Compliance & Ethics. Professional. Meet Angela Styles Coordinator, Defense Industry Initiative on Business Ethics and Conduct

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1 Compliance & Ethics Professional Vol. 7 / No / 2010 A publication of the Society of Corporate Compliance and Ethics Top stories inside 8 You can t handle the risk 18 SEC announces sweeping overhaul to its investigation and cooperation procedures 26 Managing Ethics Risks 32 Prepare for steppedup enforcement of the Foreign Corrupt Practices Act 38 Web 2.0 and Social Networking: New challenges to regulatory compliance 44 From bullets to Band- Aids: The changing role of whistleblowers Come to the 2010 Compliance & Ethics Institute: A full track of sessions on managing compliance and ethics risks Meet Angela Styles Coordinator, Defense Industry Initiative on Business Ethics and Conduct This article, published in Compliance & Ethics Professional, appears here with permission from the Society of Corporate Compliance & Ethics. Call SCCE at or 888/ with all reprint requests.

2 Prepare for stepped-up enforcement of the Foreign Corrupt Practices Act By Joseph W. Martini, JD; James I. Glasser, JD; and Jenny R. Chou, JD Companies in the pharmaceutical and medical device industries are expanding into new, emerging markets around the world. Many of these markets are located in countries where pay to play is de rigueur. At the same time, U.S. authorities responsible for criminal and civil enforcement of the Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign officials, have announced that they intend to focus their enforcement efforts on companies in these industries and their executives. These developments create tricky terrain, particularly where companies operating in new markets may be dealing with foreign government officials in many if not all aspects of their operations. Because of this heightened scrutiny, it is useful to understand what the FCPA proscribes, how it has been enforced, and how companies in these newly targeted industries can implement compliance measures to ensure that they do not become the next example of enforcement activity featured in some future article or publication. At its core, the anti-fraud provisions of the FCPA, jointly enforced by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), proscribe corruptly giving money or anything of value to a foreign official to obtain or retain business. The proscription extends to offering or promising to pay, authorizing someone else to pay, and giving a gift to a third party knowing that any part of the gift will be used to pay foreign officials to influence their actions. The FCPA has an extremely broad jurisdictional reach. It applies to U.S. citizens, nationals, residents, and companies, and all companies listed on a U.S. stock exchange, as well as to non U.S. companies and individuals acting within the territory of the U.S. The FCPA makes exceptions for payments to facilitate routine governmental action, such as processing visas and work orders, and providing police protection and utility services. That a payment was a reasonable and bona fide expenditure directly related to the promotion, demonstration, or explanation of products, or to the execution or performance of a contract, may serve as an affirmative defense to a claim of violation of the FCPA. Similarly, that a payment was lawful under the written laws of the foreign official s country may also serve as an affirmative defense. Notably, it is not an affirmative defense that payments are customary or permitted under unwritten codes of conduct. The FCPA also requires public companies to keep books and records, and submit reports that accurately reflect the disposition of corporate assets. A company that is paying bribes, in all likelihood, will not list bribe in its books reported up to the SEC, but will instead cloak such a payment with the appearance of legitimacy under an innocuous-sounding name. Thus, the so-called Books and Records provisions of the FCPA, enforced by the SEC, bar companies from accounting for bribes as permissible fees for services under such euphemisms as placement fee, or consulting services. The Books and Records provisions provide the government with a flexible and effective tool to punish corrupt practices, even when the underlying actions might be outside the jurisdiction of the FCPA. And, it is a tool the government uses often. In the past several months, U.S. officials have announced that they plan to carefully scrutinize the pharmaceutical industry for compliance with the FCPA. The government s interest in this industry is not an accident. It can be explained by the impressive revenues being generated overseas and the fact that, according to industry analysts, emerging economies (including China, Brazil, continued on page Compliance & Ethics Professional June

