fcpa and other international issuesa plan for implementing a global fcpa compliance program step 7...

FCPA and Other International Issues

Presenters

Jonathon KellermanPartner, Pharmaceutical and Life SciencesPricewaterhouseCoopers(267) [email protected]

Rita Gail JohnsonDirector, Corporate Business DevelopmentEurasia Group(212) [email protected]

Section one

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

PricewaterhouseCoopers

Compliance Professionals Face the “Perfect Storm”

Future relevance

and span of control

* Continued mergers and acquisitions and

growth into emerging markets

* Increased enforcement

and investigations


Enforcement & Investigations – Evidence of FCPA Activity

• Huge current wave of DOJ/SEC enforcement• FCPA listed as one of US DOJ Fraud Division’s 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


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 Senate’s approval of the U.N. Convention Against Corruption

• US working in context of the OECD Convention


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


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


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


Core Decision Points and the Potential for Corruption

Registration Selection Procurement DistributionService

Delivery

EfficacyLabelingMarketingUseWarningsFull registrationRe-evaluation

of older drugs

Determine budget

Assess morbidity profile

Determine drugneeds to fit morbidity profile

Cost-benefitanalysis of drugs

Consistency with WHO criteria

Determine model of supply/distribution

Reconcile needs and resources

Develop criteriafor tender

Issue tenderEvaluate bidsAward supplierDetermine

contract termsMonitor orderMake paymentQA

Receive andcheck 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 careDispensing of

pharmaceuticalsAdverse drug

reaction monitoring

Patient compliance with prescription

Section two

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


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


Globalization has led to increasing acceptance of political risk

Imperative for BusinessNo matter how local your business, international politics can have an impact. By identifying and monitoring political risk, you will better understand your company’s global exposures and balance your risk appetite against achievement of business objectives

Imperative for BusinessNo matter how local your business, international politics can have an impact. By identifying and monitoring political risk, you will better understand your company’s global exposures and balance your risk appetite against achievement of business objectives

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

Political Risk DefinitionAny 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 ChangePolitics influences how markets operate - often the most unpredictable economic events are political in origin

Impact of Political ChangePolitics influences how markets operate - often the most unpredictable economic events are political in origin


Political Risk – What to monitor

GOVERNMENTPolicies and attitudes toward business; regulation, taxation, infrastructure, privatization, foreign ownership, corruption

ECONOMYFiscal and monetary policy, foreign exchange rates, inflation, economic growth

SOCIETYDemographic shifts, social behaviors, societal tensions/conflicts

SECURITYCross-border conflicts, terrorism, emergencies, biosecurity threats, environmental disasters


Political risks across the BRICs

Country Risk

Economic Policy Risk

Local Risk

CHINA: An increasingly predictable business environment for new and existing companies, but substantial country risk.

INDIA: New entrants face bureaucratic procedures, but country stability and increasingly market-oriented policies. Some economic policy risk, but little country 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.

RUSSIA:

Country risk associated with increasing centralization of political power

Economic policy risk created by centralized power

Local risk from domestic competitor’s political connections.

Source: Eurasia Group


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


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


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 againstunwanted surprises

Section three

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


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 activitiesOutcomes – 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 complianceOutcomes – 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.



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 programOutcomes – 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.



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 programOutcomes – 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 management’s 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


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


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”)


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


Concluding Thoughts….

• The world has truly changed

• Yesterday’s 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 aren’t 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

fcpa and other international issuesa plan for implementing a global fcpa compliance program step 7...

Documents