As part of a continuing enforcement trend focusing on the global pharmaceutical and healthcare industries, on August 7, 2012, the Department of Justice (DOJ) entered into a deferred prosecution agreement (DPA) with Pfizer H.C.P. Corp. (Pfizer HCP) — a wholly-owned subsidiary of Pfizer Inc. (Pfizer) — resolving charges related to violations of the Foreign Corrupt Practices Act's (FCPA) anti-bribery and books and records provisions, in connection with improper payments allegedly made to government officials including publicly-employed regulators and health care professionals in Bulgaria, Croatia, Kazakhstan, and Russia. Pfizer and Wyeth LLC (Wyeth) — which was acquired by Pfizer in 2009 — also reached separate settlements with the Securities and Exchange Commission (SEC) for related conduct.1 Besides signaling the government's continued interest in these industries, the resolution of this case is particularly interesting because the SEC appears to have taken an expanded view of what constitutes a "foreign official" under the FCPA, namely, a private company under government contract. However, despite the increased scrutiny companies in these industries are facing, DOJ's decision not to require Pfizer to retain a corporate monitor — departing from the recent trend — and also not to pursue a criminal resolution related to the pre-acquisition conduct of Wyeth's subsidiaries, indicates that extensive remediation and due diligence efforts can play a significant role in reducing a company's exposure under the FCPA.
Pfizer first voluntarily disclosed the conduct at issue to the SEC and DOJ in 2004 and launched a significant internal investigation which uncovered additional conduct. In all, the company and the government were reviewing, investigating, and negotiating for over eight years, including conducting, through the use of external counsel and forensic accountants and internal legal, compliance, and audit personnel, a global review of operations and a review of the company's compliance programs and procedures. Pfizer reported to the DOJ and the SEC throughout this period, and regularly sought their input on the company's remedial efforts. The DPA ultimately required Pfizer HCP to pay a $15 million criminal penalty — approximately 34 percent off the bottom of the sentencing guidelines range — and Pfizer and Wyeth agreed to pay more than $26.3 million and $18.8 million, respectively, in disgorgement of profits, including prejudgment interest, to settle the SEC charges.
Nature of the Alleged Scheme
According to the DOJ charging documents, between 1997 and 2006, Pfizer HCP sought to make and conceal corrupt payments to foreign officials in order to gain improper business advantages, including regulatory approval and increased sales of Pfizer pharmaceutical products. Through its employees and agents, the company agreed to provide kickbacks, cash payments, gifts, entertainment, and travel resources to numerous government officials, including physicians and pharmacologists, who were employed by state-owned enterprises including hospitals and government health centers in Bulgaria, Croatia, Kazakhstan, and Russia.
Several of the allegations against Pfizer focused on improper travel-related payments or bonuses. For example, in 2003, a Pfizer Russia employee indicated that a publicly-employed Russian doctor requested funds to attend a conference and "pledged to prescribe at least 20 packs" each of two separate Pfizer products per month. In another example, an agreement was allegedly in place between Pfizer HCP Croatia and a chief doctor associated with Croatian public hospitals in which the doctor promised purchases of a Pfizer product in exchange for Pfizer HCP's providing things of value including travel benefits and bonuses based on sales percentages. Other improper actions related to distributorships or "consulting agreements" being used to secure regulatory and registration approval of Pfizer products in various countries.
Overall, Pfizer HCP is alleged to have corruptly authorized the payment of at least $2 million to intermediary companies, government officials, and others to corruptly induce the prescription, purchase, and approvals of Pfizer products. These improper payments were recorded under false and misleading descriptions, such as "Travel and Entertainment," "Convention and Trade Meetings and Conferences," educational or charitable support, "Distribution Freight," "Clinical Grants/Clinical Trials," and "Gifts," in an attempt to conceal their improper nature, and these Pfizer HCP records were consolidated with Pfizer's year-end financial reporting documents, which were filed with the SEC.
A New Type of "Foreign Official?"
