Interacting With High-Risk Parties and Government Officials in the Life Sciences and Extractive Industries

Charitable donations, community investments, political contributions, and sponsorships all seem like they’d look great for your organization’s image. Unfortunately, they are also all capable of being used as bribes. They can be made to support the “cause” of a public official with decision-making power over contracts or regulations that affect your organizations, or be used to channel funds to front organizations controlled by a bribery recipient. They can also present opportunities for individual employees or third parties to inflate sums – as donations or sponsorship fees – and receive money back from the recipients as kickbacks.

Unlike commercial contracts where the choice of suppliers is governed by specifications and other criteria, there is often flexibility in choosing a recipient for donations and sponsorships and the selection process can be manipulated. For instance, an official responsible for a contract decision may create a trust, charity, or event for the specific purpose of receiving bribes in the form of donations or sponsorship.

These types of payments can therefore be very high-risk, especially if you find yourself in a highly regulated industry dominated by state actors such as the Life Sciences sector (including pharmaceuticals and medical devices) or Extractive Industries (including Oil & Gas and Mining). The global anti-corruption enforcement landscape is extremely complicated, especially for those in heavily regulated industries seeking to do business with government officials or entities or other high-risk parties where bribery is especially common.

Gifts and Entertainment Compliance in the Life Sciences Industry

For U.S. regulators, the Life Sciences (“LS”) sector has been an increasing focus for enforcement, particularly under the FCPA, with the prevalence of pay-to-prescribe bribery in the pharmaceutical industry of specific concern. Since 2011, the DOJ and SEC have brought enforcement actions against at least 23 LS companies resulting in over $1.7 billion in total fines, penalties, and disgorgement pursuing several companies in the medical device industry for kickbacks with foreign health departments, payments to consultants in hospitals, unjustified fees and using excessive means to influence healthcare professionals. LS companies continue to be a major target for U.S. enforcement, second to only the Oil & Gas industry^[1].

This is partially because healthcare is a highly regulated field, requiring government approval to sell products and –in many countries– fully government-run healthcare. This means that most healthcare professionals outside the US will be affiliated with a government entity and considered “foreign officials” for purposes of the FCPA or “public officials” under other bribery laws. Furthermore, the need for vast geographic coverage requires third-party distribution channels and reliance on sales intermediaries and other third parties. Another issue is the forms of marketing used.

For example, the “expert sponsorship,” prevalent in the pharmaceutical sector, involves a healthcare professional (“HCP”) “expert” who is sponsored to attend a convention, conference, educational or other event and is paid fees and travel expenses. The expert benefits from travel and money and the company benefits from the expert’s endorsement or influence in the marketing or prescription of their products. In October 2015, the US Justice Department announced that pharmaceutical company Warner Chilcott had agreed to plead guilty to a felony in relation to a healthcare fraud scheme and pay $125 million to resolve criminal liability and False Claims Act allegations. It was alleged that Warner Chilcott employees, at the direction of company management, provided payments, meals, and other remuneration associated with so-called “Medical Education Events” which included dinners, lunches, and receptions.

These events, which were often held at expensive restaurants, often contained minimal or no educational component, and were instead used to pay prescribing physicians in an attempt to gain a competitive advantage over other companies. Warner Chilcott also enlisted high-prescribing physicians as speakers for the company. These so-called speakers often did not actually speak about any clinical or scientific topics and, instead, the payments were primarily intended to induce them to prescribe the company’s products. In fact, speakers who were not prescribing at a high volume were told they would not be sponsored to attend subsequent events unless their prescription volumes increased.

Sponsorship scandals happen in the Extractive Industries as well. In 2015, the SEC settled an administrative proceeding with global mining commodities producer BHP Billiton, resolving allegations that the company violated the books and records and internal controls provisions of the FCPA in connection with its practice of inviting government officials and their spouses to attend the 2008 Olympics. BHP Billiton agreed to pay $25 million in civil monetary penalties, and to report on the operation of its FCPA and anti-corruption compliance program to the SEC for a one-year period.

According to the SEC, BHP Billiton was an official sponsor of the 2008 Olympics in Beijing, China. In exchange for providing the raw materials for the Olympic medals, BHP Billiton received a number of hospitality packages and perks at the games. BHP Billiton sought “to strengthen relationships with key local and global stakeholders” by inviting 650 people to attend the games at the company’s expense, 176 of whom were government officials and employees of state-owned enterprises. According to the SEC, the majority of these were “government officials from countries in Africa and Asia that had well-known histories of corruption.”

