Compliance Fines Take a Bite Out of Pharma Companies’ Bottom Lines

The sharks are circling. On the heels of last fall’s announcement of a $14.7 million payment for FCPA violations in China by Bristol-Myers Squibb, compliance investigators are paying even closer attention to the Pharmaceuticals and Life Sciences industries. Forbes noted that  Teva Pharmaceuticals, Sanofi, AstraZeneca, UCB, Novartis and Eli Lilly are all reportedly under investigation for FCPA violations. While no due-diligence program can completely eliminate risk, enforcement agencies have indicated that proof of a well-designed and enforced compliance program—including vigorous due diligence—can minimize risk. Whether or not these companies will face criminal or civil penalties—and reputational damage—by the conclusion of the investigations remains to be seen, but one fact is clear: 2016 is not the year to become complacent when it comes to conducting due diligence on third-party representatives of your company. The U.S. Department of Justice (DOJ) is just getting started. According to Forbes, the DOJ is ramping up for more foreign bribery investigations having tripled the number of FBI agents assigned to investigate foreign corruption—and they’re specifically targeting “high value, high-impact” cases. Here are just a few of the fines that have been paid in recent years:

How to Mitigate Third-Party Risk in Pharma

Having policies and procedures in place won’t rescue your company if those policies go unheeded or your due-diligence processes don’t dive deep enough. When announcing the Bristol-Myers Squibb settlement, Kara Brockmeyer, the FCPA’s chief of the Enforcement Division, said, “Bristol-Myers Squibb’s failure to institute an effective internal controls system and to respond promptly to indications of significant compliance gaps at its Chinese joint venture enabled a widespread practice of providing corrupt inducements in exchange for prescription sales to continue for years.” That’s right—red flags were raised but the lack of a timely, appropriate response left the company exposed to third-party risk. What should you do? The Pharma Compliance Monitor offers a list of warning signs to watch for.

Are your representatives …

1. Offering entertainment to reward or encourage prescribing habits?
2. Providing entertainment wholly without a clinical component?
3. Paying speaker fees tied to prescribing habits?
4. Giving lavish gifts or cash to procure recommendations?

We’re going to explore the topic further—including how to right-size your due diligence to meet varying risk levels—in a blog post next week, so stay tuned.

3 Ways to Apply This Information Now

1. Get the eBook, “Something Missing?” which outlines the unique compliance challenges Pharma and Life Sciences companies face from third parties working on their behalf.
2. Check out this post about the importance of an effective due-diligence and on-going monitoring program.
3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts.

2 Reasons why companies need to conduct risk assessments of their own compliance programs

As the aftermath of corporate corruption and ethics scandals continue to play out in news headlines and courtrooms, spurring a continued search for expert advice and best practices on mitigating compliance risk. So, when a former compliance expert at the U.S. Department of Justice (DOJ) and a Harvard Business School professor focused on corporate misconduct join forces in a Harvard Business Review article on addressing compliance program failures, we were curious. Here’s what we found.

Costs climb sharply for corporate fraud, bribery and corruption failures

When a corporate scandal is covered in the media, a price tag is inevitably mentioned. But the figures that make headlines don’t tell the whole story—especially when the corruption or compliance failures play out over years. ‘Dieselgate’, which VW first admitted to in 2015, has resulted in nearly $30 billion in costs from recalls, legal penalties and civil settlements in the U.S. In June, German prosecutors announced a $1.2 billion penalty, and earlier in September, Compliance Week reported a $10.6 billion claim on behalf of investors, calling it “… one of the most significant German investor actions against a company in more than a decade.” Add in the loss of trust that sent sales and stock values plummeting and it’s clear that the company will be feeling the pain for some time to come.

Likewise, when a money laundering investigation in Brazil began in 2013, few anticipated that “Operation Car Wash” would turn into the mega-sized bribery and corruption scandal it is today. Dozens of companies, executives—and even politicians—have been tainted by Operation Car Wash, with financial penalties in the billions and a continuing threat of additional settlements related to investor class actions. This far-reaching scandal will likely have long-term consequences—not only for the companies involved, but also for the government and citizens of Brazil.

And these are just the media sensations for corruption prosecutions. The HBR article cites data from the Association of Certified Fraud Examiners, noting that “… almost half of all fraud cases are never reported publicly, and a typical organization loses close to $3 million in annual revenue to fraud.” More worrying, perhaps, is another survey referenced by authors Hui Chen and Professor Eugene Soltes indicating that 42 percent of 3,000 surveyed executives said that unethical behavior could be justified to reach financial goals. “Clearly, malfeasance remains deeply entrenched in private enterprises today,” Chen and Soltes writes.

Throwing money at compliance isn’t what mitigates regulatory risk

Compliance programs do not come cheap. According to Chen and Soltes, “The average multinational spends several million dollars a year on compliance, while in highly regulated industries—like financial services and defense—the costs can be in the tens or even hundreds of millions.” In addition, they say, these figures don’t reflect the human resources value of training and compliance-related activities undertaken annually.