Part of the basis of the SEC's charges involving the actions of Pfizer Russia involved "customs related payments" made in order to clear Pfizer products for importation into Russia. According to the SEC, Russia required that imported pharmaceutical products be certified — indicating that the products conformed to specifications filed by the manufacturer with the Russian Ministry of Health. The Russian government licensed this certification function out to a private company, which performed the associated inspections. In 2005, when Pfizer Russia was having difficulty obtaining certification of its products, an employee of the Russian company offered to "overlook the non-compliance of Pfizer Russia's products in exchange for monthly payments of approximately $3,000." A Pfizer Russia Country Manager authorized payments of over $13,000 through intermediary companies, after which the customs clearing problems ended — until the payments were terminated as part of Pfizer's compliance review. While the FCPA's definition of "foreign official" has been broadly interpreted in recent years to cover a range of state-owned and state-controlled entities, this appears to be the first indication of the government's classification of payments to a privately-owned company under contract with the government as intended to improperly influence a "foreign official."
Penalties and Remedial Efforts
In addition to the $15 million penalty, the DPA requires Pfizer to maintain an effective compliance program, and further requires that Pfizer meet "Enhanced Compliance Obligations," such as maintaining gift, hospitality, and travel policies and procedures designed to prevent violations of anti-corruption laws; committing enhanced resources to the functions of Pfizer's Compliance Division; conducting risk assessments of relationships with third parties and potential acquires; and completing proactive reviews designed to identify anti-corruption compliance issues.
As indicated, the DOJ declined to require the retention of a corporate monitor, citing Pfizer's demonstrated improvement of its compliance systems and internal controls, and given the "enhanced compliance undertakings included in the agreement."2 DOJ also declined to pursue a criminal resolution for the pre-acquisition improper conduct of Wyeth's subsidiaries, citing, along with the SEC resolution, Pfizer's "extensive efforts" following its acquisition of Wyeth — including, in consultation with the DOJ over an eighteen month period, conducting a due diligence and investigative review of the Wyeth business operations and integrating its internal controls systems into the Wyeth business3. Both the DOJ and the SEC pointed to Pfizer's timely and voluntary disclosure of the misconduct of its subsidiaries in coming to the resolutions.
As V&E has reported on multiple occasions, the DOJ continues to indicate that it is intensely focused on pursuing corruption in the pharmaceutical, healthcare, and medical devices industries.4 Recent enforcement actions in this field have targeted companies including Johnson & Johnson, Smith & Nephew, Biomet, AstraZeneca, Bio-Rad Laboratories, Bristol-Meyers Squibb, Covidien, Eli Lilly, GlaxoSmithKline, Merck, SciClone Pharmaceuticals, and Talecris Biotherapeutics. According to the DOJ, Pfizer HCP received a reduced penalty as a result of Pfizer's cooperation in the ongoing investigation of other companies and individuals (in addition to its voluntary disclosure and cooperation with the enforcement agencies). This outcome indicates that (1) timely identification and disclosure of FCPA compliance risks can result in substantially reduced liability for companies, and that (2) the DOJ's focus on the pharmaceutical industry shows no signs of abating. This case serves as reminder to companies involved in the pharmaceutical industry of the need to be cognizant of U.S. anti-corruption laws and to review and evaluate whether existing compliance programs and procedures effectively address potential risks.
Originally published in V&E Foreign Corrupt Practices Act
Update E-communication, August 21, 2012
Footnotes
1 The SEC charges against Pfizer involve similar schemes, though the scope of Pfizer's improper conduct was limited to 2001 to 2007, but involved improper payments to foreign officials in China, Czech Republic, Italy, and Serbia, in addition to the countries cited by the DOJ. The conduct alleged in the SEC's settlement with Wyeth involved improper payments and the provision of improper benefits to officials in China, Indonesia, Pakistan, and Saudi Arabia, related to the marketing of Wyeth nutritional products.
2 Press Release, U.S. Dep't of Justice, Pfizer H.C.P. Corp. Agrees to Pay $15 Million Penalty to Resolve Foreign Bribery Investigation: SEC and Companies Agree to Civil Disgorgement of $45 Million, August 7, 2012, available athttp://www.justice.gov/opa/pr/2012/August/12-crm-980.html.
3See id.
4See Taking Its Medicine — Johnson & Johnson Agrees to Settle FCPA Charges After Cooperating Against Industry Participants, Vinson & Elkins Foreign Corrupt Practices Act Update E-communication (April 13, 2011), http://www.velaw.com/resources/JohnsonJohnsonAgreesSettleFCPACharges.aspx; Greece Payments: Smith & Nephew Settles Allegations of Corrupt Payments to Greek Surgeons, Ethisphere (Feb. 22, 2012), http://anticorruption.ethisphere.com/greece-payments-smith-nephew-settles-allegations-of-corrupt-payments-to-greek-surgeons.
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