3 Prepare for stepped-up enforcement of the Foreign Corrupt Practices Act continued from page 32 Russia, and India) will contribute most significantly to the industry s growth over the next five years. At a recent pharmaceutical industry regulatory and compliance conference, Lanny Breuer, Assistant Attorney General for the DOJ s Criminal Division, particularly cited the fact that nearly $100 billion, or one-third, of the Pharmaceutical Research and Manufacturers of America (PhRMA) members total sales were generated outside the U.S. But, the countries with the biggest growth potential also have the dubious distinction of reputations for graft and corruption. For example, China, Brazil, Russia, and India ranked in the bottom twothirds of Transparency International s most recent Corruption Perceptions Index, 1 a well-known index that ranks countries by their perceived level of public-sector corruption. The government s interest in the pharmaceutical industry is also founded on the multiplied likelihood that company representatives will interact with foreign officials. The FCPA broadly defines foreign official to include any officer or employee of a foreign government, or officer or employee of a government department or agency. In countries where medical facilities and/or the medical system is state-run, persons who appear to be private actors may, in reality, be foreign officials for purposes of the FCPA. As Assistant Attorney General Breuer has stated, 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 may involve a foreign official within the meaning of the FCPA. 2 Although law enforcement officials recent remarks have been directed predominantly at pharmaceutical companies, they apply with equal force to medical device manufacturers. Recent FCPA enforcement actions have included both industries. For example: In 2005, Diagnostic Products Corporation, now part of Siemens, paid a $2.8 million fine in connection with a Chinese subsidiary s guilty plea to FCPA violations for making payments to physicians and laboratory workers at stateowned hospitals in China. Also in 2005, California-based medical device manufacturer Micrus Corporation entered into a deferred prosecution agreement and paid nearly half a million dollars in civil penalties for making payments to physicians at stateowned hospitals in several European countries. Since 2006, Bristol Myers Squibb has been subject to a formal SEC inquiry concerning People Received a Promotion? On the Move Have a New Hire in your Department? Let us know! We will be publishing compliance job moves in upcoming issues of Compliance & Ethics Professional. So, if you have received a promotion, award, degree, accepted a new position, or added a new staff member to your compliance department, please let CEP know. It s a great way to let the compliance community know where you have moved on to, or who has joined the compliance team. Deadline for August issue is June 15th Send your job change information to: marlene.robinson@corporatecompliance.org 34 Compliance & Ethics Professional June

4 potential FCPA violations by the company s German pharmaceutical subsidiaries. Since 2007, orthopedic device companies, including Indiana-based Zimmer, Inc. and Biomet Orthopedics, Inc., have been complying with an industry-wide informal investigation by the SEC and DOJ into payments to physicians in foreign countries. In 2008, AGA Medical Corporation, a privately-held company headquartered in Minnesota, entered into a deferred prosecution agreement and paid a $2 million penalty for arranging to make, through a local distributor, corrupt payments to physicians at stateowned hospitals and officials at the State Intellectual Property Office in China. In 2009, Eli Lilly reported that the SEC and DOJ had expanded their earlier investigation into FCPA compliance at the company s Polish subsidiary, asking the company to voluntarily provide additional information relating to affiliates in a number of other countries. Investigations of pharmaceutical and medical device companies are front and center among the 130 FCPA investigations that were open as of the end of Inasmuch as the government is publicly telegraphing vigorous enforcement efforts in this area, companies within the ambit of the warnings are well-advised to take a close look at their compliance and training programs and to implement measures to ensure that the company and its employees do not contravene the FCPA. Global training The best investment a company can make is in global training on FCPA issues, at all levels of the organization. Companies already doing business overseas most likely are aware of the FCPA and have developed policies to address its rules. Companies must also consider any anti-corruption laws in the countries in which they do business. Compliance officers should make certain that company policies are robust, and that existing policies are communicated to employees and others acting on the company s behalf in all its locations. Employee handbooks should be translated into, and training should be conducted in, employees native languages. Training must also extend to the highest