Charity That Isn't So Charitable

Pharmaceutical companies that operate in global markets have to be careful with how their money is spent overseas. That hospital dispensing the company’s products in China? It could be a state-owned enterprise, and at least in the eyes of law enforcement, filled with government officials who could be the recipients of illicit payments. Those travel and entertainment expenses? They might be appropriate, but if too lavish, they could easily cross the line into illegal attempts to curry favor with government buyers. Even contributions to charitable causes can run afoul of the Foreign Corrupt Practices Act (FCPA), and pharmaceutical and medical device companies have fallen into this trap several times.

Here’s the problem: While the FCPA doesn’t mention charitable contributions explicitly, the statute does prohibit giving “anything of value” to a foreign official to induce an official action to obtain or retain business. (15 U.S.C. §§ 78dd-1 – 78dd-3.) And unsurprisingly, the government takes an expansive view of the phrase “anything of value.” A bag of cash is certainly valuable to a lot of people. What about a contribution to a foreign government official’s favorite charity, one that he is particularly invested in?

Schering-Plough

FCPA practitioners have focused on this issue since 2004, when the SEC brought a settled enforcement action against Schering-Plough arising out of its business in Poland. The SEC’s complaint alleged that one of the company’s foreign subsidiaries, Schering-Plough Poland, made improper payments to the Chudow Castle Foundation, a charitable organization established to restore castles and other historic sites in the Silesian region of Poland. See SEC v. Schering-Plough Corp., No. 04-cv-00945 (D.D.C. June 16, 2004). The foundation was headed by an individual who also happened to be the director of the Silesian Health Fund. The health fund was a Polish governmental body that, among other things, bought pharmaceutical products and influenced the purchase of those products by other entities, including hospitals. The SEC alleged that the subsidiary paid around $76,000 to the Chudow Castle Foundation to induce the director to influence the health fund’s purchase of Schering-Plough’s pharmaceutical products. After allegedly giving Foundation payments false medical justifications, the company was charged with violating the internal controls and books and records provisions of the FCPA, and escaped with a $500,000 penalty.

Eli Lilly

Eli Lilly faced similar issues in 2012, in the same country (Poland), with the same charity (the Chudow Castle Foundation), and the same government agency (the Silesian Health Fund). See SEC v. Eli Lilly and Co., No. 12-cv-02045 (D.D.C. Dec. 20, 2012). To be sure, Eli Lilly also had problems in China, Brazil, and Russia, and its castle issues were mild by comparison. Here, the company paid $39,000 to the Foundation between 2000 and 2003, allegedly in exchange for pharmaceutical business from the health fund. The SEC said that, in its books, Eli Lilly mischaracterized the payments as having true charitable purposes or as compensation for conference space. As it did to Schering-Plough, the SEC charged Eli Lilly with violating the internal controls and books and records provisions of the FCPA.

Stryker

In 2013, Michigan-based medical technology company Stryker Corporation found itself the subject of a wide-ranging SEC administrative order focused on its alleged FCPA violations. While the company’s problems spanned three continents, it was in Greece that it stumbled into the charitable contribution trap. According to the SEC’s order, Stryker’s subsidiary in Greece made a purported “donation” of nearly $200,000 in 2007 to a public university in Greece to fund a laboratory that was a pet project of a public hospital doctor. In re Stryker Corp., Admin. Proc. File No. 3-15587 (Oct. 24, 2013). In exchange for the payment, the doctor agreed to provide business to Stryker. Again, the SEC’s order alleged violations of the FCPA’s internal controls and books and records provisions.

What to do

These cases offer lessons about how to assess charitable contributions in countries where pharmaceutical companies do business. Companies should certainly ask themselves these questions:

◾ Does the company have internal guidance regarding its charitable activity? For example, does the company confine that activity to a certain sector, such as health-related causes?
◾ Does the proposed contribution fit within that guidance?
◾ How large is the proposed contribution compared to the company’s overall charity budget?
◾ Do repeated charitable contributions within a short time appear to be structured to avoid going over established authorization limits?
◾ Do government agencies and charitable foundations share common personnel?
◾ How are donations characterized in corporate books? Do those descriptions make sense?

Asking these questions and rigorously demanding answers will put companies on strong footing for FCPA compliance. Companies should also train accounting staff to recognize red flags when they arise.

Good arguments can be made that the FCPA should not even cover the payments described in the cases described above. Unfortunately, winning those arguments can be prohibitively expensive. Empowering personnel to recognizing these issues before they become problematic can save enormous sums in the long run.

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