Recent publicly announced U.S. Department of Justice settlements for deferred prosecution agreements (DPAs) on alleged Foreign Corrupt Practices Act (FCPA) violations have involved some of the industry’s largest global medical device manufacturers, including BioMet, Smith & Nephew, and DePuy. The fact patterns underlying these DPAs often reveal a direct correlation between a nascent internal corporate compliance control environments and complex and inherently fragmented sales and distribution network within emerging markets. The global demand for innovative healthcare goods and the competitive realities for sustainable growth in the medical device industry have resulted in rapid expansion into high-growth—and high-risk—markets. In many international markets, the government acts as the ultimate payor and thereby creates the FCPA nexus. This nexus, combined with varied commercial customs and practices and evolving local anti-corruption laws and enforcement initiative, requires that companies identify and mitigate the potential risks presented by doing business in these markets.
Many of the world’s fastest-growing economies have been designated as relatively “highly corrupt” by global transparency monitoring groups. It is important that medical device companies take steps to mitigate bribery and corruption risk by building a strong internal control infrastructure and by taking measures to assert corporate ethical standards as their operations expand into new markets.
Medical device companies should be sensitive to the possibility of continued and increased enforcement scrutiny given several key characteristics that tend to be unique to their business operations:
– A business model that involves the commercialization of a broad and often diverse product portfolio, including capital equipment and consumable and disposable products
– An increased demand in markets with quickly growing economies where product purchases are funded through nationalized healthcare
– A fragmented and unwieldy distribution network with numerous individual arrangements—often thousands of small, niche market distributors
– Distribution operations, customer composition and sales models that are fragmented and decentralized
– Government tenders with the distributor as the contracting entity, with limited to no involvement of the manufacturer in the governmental tender process
– Financial interactions with healthcare providers whose services are oftentimes reimbursed by government funds, thus designating them as ‘government officials’ for purposes of FCPA
– Commercial needs expanding in emerging, high-risk global markets faster than the corporate control infrastructure
– Routine cash business transactions in markets where purchases are not made on credit (e.g., Russia, Colombia)
Of growing concern is the proliferation of foreign laws in the area of healthcare fraud involving financial interactions with healthcare professionals (HCPs) and the potential for exposure to FCPA risks. For example, in France the so-called anti-cadeaux law governs interactions between HCPs and medical device companies that market products reimbursed by the French social security system. It treats the provision of “gifts” to and receipt of “gifts” by HCPs as a criminal offense.,  As medicine and healthcare in many of these markets are nationalized, HCPs subject to anti-cadeaux actions may constitute quasi-government employees for purposes of FCPA through their provision of services funded through government programs. Therefore, these interactions need to be carefully considered to mitigate possible FCPA violations in addition to local criminal liability.
To the extent that companies engage in financial transactions with HCPs directly or indirectly paid by government funds, they must take action to mitigate the possibility that such interactions will run afoul of local anti-bribery laws that might also give rise to potential FCPA exposure. In order for medical device companies to mitigate the risks and address these vulnerabilities, a focused and coordinated effort should be developed and implemented to create a sustainable control environment within their global operations. A number of measures to consider when assessing and addressing these risks within an organization may include:
- 1. Know your team and business in these markets. Trust, but verify! While all companies strive to hire experienced professional staff and management with the right moral compass, it is imperative that the right control environment—based on transparency and independence—be established to provide independent oversight. It may be appropriate for the control functions (i.e., finance, legal, compliance) within the management team to report independently outside of the local management structure to provide effective, independent oversight. Consider procedures to allow the local external advisors (e.g., legal, audit) to have a link to central corporate to mitigate the possibility of local conflicts of interest. And finally, the right policies and procedures should be put into place to support the mission of the control environment. This environment should facilitate frequent and effective communication and awareness of protocols between and among the parent and its business units or subsidiaries operating in these emerging high-risk markets.
- 2. Know your local distributors, dealers, and sales agents. Know how your distributors do business and interact with their customers. Do they sell to the government or to government-funded programs and/or HCPs? Do they operate on a cash or credit basis? Have they obtained performance bonds and/or business risk insurance? Screen your distributors and their owners and principals for red flags involving past allegations of fraud or corruption and/or credit risk; have a documented contractual arrangement complete with an appropriate anti-corruption certification; train distributors on your policies and standards; and exercise audit provisions and examine your distributors’ records. Companies need to monitor that their distributors and partners are conducting business on a commercially sound, ethical, and legal basis.
- 3. Create and promote consistent policies and standardized procedures. Policies should define the rules for how the company participates in public tenders, trains its distributors and business partners, fosters a culture of transparency and awareness (including compliance hotline, empowered resources to follow up), and prohibits retaliation against employees who voice concerns. While the manufacturer often is not the contracting entity on government tenders, companies must nevertheless conduct adequate due diligence with respect to business involving a direct or indirect sale to a government or quasi-government entity, especially if such sales occur in high-risk markets.
- 4. Supplement global policies with local rules and customary business considerations. Nearly every country has its own local anti-corruption laws and enforcement initiatives. While the FCPA is one of the more stringent standards, a western-based anti-corruption compliance program must contemplate and demonstrate respect for local country guidelines. Companies should consider how their policies and procedures interact within these markets and be sensitive to the legal and practical considerations of doing business in those markets.
Globalization of commerce and expansion of healthcare delivery in emerging markets present medical device companies with tremendous opportunities for economic growth and innovation. Companies that establish an effective control environment, know their local markets from legal, business, and cultural standpoints, foster awareness of standards, and facilitate open communication will be better positioned to capitalize on these opportunities, manage risk of fraud and corruption, and demonstrate a systematic program for global and local regulatory compliance.
 Department of Justice, “FCPA-Related Enforcement Actions”, accessed at:
http://www.justice.gov/criminal/fraud/fcpa/cases/biomet/2012-03-26-biomet-dpa.pdf; http://www.justice.gov/criminal/fraud/fcpa/cases/smith-nephew/2012-02-01-s-n-dpa.pdf; http://www.justice.gov/criminal/fraud/fcpa/cases/depuy-inc/04-08-11depuy-dpa.pdf.
 Bloomberg Markets, “The Top 20 Emerging Markets” (2013), accessed at:
 Transparency International, “Corruption Perceptions Index 2012” (2012), accessed at:
http://cpi.transparency.org/cpi2012/results/. On a scale of 0 to 100, where 0 is highly corrupt and 100 is very clean: China (39), Thailand (37), Peru (38), Russia (28), Indonesia (32), Colombia (36), Mexico (34), Morocco (37), Philippines (34).
 French Public Health Code, Article L. 4113-6.
 Article L. 4143-6 of the French Public Health Code provides that a healthcare professional found to have benefitted from an “advantage” given by a company in violation of 4113-6 can be sentenced to up to two years imprisonment and fined up to 75, 000 Euros.
 Article L. 4163-2 of the French Public Health Code provides that companies can be held criminally liable under 4113-6. Companies may be fined up to 375,000 Euros. Individual officers may also be separately prosecuted and risk the same penalties as healthcare professionals who violate 4113-6.