anatomy of a corruption investigation for pharmaceutical and medical device companies

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ANATOMY OF A CORRUPTION INVESTIGATION FOR PHARMACEUTICAL

AND MEDICAL DEVICE COMPANIES LEGAL & COMPLIANCE ISSUES

European Healthcare Compliance Certification Program

20 November 2014

European Healthcare ComplianceCertification ProgramNovember 18, 2015

Topics

I. Overview of the Global Bribery Enforcement Landscape

II. The Seven Steps of US DOJ’s Enforcement Process

III. Special Areas of Interest

IV. Internal Investigations and Government Inquiry

I. Overview

“[C]orrupt countries are less safe. Corruption thwarts economic development, traps entire populations in poverty, and leaves countries without a credible justice system. Corrupt officials who put their personal enrichment before the benefit of their citizenry create unstable countries. And as we have seen time and again, unstable countries become the breeding grounds and safe havens for terrorist groups and other criminals who threaten the security of the United States.”

Assistant US Attorney General Leslie CaldwellNorth Carolina, 23 October 2014

I. Overview

“There is, of course, no ‘off the rack’ compliance program that can be installed at every company. Effective compliance programs must be tailored to the unique needs and risks faced by each company. But there are hallmarks of good compliance programs: 1. High-level commitment . . . ; 2. Written Policies . . . ; 3. Periodic Risk-Based Review . . . ; 4. Proper Oversight and Independence . . . ; 5. Training and Guidance . . . ; 6. Internal Reporting . . . ; 7. Investigation . . . ; 8. Enforcement and Discipline . . . ; 9. Third-Party Relationships . . . ; and 10. Monitoring and Testing. As I said, there is no ‘one-size fits all’ compliance program. But these are guideposts that we consider important to the success of a strong program.”

Assistant US Attorney General Leslie CaldwellWashington, DC, 1 October 2014

Healthcare Industry Initiative

• “The depth of government involvement in foreign health systems, combined with fierce industry competition creates risk.”

• Since 2009, DOJ has brought approximately 50 cases. Exclusive FCPA jurisdiction in Criminal Division, Fraud Section. (30 prosecutors). FBI created unit of dedicated agents in NY, DC and LA. SEC dedicated additional resources to enforcement.

• As of June 2014, over 20% of all known DOJ and SEC investigations involved pharmaceutical and device companies.

• US Enforcement Supervisors:– P. Stokes, DOJ Deputy Chief

o former AUSA from EDVA with over 10 years prosecutorial experience; and

– K. Brockmeyer, SEC FCPA Chief o previously handled Siemens AG, Magyar Telekom

and Deutsche Telekom.

Healthcare Industry Initiative

“It is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.”

Former Assistant US Attorney General Lanny Breuer

Washington, DC, 2009

Over 120 Known On-Going FCPA Investigations;Healthcare Companies Reported by Trace Int’l to be

Under Investigation by US Enforcement as of October 2014

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1) ABBOT2) ACTAVIS3) ASTRAZENECA 4) BAUSCH &

LOMB5) BAXTER6) BAYER7) BIOMET8) BIOTEST AG9) BRISTOL-MYERS

SQUIBB10) DEPUY 11) DERMAPHARM12) DIAGNOSTIC

PRODUCTS13) ELI LILLY14) FRESENIUS

MED15) GLAXOSMITHKL

INE16) GRIFOLS S.A. 17) HEALTHSOUTH18) MEAD

JOHNSON 19) MEDTRONIC20) NOVARTIS AG21) NOVO NORDISK22) ORTHOFIX 23) PFIZER24) PFIZER-WYETH 25) SCICLONE26) SMITH &

NEPHEW27) STRYKER28) SYNCOR29) TALECRIS30) TEVA PHARM31) WRIGHT

MEDICAL32) ZIMMER

Pharmaceutical & Medical Device Enforcement by US Department of Justice

• BioRad agreed to pay US$55 million to settle allegations that company failed to detect $7.5 million in corrupt payments to foreign officials in Russia, Vietnam and Thailand.

• J&J agreed to pay US$78 million to settle allegations that it violated the FCPA related to payments in Greece, Poland, and Romania.

• Smith & Nephew agreed to pay US$16.8 million to resolve FCPA charges related to improper payments.

• Biomet Inc. agreed to pay nearly US$22.9 million in criminal penalties to resolve charges that it paid bribes to health care providers in China and Latin America.

• Orthofix Int’l NV agreed to pay US$7.4 million to settle SEC charges involving alleged bribes paid in Mexico.

• Pfizer Inc. agreed to pay US$60 million to resolve criminal FCPA charges involving improper payments to government officials in Bulgaria, Croatia, Kazakhstan, and Russia.

• Teva Pharmaceutical Ltd. announced that DOJ and SEC were conducting an investigation with respect to alleged FCPA issues in Latin America. Teva is the largest generic drug manufacturer in the world.