levels of the organization. Although officers and directors are most likely aware that they should not bribe or instruct anyone to bribe foreign officials, they may not be aware that their leadership roles bring additional FCPA responsibilities. In July 2009, for example, the SEC filed a settled enforcement action against nutritional supplement maker Nature s Sunshine Products, Inc. and two of its executives. The complaint did not allege that the executives knew either that a subsidiary had made impermissible payments to Brazilian officials, or that employees had subsequently falsely accounted for these payments as legitimate expenses. Rather, the executives liability was based on their alleged failure as control persons to adequately supervise employees in making and keeping accurate books continued on page 36 Call for Web Conference Presentations Web Conferences are SCCE s way of communicating important issues and challenges that affect today s corporate professional. If you are a compliance or legal professional/consultant, we are looking for your expertise to help us develop new programs: 90-minute sessions with 60 minutes for presentation and 30 minutes for Q&A. Web Conferences are an excellent opportunity to bring people together to share their professional knowledge. If you or your organization are interested in presenting a Web Conference for SCCE please contact: marlene.robinson@ corporatecompliance.org or June 2010 Compliance & Ethics Professional 35

5 Prepare for stepped-up enforcement of the Foreign Corrupt Practices Act continued from page 35 and records, and in devising and maintaining an adequate system of internal controls. As the Nature s Sunshine Products action demonstrates, individuals, and not just companies, are increasingly subject to punishment for violations of the FCPA. More individuals were tried and indicted for FCPA violations in 2009 than in any previous year. At a recent forum on the FCPA, Assistant Attorney General Breuer remarked that this was no accident. Rather, the prosecution of individuals has become a cornerstone of the government s enforcement strategy. Breuer added that: Put simply, the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations. 3 Officers and employees who are educated about their potential personal liability will be less likely to engage in actions that put the company at risk. Due diligence on foreign partners and acquisitions Companies considering expansion into overseas markets through relationships with foreign partners or through mergers and acquisitions must conduct thorough due diligence on the prospective partners or suitors before making any commitments. Even if the due diligence yields a green light to enter into a new business arrangement, vigilance is required and controls must be implemented to monitor the business partner s or acquisition s activities. The cost for failing to take such rudimentary precautions can be considerable, as Halliburton recently learned the hard way. In 2009, Halliburton settled a longstanding investigation 4 into the payment of bribes by one of its subsidiaries, through the use of agents, to Nigerian officials. Among other things, the SEC s settled complaint faulted Halliburton for failing to conduct adequate due diligence on the agents by, for example, never learning the identity of the owner of the agent company, and not checking all the references the agent provided, some of which were just plain fanciful. Halliburton might have avoided this embarrassing and costly imbroglio altogether if it had conducted thorough diligence before acquiring the subsidiary in The SEC alleged that the complained-of practices began as early as Halliburton later spun off the subsidiary into what became KBR, Inc. Together, Halliburton and KBR disgorged $177 million to the SEC, and KBR paid an additional $402 million fine to settle parallel criminal charges. The FCPA prohibits covered companies and persons, not only from personally making corrupt payments to foreign officials, but also from approving or authorizing such payments by others. The FCPA also prohibits covered entities from giving anything of value to a third person, while knowing that any or all of the gift will be used to make a corrupt payment to a foreign official for the benefit of the covered entity. Because knowledge is broadly defined to include awareness of a high probability that circumstances constituting a violation exist, a company ignores reports or suspicions of improper payments at its peril. Attorney General Opinion Despite a company s best efforts, it may not always be able to determine whether a given business opportunity or idea complies with the FCPA. Pharmaceutical and medical device companies, in particular, may be presented with unique marketing opportunities that test the borders of the FCPA s requirements. Companies in such situations should consider taking advantage of the DOJ s Attorney General Opinion process. Justice Department regulations include a procedure by