stepped up, and coordinated enforcement. • DOJ and SEC • Robust penalties. • Fines • Internal monitors
The Anti-Corruption Landscape • Enforcement efforts affecting a wide range of industries. • Defense • Oil & gas • Medical devices • Pharmaceuticals
Multiple Challenges • Cultures of corruption. • Large number of countries with widespread corruption • Transparency International bottom scores: • Sudan • Guinea • Iraq • Myanamar • Haiti • China constant source of concern
Multiple Challenges • Difficulty in controlling remote offices and agents. • Challenges in auditing and monitoring • Sometimes difficult to know who is a government official. • Especially for pharma and medical devices • Can be too tempting. • Easy to see what you can get, hard to remember that how you get it counts
Reputational Complication • Damage goes beyond the fine. • Long-term reputational consequences • Stock price • Recruiting • Press mentions
What Companies Are Doing -- Detection • Whether domestically or internationally, companies rely on multiple reporting tools for detecting violations.
What Companies Are Doing -- Detection • Supervisors are generally seen as the first line of detection, but there was no strong pattern.
Adam Turteltaub Corporate Relations Executive LRN firstname.lastname@example.org William Jacobson Assistant Chief, Fraud Section, Criminal Division US Department of Justice William.email@example.com Gary Giampetruzzi Senior Corporate Counsel Pfizer, Inc. Gary.firstname.lastname@example.org Michael Horowitz Commissioner, US Sentencing Commission Partner, Cadwalader Wickersham & Taft Michael.email@example.com Speakers
FCPA and the Practical Implications to Interactions with HCPs Gary GiampetruzziAssistant General CounselPfizer, Inc.
General Program Guidance From The Cases • Focus on maintenance of controls by companies (and individuals?) • Development of clear FCPA policies and program elements • Communication, regular training, and annual certifications • Reporting systems, and appropriate discipline when violations occur • Development of FCPA procedures reasonably capable of preventing violations • Should be a risk-based approach to controls / procedures • Due diligence and post-retention oversight of third-party relationships • Appropriate contractual language with third-party agreements setting forth anti-corruption reps and warranties, compliance with anti-corruption laws, etc. • Controls to ensure that books, records and accounts are maintained accurately • Senior management reporting on FCPA status to audit committee, etc. • Regular audits to ensure that program has been implemented in an effective manner
An FCPA Code of Conduct? Start With Your FCPA Risk Areas • Direct Healthcare Regulators • Product approval and registration • Product pricing • Product reimbursement • Placement on hospital formularies • Government-employed doctors • Gifts and hospitality • Congresses and meetings • Consultant arrangements • Education and research grants Foreign Officials • Other public officials • Customs and importation officials • Charitable and political contributions, etc. • Third-party agreements (ex. wholesalers, distributors and other service providers)
Global Policy on Interactions with Healthcare Professionals Transparency Corporate Citizenship Primacy of PatientAndHealthcare Professional Relationship Core Global Policy Principles
Dealing With Specific Areas Of Risk Ex. Support for Third Party Medical Meetings and ConferencesThe main purpose of medical congresses, conferences, symposia and similar programs supported by Pfizer must be scientific exchange and/or medical education. . . . In no instance will Pfizer provide financial support as an inducement for a healthcare professional to use, prescribe or recommend a Pfizer product or otherwise influence the outcome of a clinical trial.
Don’t Forget The Controls: A Global FCPA Procedure • A comprehensive, corporate-developed global procedure • Real controls; not merely another statement of policy (ex. GPIHP) • Implementation by local markets to enforce and implement corporate procedure • Local market identification of public officials • Detailed written procedures govern gifts and hospitality, congresses, consultant arrangements, research and other grants, third-party relationships, etc. with officials • Local implementation reviewed by Legal, with annual certifications • Essentially becomes gap analysis with existing implementing SOPs • Local systems, processes and controls subject to periodic auditing • Local trend analysis on interactions in consultation with Corporate Compliance • Appropriate record retention and training, training and more training
Fundamental Point: Policies Are Not Procedures Policy Procedure • Directional guidance • No specification of process • Detailed guidance • Process steps and controls outlined
Healthcare professionals may be hired as consultants to provide bona fide services, such as assisting in the development of medicines, participating in clinical trials, etc. In no instance will Pfizer retain any healthcare professional, regardless of qualification, as an inducement for such healthcare professional to use, prescribe, or recommend products. In some countries, many healthcare professionals are employed by government or regulatory authorities. Pfizer will ensure that all such relationships are appropriately reviewed to ensure compliance with Pfizer policies and applicable laws. Consider the subject market / territory Identify relationships with gov’t officials Determine the competence / integrity of the third party (questionnaires, interviews, etc.) Reasonableness of compensation (vs. work to be performed, fair market value) Ensure compliance with local laws Integrate standard FCPA language and safeguards into the third-party agreement Maintain continuing oversight of third-party Maintain accurate books and records, including the due diligence file Example: Dealing With Third-Party Consultants FCPA Procedure GPIHP (Policy) VS.
