Bribery and corruption in the pharmaceutical sector

September 2013 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

Reports from leading anti-corruption organisations such as Transparency International have highlighted a rise in global bribery and corruption. Transparency International surveyed 114,000 people across 107 countries and found that more than half of respondents believe corruption has worsened in the last two years. Recent stories regarding an alleged bribery scheme at GlaxoSmithKline’s Chinese operations have only served to intensify the spotlight on this issue.

Much work has already been done under the US Foreign Corrupt Practices Act (FCPA) and UK Bribery Act to try to counter bribery and corruption, particularly in the pharmaceutical sector. The UK’s Serious Fraud Office (SFO) has confirmed that it will be cooperating with the Justice Department in all investigations. Accordingly, any pharmaceutical companies investigated and found to be in breach of the Bribery Act may also find that they are being investigated and prosecuted under the FCPA.

Chinese authorities have launched a strong crackdown on the alleged bribery and corruption of local officials by multinational pharmaceutical companies. This new regulatory offensive may signify a broader trend toward elevated scrutiny of all foreign corporations operating in the country. Chinese authorities have vowed to “stand firmly against any forms of commercial bribery”.

With anti-corruption enforcement on the rise, pharmaceutical firms are under growing pressure to comply with an ever-increasing volume of regulation and legislation. But given the broad range of jurisdictions in which multinational pharmaceutical firms operate, maintaining compliance can be difficult. “The pharmaceutical sector does pose particular challenges,” says David Debenham a partner at McMillan LLP. “There are several discrete steps in the life cycle of a drug and most of these are heavily regulated by government. What may be in the private sector in the West, is part of the public sector in the East. What might be an acceptable private sector practice, may be considered ‘corruption’ in other parts of the world because the purchaser is employed by the government, or a government corporation. We have to place any allegations in this context and realise that some industries simply have a lot more interactions with government, and thus more opportunities for someone to make accusations of corruption, rightfully or wrongfully.”

In addition, disparities in the way bribery and corruption are defined may cause confusion. “In Germany, payments from drug companies to independent physicians may very well not constitute bribery or corruption,” says Jörg Rehder, a solicitor at Schiedermair Rechtsanwälte. “These payments may be in the form of cash, invitations to ‘seminars’, dinners, free office software, advertisements for the drug company’s products, and so on. German politicians are currently debating whether to introduce legislation that would criminalise those types of gifts.”

As the pharmaceutical and medical device industries grow at a significant rate, the potential for bribery and corruption allegations increases – whether based in truth or not. This is particularly true given the expansion of firms into emerging markets – many of which rank poorly on the corruption index. China in particular is becoming a very fertile area and many of the major global firms are turning to the Chinese market as revenues in the West begin to fall. Pharmaceutical giants GlaxoSmithKline and AstraZeneca have seen their profits hit as a number of patents on their key drugs in Europe have expired. In 2012, sales of AstraZeneca’s products fell 15 percent to $28bn and pre-tax profits were also down 35 percent to $7.7bn. Conversely, the company’s sales in China were up 20 percent to $1.3bn.

Although it is encouraging that authorities are placing a new emphasis on bribery and corruption, some concerns have been raised. One of the most disconcerting elements of the new emphasis on anti-corruption in China is that the relative security of being investigated under the auspices of the FCPA or the Bribery Act has now been eroded. Where previously foreign executives would likely be removed and returned home pending an investigation, increasingly they are being detained and investigated in situ. More and more pharmaceutical companies are finding it in their best interests to appease local authorities.

The recent investigation into the conduct of GSK employees has led to multiple arrests and yet more allegations of bribery and corruption. Over 18 members of staff have been detained amid allegations that they took part in a $450m bribery scandal. Staff allegedly bribed doctors with gifts, travel and lecturing fees and significant cash bonuses in order to persuade them to prescribe more of the company’s medications. There have even been claims that sexual favours were offered to doctors. It should be said that at the time of writing no formal charges have been levied against any GSK employees, however the affair has been deeply damaging to the company’s reputation. Mark Reilly, head of the company’s Chinese operations, left China before the arrests began. He has subsequently been replaced by Hervé Gisserot, GSK’s vice president for Europe.

Sadly the allegations levelled at GSK are not isolated incidents. In recent years there have been a number of similar cases of suspected bribery carried out by individuals employed within the pharmaceutical sector. Indeed, since the GSK allegations surfaced, an AstraZeneca employee has also been detained by the Chinese authorities in connection with bribery charges.

Bribery or promotion?

