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Kickbacks abroad: the foreign corrupt practices act.

Enacted in 1977 in the wake of the Watergate scandal, the Foreign Corrupt Practices Act (FCPA) was designed principally to prevent US companies from bribing foreign officials to obtain or maintain a business advantage. (14) However, similar to the federal healthcare programme anti-kickback statute, the FCPA actually covers many types of remunerative arrangements in addition to traditional quid pro quo bribes. This, combined with robust enforcement of the FCPA (which is exercised jointly by the Securities Exchange Commission (SEC) and the Department of Justice (DOJ)), signals a need for any US company doing business outside of the US to incorporate the FCPA into its compliance regime.

Healthcare entities, such as biotech, pharmaceutical and medical device manufacturers, which increasingly sell products in foreign countries, need to be particularly aware of the constraints of the FCPA. This is because the FCPA often restricts, and in some instances, prohibits, the provision of anything of value to physicians and other types of healthcare professionals, because such persons often qualify as foreign government officials under the FCPA. The engagement of foreign intermediaries (such as distributors and sales agents) complicates compliance as well. Finally, several recent enforcement actions--which resulted in large settlements--have involved pharmaceutical and medical device manufacturers. In this context, set out below is an overview of the FCPA, followed by a summary of key considerations for US healthcare entities doing business outside the United States.

Overview of the FCPA

The FCPA has two main components: (1) accounting requirements and (2) anti-bribery provisions. In a nutshell, the first component requires publicly traded companies to have internal controls to ensure that corporate assets are properly utilised, and to maintain books and records to support appropriate utilisation. In other words, the accounting requirements are designed to work in tandem with the anti-bribery provisions to eliminate 'off-the-books' transactions or 'under the table' payments.

Not unlike the US anti-kickback statute, the FCPA's anti-bribery provisions, in essence, prohibit the payment of any type of 'kickback' to a foreign official or political party to secure or maintain a business advantage. 'Foreign official' is defined very broadly to include, for example, any employee of a foreign government or any person acting in an official capacity (which, as noted above, potentially covers a variety of healthcare professionals working for a ministry of health, public hospital, or the like). Also, like the anti-kickback statute, the FCPA covers remuneration in any form; there is no de minimus exception. Finally, not surprisingly, a company cannot use a third party--often referred to as an 'intermediary'--to make an illicit payment on the company's behalf.

Exception and affirmative defences. The FCPA has one exception and two affirmative defences. The exception covers payments made to facilitate or expedite the performance of a 'routine governmental action' (or, in other words to 'grease the wheels' of commerce). As such, it is commonly referred to as the 'facilitating payments' exception. 'Routine governmental action' includes only non-discretionary actions that are 'ordinarily and commonly' performed by a foreign official in connection with activities such as: obtaining permits or licences; scheduling inspections; providing utility services; and similar activities. Importantly, the term 'routine governmental action' does not include: (1) any decision by a foreign official regarding whether to continue or award new business, or (2) any action taken by a foreign official to encourage a decision to continue or award new business.

In addition to the 'facilitating payments' exception to the FCPA, there are two affirmative defences to the anti-bribery provisions, which effectively protect: (1) payments that are legal under local law and (2) bona fide business expenditures. The former protects the offer or payment of remuneration where such activity is 'lawful under the written laws and regulations' of the foreign official's country. The latter, which covers certain business expenses, effectively permits the payment or offer of remuneration made as a 'reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official', which is directly related to (1) the promotion, demonstration, or explanation of products or services; or (2) the execution or performance of a contract with a foreign government or agent.

Enforcement. The FCPA provides for significant civil and criminal penalties. Criminal penalties against an individual for violation of the anti-bribery provisions include a $100,000 fine, five years imprisonment, or both, per violation. Companies are subject to fines of up to $2m per violation. Recent cases have resulted in large settlements, reaching as high as $44m. A range of penalties may be imposed on the civil side, and indictment or conviction under the FCPA may also lead to disbarment (exclusion from participation in federal contracts). Finally, not unlike cases under the anti-kickback statute, many FCPA cases are resolved via settlement, which may include certain contractual compliance requirements akin to a corporate integrity agreement.

Considerations for healthcare entities

Efforts to comply with the anti-kickback statute have prepared healthcare companies for compliance with the FCPA. However, the FCPA presents several unique challenges, as outlined below.

* Definition of foreign official may include physicians and other healthcare professionals: As noted above, the definition of 'foreign official' under the FCPA is extremely broad and may encompass many persons in the healthcare industry. In many countries, physicians and other healthcare personnel are employed by public hospitals and are therefore considered 'foreign officials'. Any payment to those physicians by healthcare companies may, accordingly, implicate the FCPA. For example, in a recent FCPA settlement, a medical equipment company agreed to pay a $2m criminal penalty for paying 'commissions' (a percentage of purchases) to physicians and laboratory personnel employed by government-owned hospitals in China. In another recent case, a medical device company paid $450,000 to resolve criminal liability under the FCPA for making payments to doctors employed by public hospitals in France, Turkey, Spain and Germany to induce the hospitals' purchases of the company's devices. Understanding the structure of the healthcare industry in each country in which a healthcare entity does business is, therefore, critical to ensuring compliance with the FCPA.

