The marketing of medicines is primarily an interaction between the pharmaceutical industry and Health Care Professionals (“HCP”s) such as doctors. The relationship between industry and HCPs is important to advance research, provide continued medical education (“CME”) and to observe side effects. However, due to the industry’s need to recoup R&D costs and maximize profits, without strong regulatory systems and oversight mechanisms, unethical marketing practices can take place. The close relationship between the pharmaceutical industry and HCPs can make it hard to detect corrupt marketing practices, since the line between violations and normal collaboration is often blurred. There are several methods for a corrupt pharmaceutical company to unethically market its medicines. At its most simple, a pharmaceutical company can bribe a HCP directly with payments so its medicines are more likely to be prescribed. More abstrusely individuals may include a pharmaceutical company’s medicine on the national list that is reimbursed by public funds, in return for an indirect bribe by being sent to inappropriate holiday destinations for lavish conferences. The terms “rent seeking” and “corruption” are often used interchangeably. Corruption is conceptualized as a costless transfer of income from one party to another, it may appear that corruption is a social problem only because it leads to policy distortions and because it leads to inequitable and unfair allocations of public resources and funds.
Overview of anti-bribery legislation
Companies tend to have code of ethics, wherein they expect their employees to honestly, comply with the laws and regulations governing their business and demonstrate highest level of ethics and integrity. The name of such policy is anti-bribery policy that expands on the provisions regarding anti-bribery and corruption in the code of ethics and reinforces the commitment of a company to integrity in the business. It is intended to give an organization’s employees, agents and representatives an understanding of anti-bribery laws, including the following legislations, namely (i) Canadian Corruption of Foreign Public Officials Acts (CGPOA); (ii) Canadian Criminal Code; (iii) the US Foreign Corrupt Practices Act (FCPA); (iv) UK Bribery Act and other anti-corruption laws and conventions in countries in which an organization operates. This is done to help the organization’s affiliates avoid inadvertent violations of law and understand the next steps when potential problems arise. Generally, such a policy is applicable to all employees, (including permanent, temporary, casual, contract and students), officers, directors, contractors and agents of an organization or any of its subsidiaries anywhere in the world. An organization can also expect its partners and resellers to adhere to its anti-bribery policy when they are acting on its behalf.
Bribery is a form of corruption and consists of authorizing a bribe, giving or offering a bribe, or agreeing to give or offer a bribe, or, requesting, demanding or accepting a bribe, or offering or agreeing to accept a bribe. To “bribe” means to directly or indirectly (through third parties) give, offer or agree to give or offer a loan, reward, advantage or benefit in the course of business. It could be cash, a loan, gifts, excessive hospitality or entertainment, or anything else of value. In the United Kingdom, the Bribery Act prohibits the giving of bribes to any person, in either the public or private sector, if it is intended to bring about or to reward improper performance of a function or activity. A bribe is not limited to money and can include anything of value. Anything of value means anything that has value to the recipient and can also include things that benefit the recipient’s family members or friends.
A kickback is also a form of bribery. It is negotiated bribery in which an agreed upon commission or payment is paid to the bribe taker in exchange for services rendered, such as ensuring that a particular contract is awarded to the organization that pays the kickback. A facilitation payment is another form of bribery. Such payments are typically small, unofficial payments that are demanded in exchange for providing or “expediting” routine, non-discretionary government or other services or actions to which one person is legally entitled, without having to making such payments. In contrast, payment of government taxes, fees and other legally required charges are not considered as facilitation payments.
If there is a breach of the anti-bribery and corruption policy, then such act will be considered as ground for taking disciplinary action including termination of employment. It should be encouraged that, if one is aware of such breach, then they are required to report it and failure to report such breach will be treated as an action condoning the breach. It should be clarified that, if an employee reports in good faith, a breach or suspected breach of anti-bribery policy, then such employee shall not face any disciplinary action or repercussion for reporting.
Entities which have anti bribery and corruption policy need to get this policy reviewed every year. It should have the flexibility of being amended at any time for any reason. It should be clarified that, the policy cannot be equated with a employment contract. Rather, the obligations set out in the entities’ policy are in addition to, and not in lieu of, any obligations that are set out in the employment agreement. It is possible for global organizations’ policies to not align with local law or a term of a local collective agreement. The policy must state that, it is the intention of the organization to comply with all applicable local laws and collective agreements. The applicable policy is to be interpreted in order to achieve compliance.
