Foreign Corrupt Practices Act: Device Industry Under Scrutiny

From the October 22, 2007, issue of "The Gray Sheet"

Federal prosecutors have begun targeting medical device companies in Foreign Corrupt Practices Act investigations.

Early this month, five firms - Stryker, Zimmer, Biomet, Smith & Nephew and Medtronic - announced that they were under investigation by the Securities and Exchange Commission for possible violations to FCPA, which prohibits bribery of foreign public officials by U.S. companies ("¹The Gray Sheet" Oct. 15, 2007, In Brief).

And in February, Michael Dormer, worldwide chairman of Johnson & Johnson's medical devices business, abruptly stepped down when J&J disclosed that foreign subsidiaries may have made improper payments in the course of marketing activities ("²The Gray Sheet" Feb. 19, 2007, p. 16).

Medical device companies "are a new focal point" for Department of Justice and SEC prosecutors investigating FCPA violations, affirms Sharie Brown, a partner with Foley & Lardner and expert on FCPA. Brown previously worked for Mobil Oil, where she created the firm's worldwide FCPA compliance program and represented the corporation in the Middle East and South America (see chart: "³Tips To Avoid FCPA Violations").

Federal prosecutors "have looked at the telecoms, they've looked at the oil industry, they've looked at the pharmas, and now, it seems, [they are looking at] the medical device industry," Brown said in an interview with "The Gray Sheet." "All of these are types of businesses that interact regularly with government officials in order to do business in foreign countries."

The same group of orthopedic companies under FCPA scrutiny has also been targeted by DoJ and HHS investigations involving the federal anti-kickback statute, which prohibits manufacturers from making payments to physicians in return for business.

Just two weeks prior to the recent disclosures of SEC subpoenas seeking information on foreign marketing practices, Stryker, Zimmer, Biomet, Smith & Nephew and Johnson & Johnson/DePuy settled with DoJ over anti-kickback allegations involving hip and knee implants. Medtronic had a similar settlement involving its spine business in 2006 (⁴"The Gray Sheet" Oct. 1, 2007, p. 3).

Brown and others suggest that U.S. marketing activities that could lead to a violation of the anti-kickback statute may be very similar to overseas activities that lead to FCPA violations - namely, giving an inappropriate payment or gift to a physician.

According to Brown, under FCPA, any person who is in a non-clerical, non-laborer position and has some authority with a foreign government agency, ministry or largely-owned government business, is considered a government official. This includes physicians working in government-owned hospitals, which is commonplace in many countries.

Bribery is very broadly construed under FCPA, says Don Zarin, a partner and head of the FCPA team at Holland & Knight. "It could be any action in exchange for pay," or in hopes of gaining product sales, he said in May at the Medical Device Manufacturers Association annual meeting in Washington, D.C.

A device sales representative could be in violation by saying to a government-employed doctor: "I'd like to take you out to the best restaurant in town; in exchange I would like you to buy my product."

As under the anti-kickback statute, bona fide and reasonable business entertainment expenses are permissible, but Brown agrees that "anything of value" could be considered a bribe, including offers of jets or private planes, construction work on a home, paid trips, or per diems of cash for business trips not related to visiting an office or touring a company facility. "It could even be a charitable donation made to a charity on behalf of the official," she added.

A permissible gift or payment "needs to be reasonable in the context of what the person's level would be," Brown said.

There are two parts to FCPA. The first part, generally prosecuted by DoJ, makes it a crime for any agent or employee of a U.S. company operating overseas to offer a bribe to any public official of a foreign country.

The second part of the law involves SEC, and usually comes into play when or after DoJ investigates the company for bribery. FCPA provides that all issuers of securities registered on any U.S. stock exchange must comply with SEC regulations by maintaining accurate books and records of their business transactions, including records of payments made while conducting business in foreign countries.

If DoJ finds that a company has offered a bribe to a foreign official, and then SEC follows up and finds that the bribe was not recorded as a payment to that official, or that it is hidden or disguised as some sort of legitimate payment, then a second violation of FCPA has occurred, Brown explained.

"When you think of bribery, most companies don't want to record it, they don't want to publicize it, so most likely are not going to reflect it accurately in their internal books and records," she said.

Tens Of Millions In Fines, Imprisonment Possible

For those who are caught violating FCPA, fines and penalties in the tens of millions of dollars are imposed, and even a year's imprisonment is possible, Brown said. She added that usually she sees "nothing under $5 million" in penalties assessed.

"One case that came out last week assessed a penalty of $22 million, and that involved a company called York, which admitted to some sensitive payments regarding the U.S. Oil for Food program in Iraq," she noted.

This is in addition to provisions in the act that require violators to enlist a "compliance monitor," who charges millions of dollars per year to continue to audit the company, and look for fresh incidents of bribery or illicit payment cover-ups under the books and records provisions of FCPA, Brown notes.

"Companies are not happy with this," she said, because they not only are having to implement rigorous new compliance procedures, they are also having to cooperate with and host an in-house compliance monitor, who acts as an agent of SEC or DoJ, and who can just pick any country that the company does business with, at random, to audit.

Third Parties, Undelivered Bribes Can Be Problems

Both Brown and Zarin warn that the act also makes companies liable for the actions of their agents and contractors operating on foreign soil. FCPA "applies to any third party, or consultant who gives something of value to a foreign official," Zarin said.

Further, Brown notes, "An interesting part of the statute makes even the non-payment of the bribe a violation" if it is offered, but then never given and there is no proof of payment.

Although doctors are among the most likely potential recipients of payments or gifts from device firms that could be construed as FCPA violations, company interactions with other officials, including hospital chiefs and health ministers, also must be monitored closely to avoid concern from the U.S government, particularly in countries where the temptations to give bribes for government contracts "are widespread," according to Brown.

She recommends that companies look at the "corruption perception" ⁵index maintained by the non-profit Transparency International.

Brown says, "If you are in a high risk ranking country, you can expect that your people on the ground - all your sales people, managers and agents - will be targets of persistent and relentless solicitation for bribery."

- Sue Darcey