Gifts and Entertainment Compliance in the Extractive Industry

The Extractive Industries similarly require extensive regulation, thus presenting new corruption risks – for companies to pay for cutting corners regarding environmental rules and for officials to create additional red tape and hold-ups to extract more undue payments. The awarding of contracts can create incentives for corruption, such as firms attempting to influence government decision-making through bribery or firms with political contacts being given preferential treatment. State ownership is concentrated in this sector, where public and private intersect via valuable concessions and large public procurement projects, contributing to this sector’s infamy where bribery is concerned.

Gifts, Entertainment, and the Foreign Corrupt Practices Act (FCPA)

Payments that violate the FCPA may arise in a variety of settings and include a broad range of payments beyond the obvious cash bribe or kickback. The FCPA prohibits giving “anything of value” for an improper purpose, a phrase which has taken a variety of forms. Charitable donations fall within the broad definition of “things of value” that, if provided for the improper purpose of influencing a foreign official, could result in an FCPA enforcement action. They should be closely vetted and subsequently monitored, as the DOJ and SEC have identified an emerging trend of charitable donations being used by companies as a means to funnel bribes to foreign officials.

For example, on September 4, 2018, French pharmaceutical giant Sanofi S.A. agreed to pay the SEC more than $25.2 million in penalties to resolve charges that the company had violated the books and records and internal controls provisions of the FCPA because of alleged bribery-related activities by several of its subsidiaries, including the company’s Lebanon-based subsidiary, which allegedly participated in a series of schemes to convey benefits to healthcare providers through “sponsorships, gifts, donations, product samples, consulting agreements, peer-to-peer meetings, clinical studies, and grants” that reportedly produced more than $4.2 million in illicit gains.

Political contributions

In 2017, Sociedad Quimica y Minera de Chile S.A. admitted to having violated the financial controls provisions of the FCPA by failing to implement adequate controls over the disbursement of funds from the CEO’s discretionary account, which were used to make payments to Chilean politicians, candidates for office, and individuals affiliated with government officials. This lack of controls permitted a high-level executive to make questionable payments to politically exposed persons between 1990 and 2015 totaling $14.75 million for services that were not performed. Donations were made to foundations controlled by persons affiliated with politically exposed persons without sufficient assurance that the payments were legitimate charitable contributions and were consistent with the company’s policies. The company failed to conduct adequate due diligence regarding the third-party payees to determine that the payments were legitimate, even after payments to “high-risk recipients” were identified.

Political contributions, by their nature, are made by companies for the purpose of supporting a particular political cause or outcome that would benefit the company. Whether made as direct payments or as expenditures in support of a candidate (such as a fundraising event) they a high-risk activity from an FCPA perspective, as there often is a perception that contributions are made with some expectation of a quid quo pro. For example, in 2016 Samuel Mebiame was prosecuted for making a contribution to a charity run by an official of the Government of Niger in order to obtain uranium mining concessions.

Companies should be clear about what constitutes a charitable contribution, community investment or sponsorship, as they will each have unique characteristics and be subject to different laws and tax treatments. Unlike charitable contributions, sponsorships are a commercial activity. Although they can have a social purpose, such as supporting a local sports team, the bulk of sponsorships are used to promote a company’s reputation, brands, products, and services. Sponsorships are often used as platforms for corporate hospitality, and this brings its own risks. The related promotional and marketing activities such as rights for media, ticket sales, and hospitality can also be routes for channeling funds.

Best Practices for Gifts and Entertainment Compliance

• Have a strategy for making donations and sponsorships and ensure that all proposals fit within the strategy and meet established criteria.

• Conduct due diligence on all proposed recipients to check whether they are affiliated with public officials or existing or potential customers, or other anti-bribery red flags.

• Implement controls, including approval thresholds and countersignatures, to counter the risk of kickbacks. Monitor payments and check that procedures are being followed.

• Be transparent about your donations and sponsorship strategy, procedures and, where possible, payments.

• Assure that your compliance program is both adequately resourced and empowered to function effectively.

• Assure your approach to third party risk management extends throughout the lifespan of the relationship, not just during onboarding.

• Emphasize data analytics to ensure timely and effective monitoring.

Michael Volkov specializes in ethics and compliance, white collar defense, government investigations and internal investigations. Michael devotes a significant portion of his practice to anti-corruption compliance and defense. He regularly assists clients on FCPA, UK Bribery Act, AML, OFAC, Export-Import, Securities Fraud, and other issues. Prior to launching his own law firm, Mr. Volkov was a partner at LeClairRyan (2012-2013); Mayer Brown (2010-2012), Dickinson Wright (2008-2010); Deputy Assistant Attorney General in the Department of Justice (2008); Chief Counsel, Subcommittee on Crime, Terrorism and Homeland Security, House Judiciary Committee (2005-2008); and Counsel, Senate Judiciary Committee (2003-2005); Assistant US Attorney, United States Attorney's Office for the District of Columbia (1989-2005); and a Trial Attorney, Antitrust Division, United States Department of Justice (1985-1989).