Case Laws and evolving jurisprudence
WPP, the world’s largest advertising group, agreed to pay more than $19 million to resolve charges because it violated anti-bribery, books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (‘FCPA’). According to the Securities and Exchange Commission’s (“SEC”) order, WPP implemented an aggressive business growth strategy that included acquiring majority interests in many localized advertising agencies in high risk markets. As per order’s findings, WPP failed to ensure that its subsidiaries implemented WPP’s internal accounting controls and compliance policies. Instead, founders and CEOs of the acquired entities were allowed to exercise wide autonomy and outsized influence. The order also found that, because of structural deficiencies, WPP failed to promptly or adequately respond to repeated warning signs of corruption or control failures at certain subsidiaries. Even on receipt of anonymous complaints touching on the conduct of bribing Indian government officials in return for advertising contracts by a subsidiary in India, there was no follow up action. The schemes and internal accountings showed deficiencies related to WPP’s subsidiaries in China, Brazil and Peru. Charles Cain is of the view that, a company cannot allow a focus on profitability or market share to come at the expense of appropriate controls. It is also essential for companies to identify the root cause of problems when red flags emerge and prevent the pattern of corrupt behavior from taking hold.
B. Quad/Graphics Inc
Quad/Graphics Inc., a Washington based digital and print marketing provider, agreed to pay nearly $10 million to resolve charges because it violated the FCPA by engaging in multiple bribery schemes in Peru ad China. The SEC’s order found that, from 2011 to January 2016, Quad/Graphics’ Peruvian subsidiary, namely Quad/Graphics’ Peru S.A, acted in violation of FCPA. It repeatedly paid or promised bribes to Peruvian government officials to win sales contracts and avoid penalties and improperly attempted to influence the judicial outcome of a dispute with the Peruvian tax authority. Quad/Graphics Peru S.A also created false records to conceal transactions with a state controlled Cuban telecommunications company. The Cuban telecommunications company was subject to U.S. sanctions and export control laws. The order found that from 2010 to 2015, China based subsidiary of Quad/Graphics’s , namely Quad/Tech Shanghai Trading Company Ltd, used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business. Quad/Graphics is a US listed company that is expanding abroad. It failed to ensure that its internal accounting controls were sufficient to prevent the type of widespread bribery in Peru and China and the concealment of commercial sales in Cuba. The SEC’s order finds that, Quad/Graphics violated the anti bribery, books and records and internal controls provisions of the Securities Exchange Act of 1934.
C. Alexion Pharmaceuticals
The below mentioned case laws deal with anti bribery issues in the pharmaceutical sector. Boston based pharmaceutical company Alexion Pharmaceuticals agreed to pay more than $21 million to resolve charges that it violated the books and records and internal accounting controls provisions of the FCPA. As per SEC’s order, two Alexion subsidiaries made payments to foreign government officials in order to secure favorable treatment for Alexion’s primary drug, Soliris. From 2010 to 2015, Alexion Turkey paid Turkish government officials to improperly influence them to approve patient prescriptions and provide other favorable regulatory treatment for Soliris. Further, from 2010 to 2015, Alexion Russia made improper payments to Russian government healthcare officials to favorably influence the regulatory treatment of and the budget allocated to Soliris and to increase the number of approved Soliris prescriptions. Alexion’s internal accounting controls were insufficient to detect or prevent the false books and records of such improper payments by Alexion Russia and Alexion Turkey. Alexion’s subsidiaries in Brazil and Colombia failed to maintain accurate books and records. Such entities created / directed third parties to create inaccurate financial records concerning payments to patient advocacy organizations. Alexion’s internal accounting controls failed to detect and prevent payments to foreign government officials by its subsidiaries. It is important for companies that are in frequent contact with foreign officials to ensure that their internal controls appropriately address such risks.