FCPA Training (Along With More Communications) • Prior training approach - The first 150 years • Mostly non-web based (ex. Compliance and Values Workshops) • New employee orientations, various corporate and divisional programs • The past several years – Addition of web-based training • More than 45,000 colleagues trained in the U.S. and Puerto Rico • Pfizer Code of Conduct module; healthcare law and other modules • Feedback (92% liked the course; 91% better understand rules; 94% intend to use) • Initial international roll outs complete • Almost 50,000 additional colleagues trained • More than 80 countries worldwide, and approximately 30 languages • Proactive collaborative market education and review • Online FCPA and other certifications
Auditing and Assessing An FCPA Program • PCEC feedback and statistics • Feedback and statistics from the Open Door and Compliance Hotline • Auditing and Monitoring functions (Healthcare, Manufacturing, R&D, etc.) • Global Compliance Liaisons(eyes and ears on the ground) • Legal Division survey • Global Colleague and Values survey • Global compliance survey • Employee exit interviews • Corporate Compliance website
Referable Compliance Issues (RCIs) • Definition • Significant violations of applicable law or company policy or procedure • “Significance” determined by severity of action or consequence and nature of law (i.e. intentional, criminal, or repeated behavior; participation of a manager; serious financial, operational, investor relations, health, or safety consequences) • Points of process • Handled exclusively at the direction of Corporate Compliance and GI • Reported to the Corporate Compliance Officer; Audit and Compliance Committees • Response to changed environment • Need to ensure corporate awareness of significant compliance issues (ex. Sarbanes) • Provides ability to investigate and decide whether to disclose
Global Compliance Liaisons / Regional Compliance Directors • Liaison Partnership between Corporate Compliance and leadership of local markets • Designated Compliance Liaisons in every market around the world • Liaise between market and Corporate Compliance • Ensures that Corporate Compliance Officer (CEO, CFO, Board and Audit Committee of Board) up-to-date on compliance issues at every Pfizer location around the world • Report Referable Compliance Issues to Corporate Compliance Group • Act as chief point of contact between business and Compliance Group • Be an on-site source of compliance information for colleagues • Spreads compliance knowledge and empowers colleagues • Drives compliance into the business • Regional Compliance Directors • Beijing, New Delhi, Buenos Aires, Karlsruhe, Istanbul, Hong Kong, etc.
