Life Science Compliance Update

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October 23, 2012

Foreign Corrupt Practices Act: Interview with Former Prosecutor

Over the past few years, the focus on the life sciences industry has increased dramatically, including cases under not only the Food, Drug and Cosmetic Act (FDCA) for off-label promotion, but also under the Foreign Corrupt Practices Act (FCPA). 

The Foreign Corrupt Practices Act of 1977 (FCPA), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to or bribe foreign government officials to assist in obtaining or retaining business.  In other words, FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business.  Increasingly, global drugmakers are facing new scrutiny in the U.S. under the FCPA.  There have been criticisms of the FCPA’s growing industry of attorneys and accountants all based around this law. 

A recent interview with a former Department of Justice (DOJ) official, Hank Bond Walther, who worked in the FCPA Unit shed some light on some recent enforcement trends in the healthcare industry.  Walther recently joined the law firm Jones Day.

Walther noted that there has been a lot of activity relating to enforcement of the Food, Drug, and Cosmetic Act (FDCA), which has led to blockbuster settlements with pharmaceutical companies. These FDCA matters involve allegations of misbranding and off-label marketing, i.e., product uses that are not specifically authorized by the FDA.  DOJ has also significantly bolstered its efforts to criminally prosecute medical professionals and clinic owners involved in intentional wrongdoing. 

Another noteworthy trend he recognized is DOJ and the Department of Health and Human Services “using data to more efficiently investigate and prosecute healthcare fraud.”  Whether they are investigating hospital services, home health agencies, hospice providers, or other types of medical services, “this trend allows the government to collect and analyze extraordinary volumes of data, identify patterns and abnormalities, and then decide where to allocate the government’s scarce enforcement resources.” 

Walther explained that DOJ’s success in pursuing healthcare cases is typically measured by two metrics.  First, on the criminal side, how many criminal charges were filed, who was convicted, and who was sent to jail?  Second, on the civil side, what recoveries did the DOJ obtain?  “These two metrics are complimentary, and DOJ tries to balance the number of prosecutors focused on recoveries alone with the number of prosecutors tasked with building criminal cases and sending people to prison.  Over the past three years, DOJ has succeeded in increasing the number of individuals prosecuted criminally while also increasing its high-dollar civil recoveries, the largest of which was the $3 billion resolution with GlaxoSmithKlein earlier this summer.” 

The former DOJ attorney also explained that technology and staff contribute to the strategic use of data, which historically has been a big problem.  He recognized the importance of sharing data in a useable format, and noted the numerous agencies—HHS-OIG, DOJ Criminal and Civil, FBI, and State healthcare fraud agencies. 

Walther explained that FCPA enforcement has remained robust in the last few years and has been a priority for Lanny Breuer, who is in charge of DOJ’s Criminal Division.  “The FBI has been dedicating more resources toward investigating FCPA offenses and DOJ has been getting smarter about how it investigates cases, often focusing on enforcement against entire industries, rather than individual companies.  A recent example of this is DOJ’s efforts to pursue FCPA cases against pharmaceutical and medical device companies, which has led to several recent resolutions.” 

He noted that DOJ has “made some small efforts to moderate its position on how companies should be punished for violating the FCPA, particularly in light of the U.S. Chamber of Commerce’s efforts to weaken the FCPA legislatively. One example of this has involved corporate monitors.”  For years, DOJ has often insisted that companies resolving FCPA cases hire an independent compliance monitor to assess the company’s policies and procedures, figure out ways to improve them and, most importantly, make sure an effective compliance program is implemented.  Companies routinely criticized this DOJ practice because hiring qualified monitors can be both expensive and intrusive. 

More recently, he explained that “DOJ has shown a willingness to allow companies to self-monitor. For example, both the J&J and Pfizer deferred prosecution agreements contained self-monitorship language.” 

Walther also gave some analysis of the recent FCPA settlements involving J&J and Pfizer.  He explained that one of the purposes of DOJ’s use of industry-wide investigations is to encourage each company to be the first one in the door to admit its own wrongdoing, then to tell DOJ everything it knows about its competitors who are also engaged in similar forms of wrongdoing.  He noted that “Companies that are in the government’s crosshairs are expected to disclose their own wrongdoing, then cooperate and provide information about their competitors.”  For example, he noted how DOJ cited the fact that J&J assisted in the investigation of other companies as a basis for giving J&J a lesser punishment. 

Walther recognized that pharmaceutical and medical device companies are particularly vulnerable to prosecution under the FCPA because such companies have an inordinately high number of government “touches,” or points of contact with government agencies and officials.  “The first step in assessing FCPA risk is to identify where your business directly or indirectly interacts with a government official. This includes not only traditional government officials, like cabinet-level officials or members of Congress or Parliament, but also anyone employed by a state-owned or state-run enterprise.”  He recognized how a drug or device employee who visits a doctor to promote or educate a doctor about a drug may be a government official (e.g., many doctors in China are employed by the state, for instance).  

When pharmaceutical and device companies conduct studies, they are also often interacting with government officials.  With the sheer number of times that an employee of a pharmaceutical or medical device company interacts with a government official, “it is easier to understand why those industries are being heavily scrutinized,” Walther said. 

He also discussed how the new regulations promulgated by the Securities and Exchange Commission (SEC) may affect FCPA enforcement.  The SEC’s whistleblower regulations encourage employees to report allegations of wrongdoing directly to the government by offering the whistleblower a percentage of any recovery the SEC ultimately receives.  “These regulations are based on the whistleblower successes that DOJ has enjoyed over the last several years, particularly in healthcare and defense procurement cases.”  Walther explained that the SEC’s relatively new FCPA Unit will surely use this new tool to encourage insiders to come directly to the SEC with allegations of FCPA misconduct.  “In any instances where the SEC believes there may be criminal wrongdoing, they will refer the case to DOJ,” in addition to the well-developed plaintiffs’ bar that handles qui tam matters. 

Walther said that the most important step a company can take to minimize the impact of any investigation is “to think preventatively and implement a reasonable and effective compliance program.  If a company can demonstrate to the government that it has a thoughtful compliance program, that it trains its employees to comply with the law, and that it periodically tests its program, then those actions can go a long way to minimizing the impact of an enforcement action.”  

A recent example Walther pointed to was DOJ’s decision not to prosecute Morgan Stanley for the conduct of one of its executives in China.  This executive pled guilty to violating the FCPA, but DOJ declined to prosecute Morgan Stanley because the company was able to show that it took reasonable steps to train its employees and identify potential wrongdoing.  He also explained how an effective compliance program requires knowing what types of services your company is providing all over the world. 

Finally, the former chief of the DOJ Health Care Fraud Unit explained that the Affordable Care Act has seen enhanced penalties for people who violate the criminal healthcare laws, as well as judges who are starting to hand down tougher sentences to healthcare criminals.  Another provision of ACA that enhanced the government’s enforcement efforts relates to HHS’s authority to suspend payments to providers suspected of fraud.  The ACA clarified standards for HHS and stated that payments can be suspended when there are “credible allegations of fraud.”  He also pointed to the money given to CMS to create a new data tool called the Fraud Prevention System (or FPS) that can analyze an unbelievably large volume of claims and identify trends that may indicate fraud or negligent over-billing.  The success of this program, however, has been questioned. 

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