D. Novartis AG
Novartis AG, a global pharmaceutical and healthcare company headquartered in Basel, Switzerland, agreed to pay over $112 million to settle charge that it violated the books and records and internal accounting controls provisions of the FCPA. As per SEC’s finding, local subsidiaries or affiliates of Novartis or its former subsidiary Alcon Inc, engaged in schemes to make improper payments or to provide benefits to public and private healthcare providers in South Korea, Vietnam and Greece in exchange for prescribing or using Novartis or Alcon products. These schemes took place between 2012 and 2016 and were known among certain managers of the local subsidiaries or affiliates. Novartis lacked sufficient internal accounting controls within its former Alcon business in China from 2013 to 2015, which used forged contracts as part of local financing arrangements that generated large losses and resulted in Novartis and Alcon writing off more than $50 million in bad debt. This case illustrated that poor control environments act as fertile soil for malfeasance and Novartis’s misconduct shows that weakness in one part of the business can often serve as a harbinger of larger unaddressed problems.
E. Cardinal Health
Ohio based pharmaceutical company Cardinal Health agreed to pay more than $8 million to resolve charges that it violated the books and records and internal accounting controls provisions of FCPA. As per SEC’s order, Cardinal’s internal accounting controls were not sufficient to detect improper payments made by employees of its former Chinese subsidiary. Between 2010 and 2016, Cardinal China retained thousands of employees and managed two large marketing accounts for the benefit of an European dermo-cosmetic company whose products Cardinal China distributed. The dermo-cosmetic company directed its day-to-day activities of the Cardinal China employees, who used the marketing account funds to promote the dermo-cosmetic company’s products. As per the order, employees directed the payments to government employed healthcare professionals and to employee of state owned retail companies who had influence over purchasing decisions. Cardinal did not apply its full accounting controls to the accounts and regularly authorized payments without reasonable assurances that the transactions were executed appropriately. A profit sharing agreement with the dermo-cosmetic company provided Cardinal with a percentage of profits from sales derived from improper payments. Consequently, Cardinal failed to maintain complete and accurate books and records concerning marketing accounts. Cardinal’s foreign subsidiary hired thousands of employees and maintained financial accounts on behalf of a supplier without implementing anti-bribery controls surrounding such high risk business practices. The FCPA is designed to prohibit such conduct, which undermined the integrity of Cardinal’s books and records and heightened the risk that, improper payments would go undetected.
F. Teva Pharmaceuticals
Teva Pharmaceuticals Limited agreed to pay more than $519 million to settle parallel civil and criminal charged because it violated FCPA by paying bribes to foreign government officials in Russia, Ukraine and Mexico. The SEC’s complaint alleges that, Teva made more than $214 million in illicit profits by making influential payments in order to increase its market share and obtain regulatory and formulary approvals and favorable drug purchase and prescription decisions. It failed to devise and maintain proper internal accounting controls to prevent the company’s payments of bribes to win business in certain regions around the world. It was also alleged that, many of the bribes were concealed as legitimate payments to distributors. While distributors can help companies navigate complex regulatory environments and provide valuable industry relationships, they can also create significant corruption risks for companies.
GlaxoSmithKline Plc (“GSK”) agreed to pay $20 million to settle charges that it violated the FCPA when its China based subsidiaries engaged in pay to prescribe scheme to increase sales. An SEC investigation found that, the schemes spanned a period of years and involved the transfer of money, gifts and other things of value to healthcare professionals. This led to millions of dollars in increased sales of GSK pharmaceutical products to China’s state health institutions. The participants included certain complicit sales and marketing managers within GSK’s China based subsidiaries. GSK failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program in order to detect and prevent these schemes. As a result, improper payments were not accurately reflected in GSK’s books and records. Between 2010 and June 2013, employees and agents of GSK’s China based subsidiary and a China based joint venture engaged in various transactions and schemes to provide things of value to foreign officials, including healthcare professionals (“HCPs”), in order to improperly influence them and increase sales of GSK products in China. This misconduct was facilitated in part by the use of collusive third parties that ostensibly provided legitimate travel and other services. The funds used for the improper inducements were frequently obtained under the guise of, and falsely recorded in GSK’s books and records as, legitimate travel and entertainment expense, marketing expense, speaker payments, medical associations payments and promotion expense. GSK failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti corruption