DOJ/SEC FCPA Enforcement through 2014

US Enforcement Actions

US Enforcement Actions Against Individuals

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Duration of an FCPA Investigation: Historic

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Duration of US Investigations: Average 7+ Years

CASE & DOCKET NUMBER TYPE OF RESOLUTION

DATE OF LAST CIMINAL ACT DATE OF RESOLUTION TIME TO RESOLVE

U.S. v. Weatherford Services, Ltd.:Docket No. 13-CR-734 (S.D. TX) DPA 9/2007 11/26/13 6 years

U.S. v. Weatherford International Ltd.: Docket No. 13-CR-733 (S.D. TX) PLEA 9/2006 11/26/13 7 years

U.S. v. Bilfinger SE: Docket No. 4-13-CR-745 (S.D. TX) DPA 6/2005 12/9/13 8.5 years

U.S. v. Alcoa World Alumina LLC: Docket No. 14-CR-007-DWA (W.D. PA) PLEA 6/2005 1/19/14 8.5 years

U.S. v. Marubeni Corporation: Docket No. 14-CR-052-JBA (D. Conn) PLEA 10/2009 3/19/14 4.5 years

U.S. v. ZAO Hewlett-Packard A.O.: Docket No. CR-14-201-DLJ (N.D. CA) PLEA 12/2003 4/9/14 11 years

U.S. v. Hewlett-Packard Polska, SP. Z O.O.: Docket No. CR-14-202-EJD (N.D. CA) DPA 6/2009 4/9/14 5 years

U.S. v. Hewlett-Packard Mexico, S. de R.L. de C.V. (2014) NPA 3/2009 4/9/14 5 years

U.S. v. Avon Products, Inc.: Docket No: 14-CR-828-GBD (S.D. NY) DPA 6/2008 12/17/14 6.5 years

U.S. v. Avon Products (China) Co. Ltd.: Docket No: 14-CR-828-GBD (S.D. NY) PLEA 6/2008 12/17/14 6.5 years

U.S. v. Alstom Network Schweiz AG.: Docket No: 14-CR-245-JBA (D. Conn) PLEA 5/2007 12/22/14 7.5 years

U.S. v. Alstom S.A., et al.:Docket No: 14-CR-246-JBA (D. Conn) PLEA 5/2007 12/22/14 7.5 years

U.S. v. Alstom Grid, Inc.: Docket No: 14-CR-247-JBA (D. Conn) DPA 3/2004 12/22/14 10.5 years

U.S. v. Alstom Power, Inc.: Docket No: 14-CR-248-JBA (D. Conn) DPA 5/2007 12/22/14 7.5 years

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Yates Memo: DOJ Focus on Individual Targets• OUTLINES 6 Requirements of Corporate Resolutions:• 1. MUST ID Responsible Individuals• 2. Crim and Civ Investigators Must Focus on Individuals• 3. Crim and Civ Investigators Must Coordinate • 4. Individuals will NOT be released from liability • 5. No corporate resolutions without "clear plan" to

charge responsible individuals• 6. Civ Attorneys should focus on and bring suit against

individuals regardless of their ability to pay• Consequences:• Investigations will take longer• Individual cooperation in internal investigation dicey• Communication with Prosecutors Key

II. U.S. Department of Justice Investigatory Process in (7 Steps)

1. Receipt of Information by US (FBI, DOJ, SEC)

2. DOJ and FBI access ability to access witnesses, documents and data (May confer with Foreign prosecutors and agents)

3. FBI confirms or refutes information

4. DOJ sends inquiry to company or declines

5. DOJ requests company analyze conduct and disclose

6. FBI compares disclosed materials to investigatory findings

7. Resolution decisions (Declination, Agreed Terms, or Indictment)

Step 1: FBI Receives Information

Step 1: FBI Receives Information• Where do the cases come

from?• Whistleblowers• Voluntary Self-Reporting• Cooperating Individuals or

Companies• News Media

Step 2: DOJ and FBI Confer with Foreign Prosecutors and Agents regarding Access to Witnesses, Documents and Data Regarding ess to Witnesses, Documents and Data• How do the authorities keep in

touch?

•Who takes the lead?

• How do they coordinate?

S

Step 3: FBI Confirms or Refutes Information 3: FBI Confirms or Refutes Information

• What are the sources of information used to confirm or refute the allegations?

• How does the government investigate?– Documents and other records,

witnesses, surveillance, search warrants, etc?

Step 4: DOJ Decides to Send Inquiry to Company or Decline

•What form does an inquiry to the company take?

•To whom is it addressed?

•What factors are weighed by DOJ to pursue or decline?

Step 5: DOJ requests company to analyze, conduct investigation, and disclose

•What records, witnesses or other information are requested?•Who should conduct the company’s

investigation?– The company itself?– Outside counsel?– Forensic accounting firm or other experts?•What are the roles of the company’s

business representatives, lawyers, compliance staff?

Step 6: FBI Compares Disclosed Materials to Investigatory Findings • What is the relationship between the FBI,

DOJ and SEC?• What factors are important to the FBI?• What role does a the apparent

effectiveness of company’s compliance program play?• If misconduct is confirmed…– What difference is there between a

situation where the company knew or should of known of the misconduct and the situation where fraud on the company funded fraud on the government?

