FCPA and Other International Issues

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• FCPA and Other International Issues

PwC
PwC
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Presenters

• Jonathon Kellerman
• Partner, Pharmaceutical and Life Sciences
• PricewaterhouseCoopers
• [phone]
• jonathon.l.kellerman_at_us.pwc.com
• Rita Gail Johnson
• Director, Corporate Business Development
• Eurasia Group
• [phone]
• johnson_at_eurasiagroup.net

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Section one

• Why should you be concerned with FCPA?
• Identifying international risks in a changing
  global landscape
• An approach to implementing an FCPA compliance
  program

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Compliance Professionals Face the Perfect Storm
Increased enforcement and investigations
Future relevance and span of control
Continued mergers and acquisitions and growth
into emerging markets
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Enforcement Investigations Evidence of FCPA
Activity

• Huge current wave of DOJ/SEC enforcement
• FCPA listed as one of US DOJ Fraud Divisions top
  three priorities Source ACFE Conference speech
  by DOJ rep. John Richter July 2005
• More cases filed and active from 2003 to 2005
  than in all previous years
• Largest fines/penalties ever
• Titan case - 28.5 million
• ABB case - 16.4 million
• DPC case - 4.5 million
• Statoil case - 10.5 million and monitor
• Schnitzer Steel case - 7.5 million (voluntary
  disclosure)
• Failure of mergers
• Lockheed- Titan
• According to US DOJ, 11 companies made voluntary
  disclosures of FCPA problems in March 2006 alone

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Possible Sources of the Upswing in FCPA
Enforcement

• Increased scrutiny due to Sarbanes Oxley 404
  testing and controls work
• Different environment post Enron/WorldCom
• More co-operation between international
  government regulators
• Elevated whistleblower activity
• New lead people at DOJ/SEC (Mendelsohn/Grime)
• US Senates approval of the U.N. Convention
  Against Corruption
• US working in context of the OECD Convention

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Looking at the Major Trends in FCPA Enforcement

• Simultaneous investigations
• Dramatic increase in scrutiny of emerging markets
  (China, India, Russia)
• More self reporting (race to DOJ effect)
• Much bigger penalties / settlements
• Disgorgement of profits
• Unique charging
• Charitable donations / expansion of Foreign
  Official definition
• More expansive interpretation of statute language
  
• Give value to/something of value
• Foreign official
• For the purpose of obtaining or retaining
  business
• Increased scrutiny of acts of others
• Parent company responsibility for acts of a
  subsidiary
• Liability for acts of a distributor
• Deferred prosecution, non-prosecution
• Use of independent compliance monitors

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Considerations of High Risk Business Activities

• High-risk governmental decision making (i.e.,
  pricing, reimbursement, formulary listing, bulk
  purchasing and licensing)
• Define and identify government officials
• Various payments
• to or on behalf of health care professionals for
  attendance at foreign congresses, symposia or
  company events
• for meals, permitted gifts, permitted
  entertainment incident to education or promotions
  about company products
• for compensated services/activities (e.g.,
  advisory boards, speaker arrangements, article
  writing, clinical trials)
• for research funds or grants to doctors from
  government or state owned hospitals
• Charitable contributions
• Contracting with third-party agents
• Fair market value
• Internal training, monitoring, auditing and
  reporting of FCPA risks

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Considerations of High Risk Business Activities

• Corporate policies should also establish a basic
  expectation for having process and controls
  related to books and records requirements,
  specifically accounting for the following
• Cash transactions and wire transfers
• Facilitation payments (if permitted)
• Gifts, travel and entertainment expenses
  (especially with government officials) and the
  general practices with respect to using cash
  and/or credit cards
• Individual expense reports (and the ability to
  capture data related to government officials)
• Advance, petty cash and commission payments to
  employees or 3rd parties
• Classification of payment types in the general
  ledger (e.g., charitable contributions and
  donations, payments to health care professionals,
  sponsorship of health care professionals to
  international congresses and symposia)
• Approval limit policies

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Core Decision Points and the Potential for
Corruption
Service Delivery
Registration
Selection
Procurement
Distribution

• Efficacy
• Labeling
• Marketing
• Use
• Warnings
• Full registration
• Re-evaluation of older drugs

• Determine budget
• Assess morbidity profile
• Determine drug
• needs to fit morbidity profile
• Cost-benefit
• analysis of drugs
• Consistency with WHO criteria