Of course, if money spent paid dividends in the form of lower regulatory risk and no scandals, few companies would balk at the expense. Unfortunately, companies encounter an increasingly complex regulatory environment—from PEPs, sanctions and watchlists to different laws around the globe to address bribery and corruption, money laundering and terrorist financing, forced labor and more. As a result, companies should consider conducting a risk assessment of their own compliance strategies to evaluate their effectiveness. “For many firms,” Chen and Soltes write, “appropriate measurement can spur the creation of leaner and ultimately more-effective compliance programs. Put simply, better compliance measurement leads to better compliance management.”

Unfortunately, the article points out that “… only 70% of firms even try to measure the effectiveness of their compliance programs. And of those that do, only a third are either confident or very confident that they are using the right metrics.” Rather than checking the box for components of a risk mitigation process, companies need to gather metrics that show the value of each component. What are regulators looking for? While at the DOJ, Chen was tasked with creating the “Evaluation of Corporate Compliance Programs” that was published in 2017 to give companies guidelines—not a checklist—for evaluating the effectiveness of their compliance program. Since companies have different risk considerations, a one-size-fits-all approach to mitigating regulatory, reputational, financial or strategic risk will almost certainly fall short. Instead, companies must tailor their processes— from employee and third-party training to compliance due diligence and monitoring for regulatory risk—and validate each component’s effectiveness using meaningful metrics. How does your own risk mitigation process measure up?

Next Steps

1. See how the ISO 37001 anti-bribery and corruption standard—developed with input from 37 countries—enables risk-appropriate, efficient risk mitigation. Get the eBook now.
2. Learn more about LexisNexis® Entity Insight, our proactive, PESTLE-based risk monitoring solution.
3. Share this blog with your colleagues on LinkedIn to keep the conversation going.

Monitoring Macro Trends: Everyone is Hot on the Environment

The environment has consistently been a hot topic, but at the end of 2015, it dominated headlines for weeks due to unusually warm temperatures in some places and extremely cold weather conditions in other parts of the United States. From tornadoes to blizzards and record highs to unseasonable lows, December had people talking about the climate. Here is an infographic with some of the highlights. 

Wacky Weather

While the climate change debate goes on, everyone agrees that the weather phenomenon El Nino is contributing to the wacky weather. What is El Nino, you ask? According to Scientific American articles found in Newsdesk, it’s part of a naturally occurring, irregular cycle that takes place every two to seven years in the equatorial Pacific Ocean. “El Niño is characterized by a large area of warmer-than-average ocean surface temperatures in the central and eastern Pacific. The other half of the cycle is La Niña, when the surface waters are cooler than normal. There's also a neutral phase, when the temperatures are about average.”

Emoji Sensation

Coincidence or not, El Nino was front and center at the same time global leaders came together in Paris for COP 21, the 21st U.N. summit focused on forging a new global agreement to reduce carbon dioxide emissions. Twitter® was quick to get in on the action by unveiling three new, environmentally-focused emojis to coincide with the conference.  The social media website unveiled the icons, which are activated by hashtags, to mark the two-week-long Conference of the Parties to the U.N. Framework Convention on Climate Change. The emojis—an Eiffel Tower overlaid on a green leaf, a green Eiffel Tower and a heart-shaped Earth icon—appeared when users tweeted using the hashtags #COP21, #GoCOP21, #ActionDay and #ClimateChange. 

Generation Gap

With all this talk about climate change and the environment, how can we know who prioritizes this as a critical issue? Based on environmental media mentions tracked by Newsdesk across 100 days, Millennials are, by far, the most environmentally-connected generation, owning more than 71 percent of the conversation, or nearly 14,000 articles. That’s a lot of talking!

Connecting the Dots

• Rising temps seem to be here to stay. Tailor your marketing and product development to lifestyle changes that will come with warmer weather. People will be outdoors more months of the year and will need ways to stay cooler when summer rolls around.
• Social media is a part of all we do. When you roll out a new campaign, be sure you’re leveraging social. Create custom hashtags to turn your content into the new trend.
• Developing new products? Consider an environmental angle. From using minimal packaging to introducing products that are designed to help us use less energy, products with purpose are big. 

What’s a PEP and Why Should You Care?

When it comes to finding your way around the regulatory landscape, the overabundant use of acronyms may make you feel like you need a translator by your side.  FCPA, OAFC, BSA, PEP and others … keeping all of them straight could be a full-time job—if you weren’t already busy full-time conducting due-diligence investigations. We decided to tackle a commonly-used acronym today to clarify what it means, how it has evolved and why it should stay on your radar.