compliance program. Such deficiencies in GSK’s internal accounting controls and compliance program also led to instances of similar improper conduct in connection with sales in other countries in which GSK operates. From 2010 to June 2013, employees and agents of relevant entities engaged in transactions and schemes to corruptly transfer things of values to foreign officials in China to increase sales of pharmaceutical products. The payments were made to increase sales through increased prescriptions by individual HCPs and purchases by hospital administrative staff responsible for product selection or purchase. The conduct occurred across all geographic areas within the sales and marketing functions and impacted all product lines. The corrupt payments took varied forms, including gifts, improper travel and entertainment with no or little education purpose, shopping excursions, family and home visits and cash. The costs associated with these payments were recorded in GSK’s books and records as legitimate expenses, such as medical association sponsorships, employee expenses, conferences, speaker fees and marketing costs. These improper practices were pervasive amongst relevant entities’ sales and marketing representatives, but were condoned by regional and district managers. For instance, a sales representative submitted a work plan to regional sales manager describing the intent to pay an HCP prescribed product every month and deliver appropriate gifts on each holiday in exchange for a guarantee of more than a specified number of boxes of prescribed product every month. The employees were able to fund payments to HCPs by using collusive third party vendors, such as those used to perform planning and travel services for events involving HCPs. Between 2010 and June 2013, nearly $225 million was spent on planning and travel services. Test sampling showed that, approximately 44% of the sampled invoices were inflated and approximately 12% were for events that did not occur. Control weaknesses also permitted ostensibly legitimate speaker fees to be used to improperly influence HCPs. While GSK’s policies placed limits on the amount of fees paid to speakers per hour, there was no effective system in place to ensure the actual identity of a speaker. Of the amount spent in speaker fees, amount was paid to persons whose qualification as a HCP could not be verified. The other mechanism used to improperly influence HCPs were the marketing programs. In 2010, a relevant entity engaged a local vendor to facilitate a national marketing program called the Cold Chain Project. This project was intended to provide healthcare clinics with tools to facilitate the storage and administration of vaccines that required refrigeration. However, the project was instead used to provide HCPs with gifts such as laptops, tablets and other electronic devices. The selected clinics were based on the potential to market additional pharmaceutical products. During this period, local internal audits and compliance reviews identified controls deficiencies and evidence of some mechanisms that were used to fund improper payments. They were treated as isolated instances rather than signs of a larger problem. In 2013, sales rep office audit was conducted by internal audit with respect to the Guangzhou office. A few of the problems that were identified were (i) issues of falsified POS slips and fake bank statements; (ii) issues of fake invoices claimed from hotels and restaurants for sales meeting activities. These invoices came from a local preferred meeting agency used by the Guangzhou office (iii) compliance and new employee training not timely completed (iv) sales employees salaries were significantly driven by commissions that could lead to an incentive to improperly inflate sales. Furthermore, as early as in 2010, internal audit identified that many commercial and medical staff do not understand how to apply policies or the rationale behind policies governing commercial activities such as grants and donations and sponsorships. This was evidence by approval of non compliant activities, a lack of clarity on which policy to apply for activities such as grants, and weakness in documentation to support the legitimate intent of activities such as advisory boards and sponsorships of HCPs to attend meetings.
H. AstraZeneca PLC
AstraZeneca PLC agreed to pay more than $5 million to settle charges because it violated books and records and internal controls provisions of the FCPA as a result of its wholly owned subsidiaries in China and Russia making improper payments to foreign officials. Through at least 2010, AZN failed to devise and maintain a sufficient system of internal accounting controls relating to the interactions of its China and Russia subsidiaries with government officials, the vast majority of whom were health care providers (“HCPs”), at state-owned and state-controlled entities in China and Russia. Sales and marketing staff, along with multiple levels of management at the two AZN subsidiaries, designed and authorized several schemes to make improper payments of gifts, conference support, travel, cash and other benefits to HCPs to reward or influence their purchases of AZN pharmaceuticals. In addition, employees in the China subsidiary made cash payments to local officials to reduce or avoid fines that were levied against the China subsidiary. AZN falsely recorded all of the improper payments by its China and Russia subsidiaries as bona fide business expenses in its consolidated financial statements.