• Determine model of supply/distribution
• Reconcile needs and resources
• Develop criteria
• for tender
• Issue tender
• Evaluate bids
• Award supplier
• Determine
• contract terms
• Monitor order
• Make payment
• QA

• Receive and
• check drugs with order
• Ensure appropriate transportation and delivery to
  health facilities
• Appropriate storage
• Good inventory control of drugs
• Demand monitoring

• Consultation with health professionals
• In-patient care
• Dispensing of
• pharmaceuticals
• Adverse drug reaction monitoring
• Patient compliance with prescription

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Section two

• Why should you be concerned with FCPA?
• Identifying international risks in a changing
  global landscape
• An approach to implementing an FCPA compliance
  program

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What are other international risks?

• Country Risk
• Centralization of power, as in Russia and China
• Destabilizing effect of Presidential coup in
  Thailand
• Economic Policy Risk
• Local and foreign pharmaceutical companies in
  India oppose government price controls
• French government recommends limitations on drug
  reimbursement
• Differential treatment of domestic and foreign
  drug makers in China
• Local Risk
• Regional governments in China act independently
  of national government on IPR enforcement

Political Risks
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Globalization has led to increasing acceptance of
political risk

• Political Risk Definition
• Any political change that alters the expected
  outcome and value of a given economic action, by
  changing the probability of achieving business
  objectives

Impact of Political Change Politics influences
how markets operate - often the most
unpredictable economic events are political in
origin
Imperative for Business No matter how local your
business, international politics can have an
impact. By identifying and monitoring political
risk, you will better understand your companys
global exposures and balance your risk appetite
against achievement of business objectives
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Political Risk What to monitor

• GOVERNMENT
• Policies and attitudes toward business
  regulation, taxation, infrastructure,
  privatization, foreign ownership, corruption
• ECONOMY
• Fiscal and monetary policy, foreign exchange
  rates, inflation, economic growth
• SOCIETY
• Demographic shifts, social behaviors, societal
  tensions/conflicts
• SECURITY
• Cross-border conflicts, terrorism, emergencies,
  biosecurity threats, environmental disasters

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Political risks across the BRICs
RUSSIA Country risk associated with increasing
centralization of political power Economic
policy risk created by centralized power Local
risk from domestic competitors political
connections.
CHINA An increasingly predictable business
environment for new and existing companies, but
substantial country risk.
Country Risk
INDIA New entrants face bureaucratic procedures,
but country stability and increasingly
market-oriented policies. Some economic policy
risk, but little country risk.
Economic Policy Risk
BRAZIL Difficult for new entrants, but country
stability, an improving bureaucracy and
increasingly market oriented policies. Risk is
localized, depending on sector and competitors.
Local Risk
Source Eurasia Group
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Political risk can be anticipated, prepared for
and mitigated

• Managing political risk effectively requires
• Understanding the potential business consequences
  of political risk
• Employing a systematic, structured way of
  thinking about political risk
• Embedding political risk considerations into
  operating business processes
• Having a portfolio view of risk to understand the
  implications and interdependencies between
  political risk and other business risks
• Obtaining geo-political intelligence relevant to
  long-term challenges and opportunities
• Ongoing monitoring, to ensure implementation
  reflects changing political risk scenarios

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Key risk change signals

• For new or existing investment, operations,
  sales or supply chains in international markets,
  monitor the following
• Rapid economic growth, instability or
  deterioration
• Increasing foreign investment
• Imminent change in government leadership
• Political bodies are debating regulatory changes
• Multilateral agencies are considering changes to
  trade agreements
• Demographic shifts
• Social unrest is common or likely
• Security issues are a concern and not adequately
  addressed

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Benefits of a proactive approach to political risk

• Improved measurement using risk-adjusted
  evaluation of international performance
• Ability to make better, more timely, decisions
  about international investments and operations
• Identification of opportunities as well as risks
  presented by political shifts
• Time and opportunity to implement appropriate
  risk mitigation steps
• Minimization of reputational risk
• Realization of globalization objectives while
  protecting against unwanted surprises

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Section three

• Why should you be concerned with FCPA and other
  international issues?
• Identifying international risks in a changing
  global landscape
• An approach to implementing an FCPA compliance
  program

