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©2011 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Foreign Corrupt Practices Act and the Health Care Industry

ACC Health Law Committee April 5, 2011

©2011 Foley & Lardner LLP

FCPA ENFORCEMENT ACTIVITY

FCPA Prosecutions 2003-2010

0 5

10 15 20 25 30 35 40 45 50

2003 2004 2005 2006 2007 2008 2009 2010

DOJ SEC


TOP 10 FCPA-RELATED MONETARY SETTLEMENTS

(figures in millions)

$137.4 $81.9

$58.3 $56.2

$800 $579

$400 $365

$338 $185

Siemens (2008) KBR/Halliburton (2009)

BAE Systems (2010) ENI/Snamprogetti (2010)

Technip (2010) Daimler (2010)

Alcatel-Lucent (2010) Panalpina (2010)

ABB (2010) Pride International (2010)


RECORD FINES AND PENALTIES

  Individual defendant sentences: –  Charles Paul Edward Jumet – 87 months incarceration –  Nam Qouc Nguyen – 16 months incarceration –  Jason Edward Steph – 15 months incarceration –  An Quoc Nguyen – 9 months incarceration –  Gerald Green – 6 months incarceration –  Patricia Green – 6 months incarceration –  Leo Winston Smith – 6 months incarceration –  Frederick Bourke – 366 days incarceration –  Jim Bob Brown – 366 days incarceration –  Bobby J. Elkin – 3 years probation –  Joseph Lucas – 2 years probation –  Kim Anh Nguyen – 2 years probation


FCPA Enforcement in the Health Care Industry   Representative Enforcement Actions in the Health Care

Industry: –  AGA Medical (kickbacks to Chinese physicians) –  DPC (improper commission payments to Chinese physicians

and lab techs) –  HealthSouth (add-on FCPA charges for improper payments to

Saudi officials to secure hospital management contract) –  Immucor (payments to director of public hospital in Italy) –  Micrus (inaccurately recorded payments to physicians in

France, Turkey, Spain and Germany) –  Schering-Plough (charitable donation in Poland) –  Siemens (included charges for payments to officials in China

and Vietnam) –  Syncor (improper commission payments to physicians in

Taiwan and Mexico; improper hospitality provided to physicians in Western Europe)


FCPA Enforcement in the Health Care Industry – Public Disclosure of Pending Investigations

  Astra Zeneca   Bausch & Lomb (providing

free product through Spanish sub)

  Biomet   Bio-Rad Laboratories   Eli Lilly   Medtronic   Orthofix (Mexico)

  Pfizer   Philips (sale of medical

equipment in Poland)   SciClone   Smith & Nephew   Stryker   Talecris   Wright Medical Group   Zimmer


KEY DEVELOPMENTS IN 2010

  The Dodd-Frank Act includes a program providing bounties for FCPA whistleblowers

  The UK passed the UK Bribery Act of 2010, which criminalizes: –  Commercial bribery –  A company’s failure to prevent bribery

  The SEC charged a company that is not a U.S. issuer with violating the FCPA (Panalpina case)

  Continued focus on the prosecution of individuals   More aggressive, traditional law enforcement tactics

employed   Preview of 2011:

–  Individual jury trials –  Challenges to “foreign official” interpretation


THE BASICS:

The FCPA’s Prohibitions and Essential Elements


TWO MAIN COMPONENTS:

  Anti-Bribery Provisions

  Books and

Records and Internal Control Provisions


ANTI-BRIBERY PROVISIONS

  Applies to: –  Domestic concerns (“private” companies, LLC’s, etc., and

U.S. citizens); –  Issuers (basically, “public” companies); and –  Any person who, while in the U.S., commits an improper act

  Covers payments made by third parties with “knowledge” that the payment would be used to fund FCPA-illegal activity

  Extra-territorial jurisdiction


WHAT IS PROHIBITED?

  The anti-bribery provisions prohibit: –  Paying or offering to pay “anything of value” –  Directly or indirectly –  To a “foreign official,” or to any other person “while

knowing” that all or part of the thing of value will be paid or offered to a foreign official

–  Corruptly –  For the purpose of influencing the official in some

official act or to secure any improper advantage –  In order to “obtain or retain business”


“ANYTHING OF VALUE”

Examples:   Cash or a cash equivalent   Travel expenses and/or

payment of personal expenses

  Services   Golf outings or other

entertainment unrelated to customary entertainment connected with a particular deal or contract

  Charitable donations   Loans


“FOREIGN OFFICIAL”

  Any officer or employee of a foreign government or any department, agency, or instrumentality thereof –  Includes employees of state owned or controlled

enterprises (“SOEs”) –  No distinction made as to rank or title (CEO as well

as engineer or procurement manager, or even the janitor)


“OBTAIN OR RETAIN BUSINESS”

  FCPA only covers payments made for a business purpose –  Includes payments related to the renewal of

contracts, the execution or performance of contracts, or the retention of existing business

  However: –  DOJ and SEC interpret this element very broadly

  Even unsuccessful bribery attempts are grounds for prosecution – Monsanto (2005)


EXCEPTIONS & AFFIRMATIVE DEFENSES

  Limited nature of exceptions –  A payment does not violate the FCPA if its purpose is

to expedite or secure the performance of a routine governmental action ordinarily and commonly performed by a foreign official

–  Emerging “best practice” – prohibition of facilitating payments except where the health and safety of an employee is involved


EXCEPTIONS & AFFIRMATIVE DEFENSES (cont.)