8th Annual Pharmaceutical Regulatory & Compliance Congress Michael E. Horowitz, Esq. Partner, Cadwalader, Wickersham & Taft Michael.Horowitz@cwt.com; (202) 862-2253
Potential Industry FCPA Issues • Direct Regulators • Product Registration • Reimbursement Rules • Importation/Customs • Distributors/Agents • Government-Employed Doctors • Employee of Government Hospital or University • Clinical Trials, Gifts, Conference Travel, Honorarium, Consultants/KOLs • Charitable Donations
Health/Pharma Industry – Recent Cases • Syncor (2002) – Cardinal Health acquisition. Improper payments to gov’t physicians: • At least $400,000 in commissions to influence purchasing decisions; cash payments improperly recorded as promotional and advertising expenses • At least $113,000 in referral fees (much in cash) to influence doctors • Loans never repaid, personal expenses not incurred, “over invoicing” arrangements to generate cash gifts • At least $245,000 involving sponsorship at educational seminars (registration fees, travel, lodging, meals), gifts of computer equipment, digital cameras, expensive wines, wristwatches, software and office furniture, sponsorship of social functions and hospital fundraisers, etc. • Syncor Taiwan pleaded guilty to violating FCPA anti-bribery and books & records provisions; sentenced to 3 years of supervised probation and $2 million fine • Syncor International charged by SEC with violating FCPA anti-bribery, books & records, and internal controls provisions; paid $500,000 civil penalty; required to retain independent consultant
Syncor– Lessons Learned • Enforcement action can slow closing of transactions • Acquisition by Cardinal Health was delayed until investigation concluded and agreements were struck with DOJ and SEC • FCPA liability/exposure can have an impact on pricing • Cardinal Health purchased for lower price than originally negotiated • Parent liability established through the foreign subsidiary’s books and records • Notable as first Healthcare Industry FCPA prosecution - established U.S. government position that state-employed doctors are government officials for purposes of the FCPA • Notable as first case in which DOJ criminally prosecuted a foreign subsidiary of a U.S. company
Health/Pharma Industry – Recent Cases (cont) • Schering Plough (2004) • At request of director of Polish regional government health care fund, Schering made $76,000 in donations to Polish charity; payments structured to avoid detection and exceeded local manager approval levels (no knowledge at U.S. headquarters). • During time period when donations made, sales of two oncology products increased disproportionately in that Polish region • SEC Resolution: $500,000 civil penalty and Schering retained independent consultant to review and make recommendations on FCPA procedures; Company agreed to adopt all recommendations.
Health/Pharma Industry – Recent Cases (cont) • Micrus (2005) – private medical device company • Payment of more than $105,000 to doctors employed at publicly owned and operated hospitals in France, Turkey, Spain, and Germany in return for the hospitals' use of Micrus' products. • Payments "disguised" in Micrus' books as stock options, honorariums and commissions paid in return for the doctors' service on "advisory committees.“ • Additional payments totaling $250,000 for which Micrus had failed to obtain necessary prior administrative or legal approval required under the laws of the relevant foreign jurisdiction. • Non-prosecution agreement, fine of $450,000, adopt compliance program, retain independent compliance expert for 3 years
Health/Pharma Industry – Recent Cases (cont) • DPC (Tianjin) (2005) – provider of medical products • Approximately $1.6 million in bribes from 1991 to 2002 in form of illegal "commissions" to physicians and laboratory personnel employed by government-owned hospitals in PRC to obtain hospital business. • Payments authorized by DPC Tianjin's general manager, and paid in cash and hand-delivered by DPC Tianjin salespeople to person who controlled purchasing decisions for particular hospital department. • DPC Tianjin recorded payments on its books and records as "selling expenses.“ • DPC pleaded guilty to violations of the FCPA, and settled with SEC. Agreed to pay $4.8 million in fines and disgorgement, and retain independent monitor.
Health/Pharma Industry – Recent SEC Filings (alphabetical order) • AstraZeneca: SEC request for policies, audits, correspondence, and compliance documents re: FCPA, as well as for any payments to doctors and internal accounting controls for several specific countries • Bristol-Myers Squibb: SEC informal inquiry (now formal) into company’s German subsidiary and certain employees and/or agents; investigation apparently initiated by Munich prosecutors • GlaxoSmithKline: SEC subpoena regarding participation in U.N. oil-for-food program; SEC investigation into sales and marketing practices in Verona, Italy region (clinical studies, congresses, medical education) • Immucor: Self-report to SEC; settle with prosecutor in Milan; alleged improper cash payments to physicians in exchange for favorable contract awards by hospital • Johnson & Johnson: Voluntary disclosure to SEC and DOJ; overseas units are believed to have made improper payments related to sale of medical devices in two small market countries • Pfizer: Voluntary disclosure to SEC and DOJ regarding potentially improper payments related to sales activities in several foreign markets