which companies can obtain the Attorney General s opinion as to whether certain specified, prospective not hypothetical conduct conforms with the DOJ s current FCPA enforcement policy. Generally, an Opinion request should be made before the company makes any commitment to proceed with a transaction. Companies must provide a full and true disclosure of the circumstances surrounding the question presented, including background documents and detailed statements of any collateral or oral understandings. (Documents submitted will be exempt from Freedom of Information Act requests.) The Attorney General or his designee will issue an opinion, or request additional information, within 30 days. Under the regulations, the guidance applies only to the party requesting guidance and extends only to DOJ policy. As a practical matter, however, other 36 Compliance & Ethics Professional June

6 companies may find the guidance instructive. In 2009, one medical device manufacturer requested guidance on whether providing $1.9 million worth of equipment in order to be considered for a foreign government s program would violate the FCPA. As described in the Opinion, the foreign government had developed a program to subsidize the provision of medical devices to its needy citizens. The government intended to purchase the devices and resell them to patients below cost, but would only consider products it had evaluated with favorable results. The company was asked to provide 100 devices valued at $19,000 each. The devices would be distributed among ten health centers, to be given to recipients whose economic inability to pay had been certified, and who would be selected based on certain objective criteria. In addition, close family members of government officers or high level officials would not be allowed to participate, and the recipients names would be published on the foreign government s website. The DOJ determined that, under these circumstances, the gift of $1.9 million worth of products would fall outside the scope of the FCPA in that the donated products will be provided to the foreign government, as opposed to individual government officials, for ultimate use by patient recipients selected in accordance with specific guidelines. 5 Notably, the DOJ provided this Opinion just a little over one month after the request was submitted. Conclusion U.S. law enforcement authorities have trumpeted their intent to scrutinize health care-related companies for FCPA compliance. Companies prepared for this scrutiny should welcome increased FCPA enforcement, as it levels the playing field by eliminating unfair advantages borne of graft and a pay-to-play system. Companies can ensure that they do not run afoul of enforcement by understanding the FCPA and its proscriptions, educating their entire organization about its requirements, conducting exacting due diligence on potential business partners and acquisitions, and utilizing the Attorney General s Opinion process as appropriate. In the end, being featured in an article or PowerPoint presentation as the latest target of the U.S. government s FCPA enforcement effort is the last thing any company wants. Notes: 1 Transparency International. More information is available at transparency.org/policy_research/ surveys_indices/cpi/ Assistant Attorney General Lanny A. Breuer, Keynote Address at the Tenth Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009). 3 Assistant Attorney General Lanny A. Breuer, Remarks at the American Bar Association National Institute on White Collar Crime (Feb. 25, 2010). 4 See SEC Charges KBR and Halliburton for FCPA Violations. Available at sec.gov/news/press/2009/ htm. 5 FCPA Opinion Procedure Release No.: 09-01(Aug. 3, 2009). Available at opinion/. Editor s note: Joseph W. Martini is a Partner in the New Haven, CT and New York offices of Wiggin and Dana and is a member of the firm s White-Collar Defense, Investigations and Corporate Compliance Practice Group and Litigation Practice Group. He concentrates his practice in criminal matters and complex commercial litigation. He may be contacted via at jmartini@wiggin.com. James I. Glasser is a Partner in the New Haven and New York offices of Wiggin and Dana and is a member of the firm s Litigation, White Collar and Appellate Practice Groups. Mr. Glasser represents corporations and individuals in complex litigation and in investigations and prosecutions conducted by federal and state regulators in the defense, financial, and healthcare industries. He may be contacted via at jglasser@wiggin.com. Jenny Chou is an Associate in the Litigation Department and the White Collar Defense, Investigations & Corporate Compliance Group in the New Haven office of Wiggin and Dana. Jenny represents financial institutions and individuals in SEC and NASD inquiries and civil litigation, and in conducting internal investigations relating to securities matters. She may be contacted by phone at or by at jchou@wiggin.com. June 2010 Compliance & Ethics Professional 37