  Affirmative Defenses (i.e., company bears the burden of establishing the elements) –  Payments lawful under the written laws and

regulations of the foreign country –  Custom is not the same as written laws and

regulations   Reasonable and bona fide expenditures directly

related to the promotion or demonstration of product or services or the execution or performance of a contract


BOOKS & RECORDS AND INTERNAL CONTROL PROVISIONS

  Apply to: –  “Issuers” only, but SEC takes the view that they also apply

to any affiliate whose financial results appear in the consolidated financial statements of the issuer

  Require: –  Books, records, and accounts must be kept in reasonable

detail to accurately and fairly reflect transactions and disposition of assets; and

–  Internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are executed in accordance with management’s authorization and are accurately recorded


BOOKS & RECORDS AND INTERNAL CONTROL PROVISIONS (cont.)

  Regulators do not need to prove an underlying antibribery violation

  Failure to describe what actually occurred is a violation

  Recent enforcement actions involved improper payments disguised as: –  “commissions” –  “consulting fees” –  “advertising and promotions” –  “transportation expenses” –  “cost of goods sold” –  “processing fees” –  “miscellaneous expenses”


COMMON ISSUES: AGENTS & DISTRIBUTORS

  U.S. companies are not insulated from FCPA risks by doing business in foreign countries through third parties such as agents or distributors

  Rather, the FCPA also prohibits payments to third-parties if the company knows or has reason to know that all or part of the payment will be given to a foreign official

  Regulators do not need to prove that the third-party acted on the company’s direct orders or even that a company actually knew the intermediary engaged in prohibited conduct


THIRD-PARTY PAYMENT PROVISIONS

Willful Blindness = Knowledge


RED FLAGS

In the event a third-party ends up making an improper payment, a due diligence file that shows a thorough investigation and no red flags will be the company’s best defense against an enforcement action by the U.S. government, or, at the very least, the best argument for mitigating any fine or penalty


COMMON ISSUES: THE PERILS OF HOSTING CUSTOMER VISITS

  Travel expenses can be paid, provided done in good faith and not with corrupt intent or expectation of a favor

  Travel and accommodations must be reasonable and directly related to a legitimate business purpose

  Issuer’s books and record must accurately reflect value and purpose of travel

  Best practices –  Any side trips should be modest and incidental –  Expenses should be paid only for attendee (i.e., not spouse or

relatives) –  No per diem should be given –  Written notification of trip should be given to government/

organization that employs the recipient –  Delegation members should be picked by foreign government,

not company


COMMON ISSUES: MEALS & ENTERTAINMENT

  Companies may provide meals and entertainment, if in good faith, without corrupt intent, and with no expectation of a favor

  Must be directly related to legitimate business purpose   Must be reasonable in value   If an issuer, books and records must accurately reflect the

value and nature of all meals and entertainment   Best practices:

–  Should be in accordance with generally accepted business standards

–  Company personnel should be in attendance –  Should be properly documented –  Whenever entertaining government officials, should have

procedures to have cleared by compliance officer/GC


COMMON ISSUES: CHARITABLE CONTRIBUTIONS

  Companies may provide gifts or contributions to charities, if in good faith, without corrupt intent, and with no expectation of a favor

  Even though payment is not made directly to a government official, if the contribution is urged by official as quid pro quo for business or approval, could be a violation

  Case in point: Schering-Plough –  $76,000 paid over four years to charity operated by government official

  Best practices: –  Due diligence before charitable contributions –  Special care where government official has position with charity –  Public disclosure of contribution –  Following donation, confirmation that donation used for intended

purpose


FCPA ISSUES & THE REGULATORS

  Internal investigation is a no-brainer   The self-disclosure issue   Dealing with outside auditors   Deferred prosecution and non-prosecution agreements

–  Promise of continuing cooperation with investigations and continuing reporting

–  Agreement to commit no additional violations for fixed period of time

–  Usually provide for monetary penalties –  Usually require upgraded compliance and risk-management

programs and appointment of compliance monitor   Appointment of compliance monitors

–  More nuanced view; not default provision in settlements


FCPA COMPLIANCE

  What the regulators expect –  Requirements of an effective compliance program

  Risk-based compliance efforts key


ASSESS FCPA RISK

  FCPA compliance risk is a combination of – Who (public vs. private customers) – What (large public projects vs. producing widgets) – Where (the country’s corruption reputation) –  How (use of third parties)

  Focus on all variables –  Recent FCPA enforcement actions instruct that while

compliance efforts should focus on high-risk situations, business leaders must be alert to the risks present in all countries in all situations


CORRUPTION PERCEPTION INDEX (2009)

foreign corrupt practices act and the health care...

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