Potential Industry FCPA Red Flags • Large aggregate payments/benefits to physician • Physician has purchasing authority for gov’t hospital or active in regulatory approvals • Conferences/training are not appropriate to physician’s practice • Extensive or inappropriate entertainment/dinner/travel • Unusual increase in product purchases or prescriptions written • High commissions or unusually large fees/gifts • Insufficient/incomplete due diligence (i.e. gov’t relationship, credit)
Potential Industry FCPA Red Flags • Distributor/agent lacks expertise or track record • Distributor/agent unusually successful in obtaining government contracts/benefits • Payments into offshore accounts • Inadequate, generic or otherwise questionable descriptions on invoices/requests • Missing or incomplete documentation • Substantial activity for new vendor/physician • Invoices paid too quickly; payments in cash or check
M&A Due Diligence – Areas of Special Interest • Foreign Operations in Suspect Markets • Low C.P.I. Score • Previous Allegations • Lack of a Compliance Operation/No FCPA Procedure • Joint Venture/Joint Distributorship Responsibilities • Non-public Company • Foreign Representatives and Agents • Commission Payments • Finders Fees • Foreign Discontinued Operations
Some Additional Issues • Low CPI Countries are usually poorer and in need of training and medical assistance • Usually few employees • Low revenue countries/remote locations • Often operate through distributors/agents
M&A Examples Michael E. Horowitz Partner, Cadwalader, Wickersham & Taft Michael.Horowitz@cwt.com; (202) 862-2253
ABB Vetco Gray - Allegations • Acquisition by “Equity Club” (JP Morgan Partners, Candover Partners Limited and 3i Group) of Upstream Oil and Gas business of ABB Limited, a Swiss company with ADR’s listed on NYSE • Problem: ABB Vetco Gray of Houston, Texas and ABB Vetco Gray of UK paid more than $1 million to officials of NAPIMS (Nigerian gov’t agency) to obtain confidential bid information and favorable recommendations from Nigerian gov’t agencies in connection with 7 oil & gas construction contracts in Nigeria for which companies expected to realize profits greater than $12 million • Payments also made to government officials in Angola and Kazakhstan for similar reasons • Payments included cash and gifts to NAPIMS officials, travel and entertainment, per diem payments
ABB Vetco Gray – Enforcement Actions • DOJ charged ABB Vetco Gray Inc. as a “domestic concern,” and ABB Vetco Gray UK Ltd. under 1998 law expanding jurisdiction to foreign companies that take acts in U.S. in furtherance of a bribe • Both companies pleaded guilty to violations of FCPA’s anti-bribery and books & records provisions; each fined $5.25 million • SEC alleged violations of FCPA’s anti-bribery, books & records, and internal controls provisions by Swiss parent; agreed to pay $5.9 million in disgorgement and prejudgment interest, and $10.5 million penalty (penalty satisfied by payment of criminal fines by subsidiaries) • Parent required to retain Independent Consultant to review FCPA compliance procedures even though it sold Vetco Gray entities
ABB Vetco Gray – Lessons Learned • Necessity to conduct rigorous due diligence and monitor activities of foreign agents, consultants, representatives, distributors, suppliers and joint venture partners • Upon acquiring company, FCPA risk areas to be addressed: • System of internal controls • Compliance program and due diligence procedures • Disciplinary actions • Change in business culture • Government investigation can slow closing -- acquisition by Equity Club delayed until agreements struck with DOJ and SEC • FCPA liability/exposure can have an impact on pricing – Equity Club purchased for lower price than originally negotiated
InVision Technologies, Inc. - Allegations • GE acquisition of InVision Technologies, manufacturer of airport security/explosive detection systems • InVision sold equipment via local agents and distributors • InVision aware of high probability that agents/distributors in Thailand, China and Philippines paid or offered to pay money (travel expenses and/or gifts) to foreign officials or political parties in connection with sale of machines • SEC alleged InVision improperly accounted for certain payments as “cost of goods sold,” realizing profits of approximately $589,000 from sale of two machines in China • SEC alleged InVision failed to develop adequate process to select and train its foreign sales agents and distributors
InVision Technologies, Inc. – Enforcement Actions • DOJ Deferred Prosecution Agreement -- $800,000 penalty, accepted responsibility for misconduct, and agreed to statement of facts summarizing improper transactions • Required to integrate InVision business into GE’s FCPA compliance program and retain Independent Consultant to evaluate GE’s efforts • SEC – Disgorged $589,000 in profits, an additional $28,700 in interest, and penalty of $500,000; SEC alleged violations of the FCPA’s anti-bribery, books & records, and internal controls provisions (failure to have system of internal controls to detect and prevent FCPA violations)
InVision Technologies, Inc. – Lessons Learned • Government investigation slowed closing – GE announced acquisition in March 2004, but transaction did not close until December 2004, after company agreed to deferred prosecution • Voluntary disclosure allowed the transaction to close – Credibility of GE’s compliance program was an important factor