Impact of the U.S. Foreign Corrupt Practices Act on Japanese Pharma

Anti-Corruption Laws in the United States and Japan

The Foreign Corrupt Practices Act (“FCPA”) contains two primary areas of application: anti-bribery prohibitions and accounting requirements. The anti-bribery prohibitions bar companies from making, offering, promising, or authorizing improper payments to foreign officials—the definition of which includes employees
of state-owned enterprises, such as doctors working at government-owned hospitals—for the purpose of influencing their decisions in order to obtain or retain business.  Improper payments are not limited to cash bribes, and may include the offering of a lavish meal, high-value gifts, entertainment, or internships and employment for family members. They may be disguised as legitimate activity, such as an education conference for health care professionals (“HCPs”) held at a lavish locale. Even small payments or customary token gifts may not be exempted if they are part of a systemic briberyscheme or given with a corrupt intent.

Additionally, the FCPA’s accounting provisions require public companies and filers to keep accurate records and maintain sufficient internal controls to ensure that transactions are executed with management’s specific or general authorization.  Companies that retain an agent or consultant, sell through a distributor, or otherwise coordinate with a third-party business partner, who, in turn, makes improper payments to foreign officials, can also be held liable under the FCPA if they knew, or had reason to know, of the third party’s misconduct.

Notably, the FCPA allows United States prosecutors to pursue foreign companies for conduct occurring in the United States, as well as for conduct occurring in another territory, as long as that company takes acts in furtherance of the scheme while in the United States. Jurisdiction has been applied broadly even to companies with seemingly few ties to the United States.  For example, in March 2014, Marubeni Corporation, a trading company headquartered in Japan, was fined $88 million for conspiring with a power company in France and its subsidiaries (including a company headquartered in the United States) to corruptly obtain a power project contract in Indonesia.  Although the bribes were paid to Indonesian government officials, the United States Department of Justice determined that it could pursue Marubeni based on the following facts:  (1) Marubeni made payments to a consultant’s bank account in the United States, from which funds were used to pay the bribes; (2) Marubeni’s employees and agents participated in meetings in Connecticut to discuss the power plant project; and (3) e-mails were sent to and from individuals in the United States that discussed the bribery scheme.  Although Marubeni operates subsidiaries based in the United States, the charges were brought against the Japanese parent company.

Marubeni actually had settled other FCPA charges with the United States government several years earlier, having agreed in 2012 to pay a $54.6 million fine related to its participation in a scheme to bribe Nigerian government officials to obtain engineering, procurement, and construction contracts.  In that instance, prosecutors alleged that jurisdiction existed in the United States because (1) Marubeni faxed a letter to a co-conspirator residing in Texas to discuss fees related to the project; (2) Marubeni wired money to a co-conspirator via a correspondent bank account in New York; and (3) e-mails were sent to and from individuals in the United States that discussed the bribery scheme. The two Marubeni enforcement actions, predicated on bribes that were not paid in the United States, are a sobering reminder of the FCPA’s broad reach.

Japan’s domestic laws also allow for prosecution of Japanese nationals and companies that engage in bribery of foreign officials.  Anti-corruption laws in Japan are mainly codified in the Unfair Competition Prevention Act (“UCPA”) and the Penal Code.  Like the FCPA, these laws prohibit the giving of money or other benefits to public officers and government officials; the Penal Code prohibits domestic bribery, while the UCPA prohibits foreign bribery.  Although Japan is not commonly viewed as having a corruption problem—it was ranked at 15 out of 175 countries in an index issued by Transparency International in 2014—it has been under increasing pressure to pursue overseas corruption.  Recently, a Tokyo court convicted three Japanese executives and their former employer, Japan Transportation Consultants, for offering 70 million yen in bribes to a government official in Vietnam in an attempt to secure infrastructure contracts.  The case involved cooperation between the Japanese and Vietnamese authorities, who formed a joint anti-corruption committee to aid their cross-border investigation.  It is suspected that Japanese enforcement actions against foreign bribery will increase in the wake of increased international coordination in anti-corruption enforcement.

Heightened Risk in the Life Sciences Industry

Japanese pharmaceutical and other life sciences companies, in particular, must be cautious of risks that are inherent to the industry and may be scrutinized by Japanese or United States enforcement authorities.  Many HCPs in Japan work for state-run hospitals and are likely considered government officials under the FCPA and Japanese Penal Code, making companies’ interactions with them a primary risk area and requiring extra scrutiny of promotional activities.  While a company’s activities and related payments may be legitimate, they may also be a means of concealing bribes or kickbacks designed to influence an HCP’s prescribing decisions.  Even non-promotional events such as sponsorships and conferences require caution, because the company may pay associated speaker fees or travel expenses for HCPs or other government officials.  Companies should also be attuned to the possibility that employees may falsify or inflate expenses in connection with gifts, promotional meetings, or interactions with HCPs in order to fund non-compliant activities. 

Another risk area includes interactions with national government agencies that are involved in regulating drugs and health care, as well as decision-makers in local governments and public hospitals.  Administrative officials at these organizations may have influence over tenders and similar public procurements for prescription medications and vaccines.  Additionally, a life sciences company faces risks in its day-to-day operations relating to clinical trials; regulatory approvals; permits and licenses; charitable donations of cash and medical products; political contributions and other participation; customs clearance; immigration and visa processing; and tax collection.  Payments to “expedite” any government function also pose significant risks.

Need for Robust Compliance Practices

In order to avoid legal difficulties, companies must ensure that they have robust compliance and ethics programs and perform regular diligence and audits to ensure that business operations are being conducted in accordance with policy.  Regular monitoring of expenses by the compliance team will allow the company to understand the flow of company resources and identify suspicious trends.  Conducting further in-depth review of a sampling of expense reports on a periodic basis, as well as conducting proactive audits of higher-risk countries or business units, will also minimize the risk of violations going unnoticed.  Relationships with third parties should be identified and monitored through due diligence and the exercise of risk-based audit rights, which should be negotiated and built into standard contracts.  Existing policies, procedures, and third-party agreements should be re-evaluated every few years to account for new legislation, changing investigative targets, and newly identified bribery schemes.  Finally, companies that suspect that violations of anti-corruption law may have occurred should retain experienced and knowledgeable counsel who are equipped to conduct an internal investigation and advise on cooperation with relevant enforcement agencies.