From 2007 until 2010, AZ China sales staff made numerous improper payments in cash, gifts and other items to HCPs as incentives to purchase or prescribe AZN pharmaceuticals. Sales and marketing team members, including managers within various business units at AZ China, designed and implemented the improper payment schemes. The HCPs who received the improper incentives worked for various government entities in several regions throughout China. Between at least 2006 and 2009, certain AZ China sales staff and their managers maintained written charts and schedules that recorded the amount of forecasted or actual payments of maintenance fees, gifts, entertainment and other expenses that AZ China would make per month or year in numerous regions throughout China. In some cases, the payments referenced gifts, entertainment and other expenses to individual physicians, and in other cases, maintenance fees to a particular hospital or medical department, as designated by an individual physician. AZ China sales staff management approved these payments with the expectation that the HCPs would increase purchases of AZN products during the corresponding period, or favorably influence the inclusion of AZN products on formulary or reimbursement drug listings. In numerous instances, AZ China sales staff submitted, and managerial employees knowingly approved, fake fa piao (tax receipts) for fraudulent reimbursements to generate cash that was used to make improper payments to HCPs. Other methods were also used, such as establishing bank accounts in doctors’ names as part of an improper payment scheme, or engaging a collusive travel vendor who submitted fake or inflated invoices to generate cash that could be used to funnel money to HCPs. As a result of the deficient controls, AZ China employees were regularly reimbursed for submitted expenses despite inadequate supporting documentation. Similarly, AZ China paid speaker fees to HCPs despite AZ China service contracts that were incomplete, containing no meeting date, venue, subject or fees associated with the particular speaker event. In some instances, the related speaker engagement was totally fabricated and never occurred. Additionally, sales and marketing team members were able to bypass formal approval procedures that required validation by a designated signatory in the company’s electronic approval system. In addition, in connection with inquiries by local Chinese government officials in 2008, AZ China employees made payments in cash to the local officials to get reductions or dismissals of proposed financial sanctions against the subsidiary.
From at least 2005 until 2010, AZ Russia employees provided improper incentives to government-employed HCPs in connection with sales of AZN pharmaceutical products. As was done by AZ China employees, AZ Russia employees created and maintained charts tracking the names of HCPs, the regions in which they practiced, their level of influence in making purchasing decisions for the respective entities where they worked and the manner in which they could be motivated to purchase AZN products through gifts, conference support and other means. Employees at several levels of AZ Russia management directed or condoned their subordinates’ practices of providing improper benefits to government-employed HCPs, which occurred in multiple regions where AZ Russia operates.
The SEC’s investigation had the following findings (i) Improper payment schemes occurred over the course of several years and were orchestrated or condoned by multiple levels of management at AstraZeneca’s China and Russia subsidiaries (ii) illicit payments by the China and Russia subsidiaries were not accurately reflected in AstraZenca’s books and records. Furthermore, the Company failed to devise and maintain a sufficient system of internal accounting controls, and lacked an effective anti-corruption compliance program during this period.
SciClone Pharmaceuticals agreed to pay more than $12 million to settle charges because it violated the FCPA when its international subsidiaries increased sales by making improper payments to healthcare professionals employed at state health institutions in China. As per SEC’s investigation, employees of SciClone’s subsidiaries acted as agents of the company, wherein they gave money, gifts and other things of value to the healthcare professionals. This lead to several million dollars in sales of pharmaceutical products to China’s state health institutions. The schemes lasted for at least five years. These schemes were condoned by various managers within SciClone’s China based subsidiaries. Such improper inducements were not accurately reflected in the company’s books and records as it failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti corruption compliance program.
Analysis and Conclusion
Corruption in the pharmaceutical sector endangers positive health outcomes and puts patient’s health at risk. Currently, there is no statutory code of ethical marketing that is applicable to the pharmaceutical industry. There ought to be penal consequences to curb such practices for the enforcement of the fundamental right to health. In India, the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations of 2002 prescribe a code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry. As per this Code, acceptance of gifts and entertainment, travel facilities, hospitality, cash or monetary grants by medical practitioners from pharmaceutical companies is prohibited. It is important to note that, this regulation is enforceable against the doctors and does not apply to companies. Consequently, this results in situations wherein doctor’s licenses are cancelled for misconduct which is actuated, encouraged, aided and abetted by pharmaceutical companies. There is no accountability of pharmaceutical companies in such situations. There is an absence of uniform code of pharmaceutical marketing practices that have the force of law, which can be enforced against the drug manufacturing companies with penal provisions for those who violate the code. In the meantime, if guidelines are framed to regulate unethical medical practices by pharma companies, then this situation can be averted. The practice of freebies given by pharmaceutical companies to doctors towards promotion of their products is not exempted from tax. The court expressed the public importance of concern wherein a doctor’s prescription can be manipulated and driven by motive to avail the freebies offered to them by pharmaceutical companies, ranging from gifts such gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences.