What life sciences boards need to understand about corruption risk

RSM’s Global Corruption Law Compliance Survey offers key insights

May 01, 2017
Risk consulting Financial investigations Life sciences

As companies grow and become increasingly active internationally, understanding of and compliance with the global web of laws, regulations, and standards governing corruption is vital. This is especially true for life sciences companies. In 2016, approximately 25 percent of the Securities and Exchange Commission’s (SEC) and Department of Justice’s (DOJ) Foreign Corrupt Practices Act (FCPA)1 enforcement actions involved life sciences companies. RSM’s 2016 Global Corruption Law Compliance Survey (RSM’s Global Corruption Survey) offers valuable insight from the middle market into how international businesses are currently addressing corruption. But what are some of the unique corruption risks confronting life sciences companies entering international markets, and how should your company react to them?

Many life sciences products are health-care-related, and health care in many countries is largely government-controlled. Therefore, life sciences companies must interact with governmental entities and officials (including health care providers), which often expose life science companies to higher public corruption risks. Consider the importance of getting a product to market (which in the case of pharmaceutical companies often involves getting a drug on the formulary in any given country), or getting pricing approval or increases in markets. These decisions, often made by governmental agencies, including ministries of health, determine whether your company’s product will be offered in a market, and often at what price.  As such, local management (who may have different views towards corruption) are often charged with expanding international growth in higher-risk markets and are regularly tasked with interacting with government officials.

Building a compliance culture

Companies can implement a variety of programs and controls to guard against corruption, but successful anti-corruption efforts must start with a strong and consistent tone at the top and an anti-corruption culture that is clearly and continually communicated throughout the company. Employees must understand when their roles within their organization put them at inherent risk of encountering corruption and explain the personal harm that may result if policies and procedures are not followed. The odds of corrupt behavior increase considerably when excessive pressure to achieve sales numbers or other goals is applied to employees and the importance of legal and ethical compliance is not communicated effectively and consistently.

Employees must also understand their duty to report illicit behavior. Equally important, employees must feel that they will be protected by the company when they do so. RSM’s Global Corruption Survey findings underscore the challenges faced in creating a strong anti-corruption culture that protects its employees. When participants of our study were asked why employees failed to report bribery or other corruption, fear of job loss and fear of retaliation were the most common answers.

This concern appears to be justified as tone at the top is vital to building a compliance culture and garnering employee confidence, yet RSM’s Global Corruption Survey finds that 85 percent of CEOs or company presidents and 67 percent of chief compliance officers felt that bribery or other forms of corruption are sometimes necessary to compete in the global market. Fortunately, a significantly lower percentage of general counsel shared that view (22 percent). Clearly, companies cannot expect management and employees to risk reporting corruption without fear of retaliation if these activities are widely tolerated at higher levels within your organization. 

As such, the board of directors and those charged with oversight of an organization must find ways to adjust international performance expectations and goals of C-suite executives so that short-term financial performance is not the only measure of their success. Compliance and risk management also should be key factors in rewarding executives and maximizing chances of long-term success. Additionally, senior management must identify ways to build employee confidence to report matters internally and apply adequate safeguards so that those reporting matters will not be retaliated against. This often begins by instituting and consistently enforcing zero-tolerance policies against retaliation.

Third-party risks

With the use of third parties (sales agents, marketers, distributors, contract manufacturers, and clinical researchers, to name a few) common in the life sciences industry, companies must remember that they remain responsible for the actions of those parties conducting business on their behalf. Conducting business in a foreign market through a third party does not isolate a company from corruption risks. Rather an increasing reliance on third-party relationships may enhance corruption risks and complicate compliance efforts. RSM’s Global Corruption Survey found that respondents were concerned about a wide variety of third-party risks. Companies must be mindful of developing robust due diligence programs and include an adequate contractual provision to allow for monitoring of third-party activity (including wherever possible audit rights within contracts).

The following are some key questions to consider when evaluating your company’s anti-corruption efforts as they apply to third parties:

  1. Has your organization performed a corruption risk assessment with an emphasis on understanding and assessing local corruption risk indicators, operational controls, and residual risk?
  2. What level of global governance and central control does your organization maintain over local anti-corruption efforts and local business activities? Does sufficient transparency exist to manage corruption risk?
  3. How is your organization tracking activities (contracting, employment, human resource issues, sales targeting, marketing, regulatory compliance, research, and development, etc.) of general managers, sales personnel, and other key parties in local markets around the world?
  4. How is your organization assessing and monitoring the level of pressure placed on employees to meet global financial performance (i.e., sales) targets?
  5. How closely are you monitoring how much third parties are being compensated including compliance with fair market value pricing requirements?
  6. What level of understanding does your organization have with regard to government touch-points in each market? How is the company monitoring potentially inappropriate or high-risk relationships between government officials and local managers, sales, regulatory compliance personnel, and others?

Corruption risks in transactions

With joint ventures and acquisitions also common in the life sciences industry, it is important to extend your company’s anti-corruption program to assess risks associated with all contemplated transactions. Inquiries into the current state of anti-corruption controls and potential historical illicit activity should be part of your company’s acquisition due diligence process. While deal documents generally include indemnity language to reduce risks to the buyer stemming from illicit acts that occurred prior to the transaction, these are likely not sufficient protections when it comes to potential actions by the DOJ and SEC which expect companies to make a good-faith effort to investigate the target company’s past potential involvement in corruption in order to promptly identify and remediate corruption risks and implement corruption compliance programs within acquired entities after acquisition.

Geography matters. If your company is buying a company or starting operations in a new market, it is crucial to understand local attitudes and risks toward corruption, as well as the corruption schemes common to those markets. As the following chart demonstrates, those risks can take different forms.

Corruption is a risk that life sciences companies must take seriously. The board of directors and others charged with oversight of the management team for life sciences companies, need to maintain and enhance their familiarity with the risks and realities that exist as it relates to global corruption. RSM’s 2016 Global Corruption Law Compliance Survey  can help provide a backdrop for the global corruption landscape, as a starting point in the process.

1. In general, the FCPA prohibits offering to pay, paying, promising to pay, or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business.

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