 Meet the Politically Exposed Person

The Bank Secrecy Act, otherwise known as the BSA noted above, defines a PEP as “A senior foreign political figure in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned corporation.”  The BSA goes on to note that “In addition a senior foreign political figure includes any corporate, business or other entity that has been formed by, or for the benefit of, a senior foreign political figure.” Broadening the scope of the definition further, the BSA includes members of a senior foreign political figure’s immediate family, close associate or any person “who is in a position to conduct substantial domestic and international financial transactions on behalf of the senior political figure.”  You’d think that says it all, but the definition is fairly fluid when it comes to anti-bribery and corruption regulations. As some pharmaceutical companies learned the hard way, a physician practicing at a state-run hospital is considered a foreign official—especially if the physician is offered financial or other incentives to promote use of a particular drug.

 Keeping PEPs on Your Radar—and Out of Your Supplier Network

It can be extremely challenging, especially in developing nations, to avoid PEPs altogether. As Alhaji Diekola Oyewo, president of the Chartered Institute of Purchasing and Supply Management of Nigeria, pointed out in a recent speech, “Corruption thrives because the existing institutions lack the muscle to check excesses of politically exposed people abusing the system.”   The UN is actually looking at how it can help curb illicit financial flows because developing countries, like some in Africa, need the nearly $50 billion that is siphoned out of the economy through corrupt practices to create jobs, reduce poverty and re-invest in development projects. Yet, these high-risk regions are where some of the best business opportunities are located. And that is why enhanced due diligence, that looks at sanctions, watch lists and PEPs, is an on-going need in today’s global business world.

 3 Ways to Apply This Information Now

1. View this Webinar to learn best practices for mitigating third-party risk with enhanced due diligence.  
2. Request a free trial of Lexis Diligence® to explore the due-diligence resources and tools available—all in a single dashboard.
3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts.

 

The Three Big Risks of Missing information

Making sound business decisions requires a significant amount of research and information gathering. Without knowing the history of a company or the market trends of the industry, your company can be exposed to liability concerns, reputational risks and financial losses.

1. Liability

Pharmaceutical companies are quite familiar with the process of approval, safety regulations and extensive testing on drugs before they are made available to the public. Continued information gathering even after a drug has been approved is important to ensure the safety of consumers and to avoid a potential legal issue if those consumers are adversely affected.

According to a book published by the National Academies of Sciences, Engineering and Medicine, post-marketing surveillance is critical to minimize the risks—in this case, of a new drug. “Because initial safety testing is limited to small groups of volunteers… safety problems have been discovered with some drugs long after marketing approval. These safety issues have had tremendous costs, both in dollars and, far more importantly, in lives lost or persons harmed by the drugs.”

Along with monitoring safety issues, it’s important to understand news about similar products, key competitors and industry regulations that may shift and introduce new risks. Continued research to gather pertinent information can help keep liability at a minimum.

2. Reputation

Having incorrect or incomplete information can lead to false statements, inappropriate claims or a scandal. When missing information, there is opportunity for costly reputational risks.

Not all businesses operate in an ethical manner with wholesome business practices. For example, if your company is interested in purchasing another company, you need a solid understanding of all aspects of the new-to-be-acquired business. Extensive research of the inner workings, practices, financial history, manufacturing practices, and backgrounds on key stakeholders is critical to truly understanding a company. From improper sourcing to bribery to political ties, if you miss a controversial piece of information about their manufacturing practices yet acquire the company without knowing this, your company’s reputation is at risk. Your customers, partners, shareholders and more can view improper background research as a blow to your company’s leadership and future growth.

Knowing everything you can about a company and how their businesses practices align with your own is imperative before entering into a business relationship.

3. Financial Loss

Since the 1970s, American businesses have set up shop in other countries like China, in the hopes that the powerful corporations will flourish in the People’s Republic. But the reality is that many of these businesses fail quickly for a variety of reasons. “Some suffered from a lack of flexibility, or a failure to localize,” writes Benjamin Carlson for CNBC. “Others fell because of bad timing, or a superior local competitor. While the causes are as varied as the industries themselves, a pattern can be discerned among the biggest failures in China: an inability to grasp just how different — and cutthroat — the Chinese market can be.”

Without a solid understanding of a foreign market, companies can struggle to thrive (or even simply survive) because of their lack of basic market practices and industry nuances. Gathering information about current market conditions and trends can be crucial; without it, your business is destined to struggle to learn on-the-go likely losing money and potentially failing in the new market. Having the right background information and performing extensive industry, news and regulatory research on a particular market, especially one as tricky as China’s, is integral to making solid decisions.

"It's a lack of understanding of the legal and cultural environment that leads to most failures," says Shawn Mahoney, managing director of the EP China consulting group. 

Ultimately, gathering information and educating your decision makers is critical to ensure you’re able to take on the competition. Having a solid base of information will help to reduce the risks posed to your business and can potentially avoid liability, a tarnished reputation, and financial loss.

To learn best practices on researching for accurate information, download our whitepaper or check out our infographic.