* Excessive distributor margins may be viewed as a kickback: In at least one case the DOJ has taken the position that the profit margin provided by a manufacturer to a foreign distributor was sufficiently wide that there was a high probability that at least part of this profit margin would be used for illicit purposes. By failing to make inquiries to discern the purposes for which the funds would be used, the DOJ asserted that the company violated the FCPA. This theory of liability is cause for concern, particularly given that it is common practice for distributors to make a profit. Manufacturers should, therefore, consider whether the government would deem the profit available to distributors on the manufacturer's products to be unreasonably high or excessive.

* Vetting intermediaries: Intermediaries of all types, including sales agents, distributors, consultants and other contractors, are frequently used by healthcare companies doing business in other countries. While such intermediaries are often commissioned for their ability to navigate unfamiliar processes and business practices in the local country, they, in turn, may not be familiar with the restrictions of the FCPA. Because a healthcare company may be liable for actions of its intermediaries, the need for comprehensive policies and procedures for selecting, screening, and monitoring (and possibly training) all intermediaries cannot be understated. Developing standardised contract terms for each type of intermediary may also facilitate, and enhance, compliance.

* Remuneration is anything of value, paid directly or indirectly: Similar to the anti-kickback statute, the FCPA covers a wide-range of remuneration that is paid or offered to gain a business advantage. Charitable donations, gifts, travel and entertainment all potentially implicate the FCPA. In addition, remuneration need not be provided directly to a foreign official to give rise to a violation. For example, a pharmaceutical manufacturer entered into a consent agreement to pay a $500,000 fine for making charitable donations to a non-healthcare-related foundation in Poland because the government alleged the donations were intended indirectly to induce the director of a Polish health fund to influence the purchase of the manufacturer's products. Finally, the remuneration need not be particularly valuable to trigger an enforcement action. Indeed, the DOJ has pursued cases where the remuneration provided was relatively minimal, as well as cases where the remuneration was never even paid, only offered. Accordingly, healthcare entities should consider developing policies governing the provision of any gifts and entertainment (and other remuneration). Local law should be considered as well, as certain countries have additional restrictions in this regard.

References and Notes

(1.) Pursuant to Regulation (EC) No. 1768/92.

(2.) Journal of Commercial Biotechnology (2006) 12, 299-311. Reported at [2006] ECR 1-40139.

(3.) Case C-202/05 Yissuin R&D Company of Hebrew University of Jerusalem v The Comptroller-General of Patents (European Court of justice, 17th April, 2007).

(4.) Other medicinal products, such as Calcijex and Rocaltrol, containing calcitriol as sole active ingredient, had already been granted authorisation to be placed on the market before Silkis ointment. Calcijex is a sterile, isotonic, clear, aqueous solution containing calcitriol for intravenous injection and is used for the management of hypocalcaemia in patients undergoing dialysis for chronic renal failure. Rocaltrol consists of soft gelatine capsules, containing calcitriol and various inactive ingredients, and is administered orally to patients with chronic renal failure or post-menopausal osteoporosis.

(5.) European Parliament and Council Regulation on advanced therapy medicinal products and amending Directive 2001/83/EC and Regulation (EC) No 726/2004 adopted on 31st May, 2007, but not yet published (text accessed on 12th October, 2007 at advtherapies/index.htm).

(6.) Available at pharmaceuticals/pharmacos/docs/doc2007/2007-09/gmpannex 2 consultation 2007 09 03.pdf.

(7.) Journal of Coininercial Biotechnology (2007) 13, 293-308.

(8.) Eisai Limited v National Institute for Health and Clinical Excellence, Alzheimer's Society and Shire Pharmaceuticals Limited (interested parties) (QBD (Administrative Court), 10th August, 2007) [2007] EWHC 1941.

(9.) The Trade Marks (Relative Grounds) Order 2007, S1 2007/1976.

(10.) 127 S.Ct. 1727 (2006).

(11.) 72 Fed. Reg. 57526 (Oct. 10, 2007) available at notices/72fr57526.pdf.

(12.) 72 Fed. Reg. 46716 (Aug. 21, 2007) available at notices/72fr46716.pdf.

(13.) 437 ESupp.2d 9235 (E.D.Mo. Mar 31, 2006).

(14.) See 15 U.S.C. [section] [section] 78m, 78dd-1 et seq.
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Title Annotation:NOTES FROM THE US
Author:Smith, Reed
Publication:Journal of Commercial Biotechnology
Article Type:Report
Date:Nov 1, 2007
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