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A Plan for Implementing a Global FCPA Compliance
Program

• Step 1 - Ensure corporate standards address
  necessary elements of FCPA compliance and
  establish minimal compliance thresholds
• Outcomes updated corporate documents and
  communications that address key messages on
  anti-bribery, anti-corruption, payments to
  government officials, internal controls, etc.
  and a formal communications and certification
  plan (intranet access, web training, messages
  from senior leadership)
• Step 2 - Evaluate corporate policies to ensure
  that they cover high-risk activities
• Outcomes a set of global standards and
  expectations for controls around high- risk
  business activities and that establish a basic
  expectation for having process and controls
  related to books and records requirements
• Step 3 Provide management training on FCPA
  compliance
• Outcomes promote compliance by educating local
  management on the key tenets of FCPA, the
  inter-communications of regulatory agencies,
  expectations of international and local country
  pharma codes, risks of whistleblowers,
  increases in local regulatory agency
  investigations, etc.

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A Plan for Implementing a Global FCPA Compliance
Program

• Step 4 Assess FCPA compliance and document
  processes and controls in select/higher risk
  subsidiaries (leverage Transparency International
  Corruption Index, revenue data, anecdotal
  information to select regional representation)
• Outcomes Risk assessment findings by
  affiliate detailed process maps for each
  high-risk business activity and recommendations
  for corrective action/remediation
• Step 5 Develop a gloabl FCPA compliance
  implementation program
• Outcomes a formal, standard set of processes
  and model policies and procedures to be
  implemented locally an implementation tool
  kit recommended monitoring controls, and
  internal reporting protocols to meet the FCPA
  compliance requirements
• Step 6 Conduct subsidiary pilot programs
  focused on testing the execution of the FCPA
  compliance implementation program locally
• Outcomes Step 5 deliverables, tailored and
  refined based on pilot implementation.

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A Plan for Implementing a Global FCPA Compliance
Program

• Step 7 To support global roll-out of the FCPA
  compliance implementation program, conduct global
  training on FCPA, company policies, the FCPA
  compliance implementation program and the
  implementation tool kit
• Outcomes Web casts and select live meetings
  designed to train local management on FCPA,
  company expectations for implementation of the
  FCPA compliance program and the tools to promote
  successful implementation
• Step 8 Global implementation of the FCPA
  compliance program
• Outcomes each subsidiary will have implemented
  the FCPA compliance program by a designed date
• Step 9 Perform post-implementation validation
  reviews at select subsidiaries (focusing on those
  that did not receive implementation assistance)
  to assess managements implementation of the FCPA
  compliance program
• Outcomes Reports on the results of
  post-implementation reviews for each subsidiary
  with recommendations for improvement and
  transferable internal audit programs for ongoing
  FCPA compliance monitoring

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Considerations for Compliance Monitoring Protocols

• Aggregate spend analysis reports (by HCP, by
  product, by geography, by program types)
• GL account reports by payment classification
  type, etc.
• Dollar threshold/limit triggers
• Frequency and amounts of expense report
  submissions (how many not approved, etc.)
• Number and type of red flags raised during due
  diligence of third parties
• Hotline calls and follow up investigations
• Training - number of people trained, frequency of
  training, training certification

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Considerations for Awareness and Training Content

• Background on FCPA and its core components -
  anti-bribery and books and records standards
  examples of settlements, etc.
• Corporate standards
• Company-wide policies
• Case studies addressing unique local country
  scenarios
• Company resources and tools available
• Implementation plan and the roadmap to successful
  implementation (tool kit)

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Considerations for Selecting Affiliates for
Implementation Pilots

• Size of operations and field force
• Revenues
• Corruption indices (Transparency International)
• Industry knowledge of regulatory activity
• Insight into the quality of leadership and the
  control environment, etc.
• Locations that have not been audited in the past
• Occurrence of prior incidents, related response
  and remediation
• Responses to FCPA survey, if one is used

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Concluding Thoughts.

• The world has truly changed
• Yesterdays solutions no longer viable
• Regulatory Agency expectations very high
  programs need to raise the bar
• Must have a documented rigorous, robust and
  proactive program
• You get what you test. If you arent looking,
  you are NOT going to find it
• Need smoke alarms in your controls to avoid a
  train wreck
• Develop compliance culture
• Floor is US DOJ 04-02