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A Government Required Transfer Of Shareholder Wealth To FCPA Inc.?

Transfer of wealth

This is the third time FCPA Professor has highlighted this specific topic.

The prior two posts (here and here) were in connection with FCPA enforcement actions against healthcare companies Johnson & Johnson and Pfizer and the “enhanced compliance obligations” imposed upon the companies in resolving an FCPA enforcement action.

In last week’s FCPA enforcement action against Bristol-Myers (BMS), the SEC also imposed enhanced compliance obligations on the company as a condition of settlement.

Specifically, the SEC order requires BMS tp “report to the Commission periodically, at no less than nine-month intervals during a two-year term, the status of its FCPA and anticorruption related remediation and implementation of compliance measures.”

The order also requires BMS to “undertake two follow-up reviews and submit written reports relating to [its] remedial efforts to devise and maintain policies and procedures reasonably designed to detect and prevent violations of the FCPA and other applicable anticorruption laws.”

Are the post-enforcement action requirements imposed on BMS really necessary?

After all, in the same order, under the heading “Remedial Efforts,” the SEC stated:

“BMS has implemented significant measures to enhance its anti-bribery and general compliance training and policies and to strengthen its accounting and monitoring controls relating to interactions with HCPs, including travel and entertainment expenses, meetings, sponsorships, grants, and donations funded by BMS China. BMS took numerous steps to improve the internal controls and compliance program at BMS China. Examples include a 100% pre-reimbursement review of all expense claims; the implementation of an accounting system designed to track each expense claim, including the request, approval, and payment of each claim; and the retention of a third-party vendor to conduct surprise checks at events sponsored by sales representatives. Additionally, BMS terminated over ninety employees, and disciplined an additional ninety employees, including sales representatives and managers of BMS China, who failed to comply with or sufficiently supervise compliance with relevant policies. In addition, BMS replaced certain BMS China officers as part of an overall effort to enhance “tone at the top” and a culture of compliance. Further, BMS revised the compensation structure for BMS China employees by reducing the portion of incentive-based compensation for sales and distribution, eliminated gifts to HCPs, implemented enhanced due diligence procedures for third-party agents, implemented monitoring systems for speaker fees and third-party events, and incorporated risk assessments based on data analytics into its compliance program.”

Again, are the post-enforcement action requirements imposed on BMS really necessary?

Or is this another example of a boundless and unconstrained government required transfer of shareholder wealth to FCPA Inc.?

Such post-enforcement action reporting obligations are, of course, lucrative for FCPA Inc.  Hence one of the reasons you probably do not see those in the industry raising concerns about the emerging trend of “enhanced compliance obligations.”

Yet such concerns should be raised and have been raised here for a third time.

For additional reading about the Johnson & Johnson and Pfizer post-enforcement action “enhanced compliance compliance obligations” see “FCPA Ripples.”

A Government Required Transfer Of Shareholder Wealth To FCPA Inc.?

This is the second time I have written about this general issue.  See here for the previous post regarding Johnson & Johnson and its “enhanced compliance obligations.”

The recent Foreign Corrupt Practices Act enforcement action against Pfizer is notable in many respects.  (See here for a prior post detailing certain notable aspects).  It is also notable for the “enhanced compliance requirements” Pfizer is required to adhere to pursuant to the terms of the deferred prosecution agreement.

Below are the pertinent facts alleged by the DOJ and/or SEC relevant to the issues discussed in this post

The substantial bulk of the enforcement action concerns conduct of Pharmacia Corporation (an entity Pfizer acquired in 2003) and Wyeth (an entity Pfizer acquired in 2009).

In the 18 months following its acquisition of Wyeth, Pfizer conducted a due diligence and investigative review of the Wyeth business operations and integrated Pfizer’s internal controls system into the former Wyeth business entities.

The DOJ or SEC do not allege that anyone at Pfizer’s or Wyeth’s corporate headquarters knew of or approved the conduct at issue.

As soon as the problematic conduct came to the attention of Pfizer’s corporate headquarters, it made a timely voluntary disclosure to the enforcement agencies.

Pfizer’s self-investigation was thorough and wide-ranging.  The DOJ stated as follows.  “From 2004 to the present, Pfizer, using external counsel and forensic accountants, internal Legal, Compliance, and Corporate Audit personnel, conducted an extensive, global review of its operations regarding allegations of improper payments to Government officials and government doctors, including in Pfizer HCP markets and those of other Pfizer subsidiaries.”  Likewise, the SEC stated as follows.  “[Since 2004, Pfizer] diligently and thoroughly undertook a global internal investigation of its operations in no less than 19 countries …”.

Pfizer provided significant cooperation to the enforcement agencies in their investigations.

Pfizer undertook early and extensive remedial efforts and has made substantial and continuing improvements to its global anti-corruption compliance policies and procedures.  The DOJ stated as follows.  “[S]tarting immediately in 2004, Pfizer launched extensive remedial actions including:  undertaken a comprehensive review of its compliance program, implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis, developing global systems to support employee compliance with the enhanced procedures, adding FCPA-specific reviews to its internal audits, performing proactive anti-corruption compliance reviews in approximately ten markets annually, and conducting comprehensive anti-corruption training throughout the organization.”  Likewise, the SEC stated as follows.  “Pfizer also undertook a comprehensive review of its operations, enhanced its internal controls and compliance functions, engaged in significant disciplinary measures, and developed and implemented global FCPA compliance procedures, including the development and implementation of innovative proactive procedures, and sophisticated supporting systems.”

Thus, for approximately eight years, Pfizer has been doing the right thing.  When the enforcement agencies themselves use words such as thorough, wide-ranging, extensive, global, worldwide, diligent, comprehensive, proactive, significant, innovative and sophisticated, there can be no reasonable doubt about this.

Yet, just as in the Johnson & Johnson enforcement action, the Pfizer DPA requires the company to adhere to “enhanced compliance obligations.”  These obligations require the company to, among other things, “select at least five markets to receive FCPA proactive reviews a year” and each proactive review shall include, at a minimum, “on-site visits by an FCPA review team,” a “review of a representative sample … of contracts with and payments to individual foreign government officials or health care providers, as well as other high-risk transactions in the market,” and “where appropriate, feasible, and permissible under local law, review of the books and records of a sample of distributors …”.

FCPA compliance policies and procedures are good.  Yet given the allegations against Pfizer (as opposed to entities Pfizer acquired) and given what Pfizer has done over the past eight years, are the “enhanced compliance obligations” truly necessary?

Or is this another example of a company being required by the government (under risk of prosecution for failure to do so) to engage in fishing expeditions (when the company has already gone fishing) just for the sake of going fishing again and thus represent a boundless and unconstrained transfer of shareholder wealth to FCPA Inc.?

Such fishing expeditions are, of course, lucrative for FCPA Inc.  Hence one of the reasons you probably do not see those in the industry raising concerns about the emerging trend of “enhanced compliance obligations.”

Yet such concerns should be raised and have been raised here.

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