The pharmaceutical industry is under scrutiny by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) as both agencies aggressively enforce the provisions of the Foreign Corrupt Practices Act (FCPA).
Like other organizations based in the Unites States and those with U.S.-listed securities, pharmaceutical companies must comply with requirements of the FCPA, which prohibits the bribery of foreign officials for the purpose of obtaining or retaining business. Pharmaceutical companies that conduct business in foreign jurisdictions are particularly at risk of FCPA violations because health care systems outside of the United States often are owned or operated by government agencies. Therefore, during the course of business activities, interactions with individuals considered to be foreign officials can be more frequent than in other industries. As a result, there is heightened exposure to potential corruption risk.
Pharmaceutical companies must also comply with requirements to maintain records that accurately reflect transactions as well as the nature and quantity of corporate assets and liabilities. Further, they must create and maintain accounting controls to provide “reasonable assurance” that:
- Transactions are executed in accordance with management’s authorization;
- Transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles (GAAP) and to maintain accountability for assets;
- Access to assets is permitted only in accordance with management’s authorization; and
- The recorded accountability for assets is compared to existing assets at reasonable intervals and appropriate action is taken if there are any differences.
Challenges and Opportunities
DOJ investigations involving the alleged bribery of foreign officials by pharmaceutical companies are on the rise. Of critical significance to management is the fact that the number of enforcement actions against corporate executives has increased. The DOJ has indicated its intent to pursue jail time for those found guilty of criminal violation of the FCPA.
Corruption risks identified as a result of recent DOJ actions against life science companies include:
- Kickbacks paid to obtain contracts with a foreign ministry of health
- Improper payments in order to secure contracts with a foreign ministry of defense
- Payments by a privately-held medical device manufacturer to physicians employed by foreign government-owned hospitals
- Contributions to the favorite charitable organization of a foreign government official who influenced and provided for the purchase of pharmaceutical products by hospitals
- Fees paid by pharmaceutical companies to influence doctors and government officials in Eastern Europe
For many pharmaceutical companies, their journey in managing corruption risk begins with an understanding of potential contact with foreign officials. Who is a foreign official, exactly? This term has been widely interpreted by U.S. regulators to include elected officials of foreign governments and other “public” or “civil” servants. Of particular concern to the life sciences industry is the inclusion of physicians and laboratory employees of government-owned hospitals as well as administrators and procurement officers of state-owned health care facilities.
How is the organization exposed to such individuals or entities? According to the DOJ, “Nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product may involve a ‘foreign official’ within the meaning of FCPA.” Therefore, all activities conducted in foreign jurisdictions by company management or joint venture partners could expose a pharmaceutical company to corruption risk.
Our Point of View
As coordination grows between law enforcement and regulators in the United States and abroad, management of life sciences companies needs to consider whether the organization has an effective program in place to prevent and detect corruption risk across the enterprise. A robust anti-corruption or FCPA compliance program provides a critical “rule book” for life sciences companies conducting business in today’s global economy. Furthermore, anti-corruption controls within financial and operational processes should be monitored on a continuous basis by management to identify potential red flags that may warrant additional or immediate attention. The program should also be audited periodically to ensure compliance at all levels and across the entire organization.
How We Help Companies Succeed
Protiviti helps pharmaceutical clients address corruption risk proactively by understanding where it can occur and implementing strategies to combat it. As a result, organizations protect their reputations, improve their bottom lines, and achieve their fiduciary and regulatory responsibilities.
- FCPA compliance and education/awareness programs – We assist clients in the development of FCPA compliance policy, training, education and awareness programs to support their regulatory and compliance initiatives across the entire organization.
- FCPA compliance audits – We plan and perform procedures to assess compliance with the company’s FCPA compliance program, corresponding policies, procedures and controls. We report areas of noncompliance and recommend solutions to enhance the organization’s FCPA compliance activities.
- FCPA compliance program assessments – Utilizing Protiviti’s proprietary consulting methodology, we compare a company’s existing FCPA compliance program in the context of authoritative guidance and leading practices. This provides management with an actionable roadmap to help strengthen its corruption risk evaluation, mitigation and monitoring activities.
- Corruption or FCPA risk assessment – We assist management in the identification and prioritization of the organization’s key corruption risks in highly collaborative -projects that promote knowledge-and-skill transfer to the company’s personnel. This enables management to enhance its prevention, deterrence and detection capabilities.
We also conduct investigations of concerns or complaints involving potential FCPA matters in conjunction with internal and external counsel, management, and boards of directors.
- Providing tailored common fraud scenarios to reflect the unique corruption risks of the biotechnology industry, we worked with our client, a midsized biotechnology company that conducts clinical trials in several foreign venues, to facilitate and document management’s identification of residual FCPA risks. We recommended the creation and implementation of FCPA policy and procedures and assisted in the execution of FCPA assessments and audits.
- On separate client engagements for a large international pharmaceutical company with multiple U.S. subsidiaries and a midsized U.S.-based pharmaceutical company with subsidiaries in foreign countries, Protiviti facilitated comprehensive fraud risk assessments. For each organization, we identified potential improvement opportunities to help mitigate and monitor corruption risks, especially those related to payments in overseas countries. As a result, FCPA policy and procedures were crafted and implemented, FCPA reviews were added to the audit plan, and due diligence of foreign collaborators was established.