Violations of the Foreign Corrupt Practices Act Destroys the Level Playing Field

In the latest instance in which a drugmaker was caught making bribes overseas, on December 20, 2012, Eli Lilly was charged by the US Securities and Exchange Commission (SEC) with violating the Foreign Corrupt Practices Act (FCPA) because its subsidiaries made improper payments to foreign government officials to win millions of dollars of business in Russia, Brazil, China, and Poland.

The FCPA forbids US companies from bribing foreign government officials. Bribery occurs under the FCPA when payments are made to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person. The law does permit relatively smaller amounts known as “facilitating payments” made to induced another party to carry out a responsibility that ordinarily should be done anyway. These are sometimes called grease payments.

With the opening of markets in Russia and China, bribery has taken a new turn. A Lilly subsidiary in Russia used offshore “marketing agreements” to pay more than $7 million to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information, according to an SEC statement.

These offshore entities rarely provided any services and sometimes were used to funnel money to government officials in order to obtain business. Transactions with offshore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little due diligence was conducted.

Moreover, the SEC alleged Lilly became aware of possible FCPA violations, but did not curtail the use of marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third-party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.

On August 7, 2012, Pfizer agreed to pay the federal government $60.2 million to settle allegations that its employees bribed doctors and other foreign officials in Europe and Asia to win business and boost sales. The charges against Pfizer were brought under the FCPA.

The SEC said that Pfizer's overseas subsidiaries made illegal payments to health care workers in China, Italy, Russia, Croatia and other Eastern European countries. As early as 2001, Pfizer sales representatives tried to conceal the bribes by recording them as legitimate business expenses for travel, entertainment and marketing purposes, the agency said.

Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers. Pfizer's China operation created a point program that allowed doctors to purchase gifts based on points earned for prescribing Pfizer medications. In other cases, Pfizer would invite high-prescribing doctors to club-like meetings as a reward for choosing Pfizer products.

Bribery is considered illegal in most countries yet the practice persists. When US companies pay bribes to foreign officials to gain business overseas it destroys the level playing field that should exists for potential providers of services to foreign governments. From an ethical perspective, a universality approach seems most appropriate. A potential briber would ask: Would I want others to act the way I am about to act in similar situations for similar reasons. The answer should be “no” because all semblance of open competition would not exist in reality. On a practical level, other companies that could bribe might out-bribe-you and you would lose business because of the institutionalization of the practice.

Blog posted by Steven Mintz, aka Ethics Sage, on February 27, 2013