Despite the allegations levelled at the pharmaceutical sector, there is still some debate regarding the nature and extent of the charges. In the GSK case, although the company has vowed to “root out” corruption, the charges are yet to be proven. Moreover, the debate continues over customer incentives offered by the pharmaceutical sector. Managing the relationship between pharmaceutical firms and their potential customers is one of the most difficult aspects of the pharmaceutical industry for anti-bribery regulators.

Crucially, the authorities must ask themselves: At what point does the promotion of products and general hospitality cross over into inappropriate conduct? This is at the heart of the matter, according to Mr Debenham. “Is there a bright yellow line differentiating legal and illegal behaviour,” he asks, “or is it simply a matter of the discretion of the enforcement officials? Let’s take another example to make the point – gambling casinos and hotels are a growth industry. They want to come to country X to build a new hotel and casino. Meanwhile, country X’s public officials have been going to Las Vegas for years, where they are ‘comped’ free private jets to and from the hotel casino, a 3000 square foot suite, food, drinks and the like. When that Las Vegas hotel and casino applies for a licence to build in country X, do the ‘comps’ suddenly become bribes?”

In this context the relationship between pharmaceutical companies and potential customers is indeed a grey area. Although the practice of offering incentives and hospitality is well established within the sector, the European Federation of Pharmaceutical Industries and Associations (EFPIA) is pushing all of its members to do away with promotional products within the framework of the transparent codex it has drafted. The proposal is under discussion at various levels of both the pharmaceutical industry and the European promotional products industry.

Nationally, approaches to hospitality payments can vary. Mr Rehder notes that Germany’s Supreme Court has ruled that self employed doctors are neither public officials in the context of Germany’s Penal Code, nor are they employees of the national health care system – they are independent professionals. “This means that these doctors can essentially accept payments from drug companies and not be charged with accepting a bribe,” he says. “Yes, there is a code of conduct that physicians in Germany must observe, but to not have a law on the books prohibiting such payments is different than from most other industrialised countries.” Similarly, in China doctors are considered to be ‘foreign officials’ and as they earn minimal salaries, are permitted to supplement their incomes by collecting payments from both patients seeking better treatment and pharmaceutical companies looking to market their products.

With systems in place that allow doctors to supplement their income in this manner, it is easy to see how more unscrupulous characters can abuse the system. So is enough being done to counter corruption at a governmental level? “People in the anti-corruption sector often say more has to be done,” says Mr Debenham. “This is a self-serving answer. The fact is that this is simply a judgment call. What can fairly be said is that in Canada, enforcement by the Royal Canadian Mounted Police has grown exponentially, our anti-corruption legislation has eliminated facilitation payments and adopted the FCPA books and records provisions, and our pharmaceutical companies have hired the best and the brightest to design, implement and monitor some of the most sophisticated anti-corruption regimes for corporations that exist in Canada.”

Whistleblowing

Over the last decade or so we have seen a dramatic rise in the number of whistleblowers in the pharmaceutical sector. Whistleblowers and government investigations in the US have exposed a number of issues relating to pharmaceutical companies in all facets of the industry. On 31 July, Pfizer Inc agreed to pay a fine of $490.9m in relation to allegations of improper marketing of kidney transplant drug Rapamune. The allegations stem from a former sales representative turned whistleblower.

But whistleblowers cannot always be trusted. According to Mr Debenham, the key is to understand that ‘whistleblowing’ is the start of a confidential investigation, not the catalyst for an anti-corporate campaign in the press. In the United States the process is becoming ‘professionalised’ by consultants to ensure that the whistleblower focuses on the proper purpose of whistleblowing, so that generous compensation packages incentivise people to make proper claims against their own company without defaming anyone. “Though whistleblowing gets a lot of attention in the world – in particular in the United States – that is not the case in Germany,” says Mr Rehder. “Largely for historical reasons, Germans are wary of ‘informants’. That is why there is no statutory provision in Germany that expressly protects whistleblowers. In Germany, all employees owe a duty of loyalty to their employers. As a result, employees in Germany must generally lodge their concerns with their employer before going public or to the authorities. Failure to do so may lead to termination of their employment.”

Conclusion

The pharmaceutical sector has been dogged by allegations of bribery and corruption for some time, and GSK and AstraZeneca’s recent troubles in China serve to highlight wider issues that could threaten to undermine the industry if left unchecked. While there are arguably enough preventative measures in place to help curtail the impact of rogue individuals without the need for additional regulation, firms must ensure that they maintain compliance. As big pharma pushes into the emerging markets, this is even more important. The effects of being tarnished with allegations of corruption often extend beyond criminal penalties.

Richard Summerfield