Step 7: Resolution decisions (Declination, Agreed Terms or Indictment)

• How do matters come to resolution?•What are the considerations?•What factors are essential to– DOJ, SEC, Foreign

Authorities?• What do recent FCPA

settlements look like? - Deferred Prosecution

Agreement- Corporate Monitor

III. Special Areas of Interest

• Value Exchanges

• Clinical Trials

• Third Parties

• Friends and Family

Special Areas of Interest – Value Exchanges

• Consulting arrangements• Product development agreements• Educational grants• Research grants• Support for medical congress attendance• Product training• Gifts• Travel, lodging, meals• Samples, free goods• Third party intermediaries

• Compliance considerations– Legitimate, documented business need – Selection based on qualifications, – Documented due diligence– Compensation at fair market value – Payment or funding not contingent on

purchasing or recommendations– Travel lodging and meal expenses

reasonable, modest, documented, in line with company policies, industry standards

– Locations conducive to the exchange of business or scientific information

– Recreation, entertainment, attendance at sporting events generally prohibited

– Proper documentation has sufficient detail to enable proper recordkeeping

Special Areas of Interest – Clinical Trials

• “Red Flags” – Clinical trial coordinators and teams chosen by marketing personnel instead of by medical/research staff– Other evidence that prescribing behaviour is taken into account when decision is made to engage the investigator– Local market personnel can sponsor trials or studies (either pre-approval or post-marketing) without notice to or

approval by parent company headquarters medical staff– Inadequate or weak due diligence and visibility into role of clinical trial investigators in official/governmental roles– Payments to individual investigators instead of institutions– Lack of approvals by local hospital, university, peer review or other applicable Independent review boards– Lack of fair-market value analysis for payments– Payments through intermediaries that provide no distinct value add or other legitimate role in the transaction– Lack of publishable data arising out of the study– Other grounds for concern,

• Requests by an official exercising discretionary authority in one realm to be hired or to have others hired for clinical trial work

• “Parceling” payments to avoid limits of authority,• Payments routed through bank secrecy jurisdictions• Payments to investigators in high-risk jurisdictions

Special Areas of Interest – Third Parties• Companies often liable for acts

of 3rd Parties– "Third-Party Intermediary”

• Individual who or entity that a company engages to provide goods or services to or on behalf of a company

• What can we learn about 3rd party due diligence from recent Deferred Prosecution Agreements?

Key Areas:

• Payments to intermediary must meet legitimate business need, services must be performed, payment at fair market value

• Payments should not be in cash• No “slush funds”• Payments should not conceal identity of

ultimate beneficiary• Payments should be in US or local

currency to local bank• Travel and hospitality expenses of third

party– Require documentation – Consider requiring advance approval in

appropriate circumstances

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Special Areas of Interest: Friends and Family

• BNY Mellon : SEC 8/15 Enforcement Action as company provided "valuable student internships to family members of [Middle Eastern] foreign government officials."• JP Morgan Chase: According to NY Times

bank under FCPA investigation for hiring children of Chinese government officials

IV. Internal Investigations and Government Inquiry

•Understand enforcement landscape– Key players and issues

•Identify and correct potential violations

•Institute global compliance

•If contacted – Establish and maintain credibility with key players– Thorough investigation and comprehensive disclosure– Answer questions that are asked – Assure one-time global resolution

• Institute global compliance

– The world is a big place…Customs, practices, understanding and enforcement vary. How can you implement “global compliance” in view of these differences?

Internal Investigations and Government Inquiry

Internal Investigations and Government Inquiry

• If contacted – Have an Action Plan in place– Establish and maintain credibility with

key players– Thorough investigation and

comprehensive disclosure– Answer questions that are asked – Assure one time global resolution

Internal Investigations and Government Inquiry

• Identify and correct potential violations– What are the indicia of a comprehensive

investigation and thorough disclosure?o Ringfenceo Remediationo Wrongdoers

– What is the “dynamic” between the government and the company?o Defense counsel?o In-house counsel?o Business leaders?o Compliance staff?

and Government Inquiry

Key Take-AwaysI. US Law enforcement continues to increase focus on healthcare;

II. US DOJ process is thorough and deliberate, but generally based on law firm internal investigation and extent of cooperation;

III. Compliance department effectiveness can be key factor in driving outcome;

IV. Compliance should be aware of issues relating to competitors;

V. Focus compliance on Value Exchanges, Clinical Trials, and Third Party Intermediaries;

VI. During Internal Investigations

A. Understand the landscape

B. Assure effective compliance program

C. Maintain credibility with key players

Discussion -- Case Scenario:

•The company has engaged a clinical research organization (CRO) to undertake studies necessary for licensing authorizations. The CRO is also is responsible for engaging institutions and investigators. The payment to the CRO consists of a large up-front payment as well as “pass through” payments for expenses. A relative of the Prime Minister is hired to administer the pass through payments.

• What risk does this arrangement present to the company engaging the CRO?

• What steps should that company take to minimize those risks?

• What should you do if CRO declines request for on-site audit as required by contract?

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Questions?•Paul E. Pelletier •Mintz Levin•pepelletier@mintz.com•202-434-7490