The world’s largest manufacturer of generic pharmaceuticals, Israeli-based Teva Pharmaceutical Industries Ltd. (“Teva International”), and certain of its global subsidiaries agreed to pay nearly US$520 million and enter into a Deferred Prosecution Agreement (“DPA”) to resolve allegations that the companies bribed government officials in Russia, Ukraine, and Mexico, in violation of the U.S. Foreign Corrupt Practices Act (“FCPA”). This resolution involves a US$283 million criminal penalty to the U.S. Department of Justice (“DOJ”) and an additional US$236 million in disgorgement and prejudgment interest to the U.S. Securities and Exchange Commission (“SEC”), making this the largest FCPA enforcement action against a pharmaceutical company. In addition, Teva agreed to retain an independent compliance monitor for a period of three years.
The allegations primarily revolve around the conduct of Teva International’s wholly-owned Russian subsidiary, Teva LLC (“Teva Russia”). Teva International executives and Teva Russia employees allegedly paid bribes to a high-ranking Russian official (“Russian Official”) to secure sales of Copaxone, a multiple-sclerosis medication, in a drug purchase auction run by the Russian Ministry of Health. Teva Russia used a distribution company (“Russian Company”) owned by the Russian Official for repackaging and distribution services throughout Russia, and the bribes were allegedly paid to the Russian Official through the high profit margins the Russian Company earned from these sales.
Teva International and Teva Russia employees, including Teva Russia’s Legal Director, allegedly hid negative information about the Russian Company and the Russian Official from Teva International. For example, Teva Russia’s Legal Director allegedly omitted the relationship between the Russian Company and the Russian Official on paperwork submitted to Teva International as part of the company’s standard anti-corruption policy regarding third-party agreements. Further, certain executives at both Teva International and Teva Russia were allegedly aware of the fact that the Russian Company and the Russian Official were under investigation in Russia for corruption, and that Teva International’s risk insurance provider had decided to stop insuring transactions with the Russian Company. The executive at Teva Russia, who had long been pushing for a deal between Teva International and the Russian Company, was the individual at Teva Russia who had spearheaded Teva International’s anti-corruption due diligence on the Russian Company.
Despite these risks, Teva International and Teva Russia agreed to grant the Russian Company the right to repackage and distribute Copaxone in Russia. The Russian Official allegedly used his influence to help Teva increase sales of Copaxone to the Russian government. The Russian Official allegedly made US$65 million in corrupt profits through the inflated profit margins, and Teva International allegedly earned more than US$200 million in the increased sales of Copaxone to the Russian government.
Teva International’s Ukrainian subsidiary, Teva Ukraine LLC (“Teva Ukraine”) allegedly made improper payments to a Ukrainian government official (“Ukrainian Official”) in exchange for his influence to get the Ukrainian government’s approval of various Teva drugs, including Copaxone. This approval was required for Teva Ukraine to sell its products in Ukraine. Teva Ukraine allegedly hired the Ukrainian Official as a registration consultant between 2001 and 2011, and paid him a monthly fee along with providing him with travel and other things of value. However, these payments were allegedly made to induce the Ukrainian Official to use his official position to corruptly influence the registration and approval of Teva International’s products in Ukraine. Teva Ukraine allegedly paid the Ukrainian Official a total of approximately US$200,000.
Teva’s Mexican subsidiaries, Lemery SA de CV, Sicor de Mexico SA, Teva Pharmaceutical Mexico SA de CV, Lemery Desarrolo y Control SA de CV, lmmobiliaria Lemery SA de CV, IVAX Pharmaceuticals Mexico SA de CV, and Vitrium Division Farmaceutica SA de CV (collectively “Teva Mexico”), allegedly made improper payments to various health care providers employed by the Mexican government to increase prescriptions of Copaxone since at least 2005. Further, the U.S. regulators alleged that Teva International and Teva Mexico failed to implement an adequate system of internal controls and failed to enforce its existing system of internal controls, thereby allowing Teva Mexico to make corrupt payments to healthcare providers employed by government-owned and/or controlled entities in violation of the FCPA.
According to the DOJ’s criminal information, Teva International and Teva Mexico executives were aware that bribes were being paid to healthcare providers employed by the Mexican government, but these executives failed to improve the compliance program to prevent or detect corrupt payments to foreign officials. Further, Teva International executives allegedly hired compliance managers that were unable or unwilling to enforce the anti-corruption policies that were put in place. For example, at a meeting in January of 2011, one of Teva International’s compliance officers that oversaw Teva Mexico allegedly expressed the opinion that his role was to not interfere with business decisions, and that Teva International’s anti-corruption policies were not relevant for the Latin America region and were to be ignored.
Teva Mexico also allegedly engaged a local distribution company (“Mexican Company”) for a period of time in 2012, and provided them with an additional 2% profit margin that the Mexican Company then used to make improper payments to government employed health care providers in Mexico. Teva Mexico allegedly conducted no due diligence on the Mexican Company prior to the engagement, did not have any written distribution agreement in place with the Mexican Company, and did not require the Mexican Company to certify any sort of anti-corruption compliance. Further, Teva Mexico allegedly knew that there was no legitimate purpose for the increased profit margin for the Mexican Company.
- The Teva FCPA action highlights the dangers inherent in using distribution companies in high-risk markets. As Eric I. Bustillo, Director of the SEC’s Miami Regional Office, said in relation to this matter, “While distributors can help companies navigate complex regulatory environments and provide valuable industry relationships, they also can create significant corruption risks for companies.”
- Companies must ensure that their due diligence efforts are not being hampered by imperfect information provided by foreign subsidiaries. Companies need to hire compliance personnel that will ensure that proper protocols are followed, and that adequate systems exist to detect and prevent corrupt payments to foreign officials.
- Companies must also ensure that the appropriate personnel at the parent company are complying with anti-corruption policies and procedures. Teva International executives were allegedly aware of the improper payments being made by Teva Mexico, but they purportedly ignored the issues in the pursuit of profit. Such actions by a parent company will undermine any local anti-corruption efforts taken by a foreign subsidiary, and expose all aspects of a business to significant corruption risk.
- This FCPA action also highlights the broad definition of a “foreign official” under the FCPA. Doctors and healthcare providers employed by a government-run facility qualify as a “foreign official” under the FCPA. Improper payments to these healthcare providers are a basis for FCPA liability.
- Adequate internal controls means having appropriate personnel in charge of the management and oversight of a company’s compliance program. In the Teva action, a Teva Russia executive with a financial interest in working with the Russian Company was in charge of conducting anti-corruption due diligence on the Russian Company. Such a clear conflict of interest should not exist when proper internal controls are in place. Anti-corruption due diligence should be conducted by individuals with the appropriate arm’s length independence from the deal, so they can freely provide their objective and unbiased opinion on any associated corruption risks.
- This FCPA action also seems to signal that U.S. regulators may look to the profit margins earned by third-parties as a proxy for corruption risk, and an unexplained increase of as little as 2% in those margins may raise red flags. It is unclear what U.S. regulators would consider a “normal” level of profit, or how that level may change across different industries, but companies should be sure to document and justify legitimate business reasons the profit margins allocated to third-parties.
*Vijay Rao is admitted only in California. His practice is supervised by principals of the firm admitted in the District of Columbia.