Corruption Risks in Pharma Manufacturing in Russia

by Michael Volkov
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russiapharmaJon Umarov, an Associate at The Volkov Law Group, returns for another post on Russia and the pharmaceutical industry.  Jon’s profile is here.  He can be reached at jumarov@volkovlaw.com.

The Russian government has targeted the pharmaceutical industry for growth and development, adopting a program Pharma 2020 Strategy. This program aims to improve the competitiveness of the Russian pharmaceutical industry and localize production resources of international pharmaceutical companies.

The Russian pharmaceutical sector relies heavily on foreign manufacturers for products, know-how and development. However, the Russian government plans to increase the share of locally manufactured medicines on its Essential Drugs List (known as the EDL) up to 90% in the upcoming decade.

One of the goals behind the Strategy is to provide preferences to domestic manufacturers in the public procurement process for locally-manuafctured pharmaceutical products. With this carrot, the Russian Pharma 202 Strategy creates opportunities and challenges for international pharmaceutical companies.

International companies are spending significant to localize production in Russia by partnering with domestic producers to secure domestic status as, in accordance with the announced plans by the Russian government as of 2014, foreign manufactured products will not be admitted to participate in state tenders if there are two or more analogous products manufactured in Russia or Belarus.

Significantly, state-owned clinics obtain pharmaceutical products in large part through the government procurement process, which is regulated by a new Russian Procurement Law No. 44-FL.pharmarussia5

Increasingly, pharmaceutical companies are evaluating the risks of moving manufacturing to Russia in light of the new shift in the regulatory framework. In addition, they must also consider the special requirements of Russia’s anti-corruption laws.

Russia is a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Accordingly, the country has taken steps to align its anti-corruption legislation with the standards set forth by the Convention.

For instance, much like the FCPA, Russian Federal Law No. 273 – FL, “On Counteracting Corruption,” adopted on December 25, 2008, requires that companies implement controls systems aimed at preventing the falsification of accounting records. Notably, Russia’s Supreme Court has issued Resolution No. 24 “On Court Practices in Bribery and Other Corruption Crimes” dated July 9, 2013. The Resolution serves as guidance to Russian judges handling cases under various offenses related to fraud and bribery under the Russian Criminal Code.

In particular, the Resolutipharmarussia4on provides a distinction between the Russian anti-corruption laws and the western anti-corruption law as it relates to payments made to third parties at the request of a government official. The Russian interpretation does not treat such payments as g bribery, so long as the government official does not materially benefit from the payments.

This distinction leads to a dilemma for foreign companies who are also obligated to adhere to the FCPA and UK Bribery Act. Consider a situation where the head of a state-owned clinic, who is considered a government official for the FCPA and UK Bribery Act purposes, asks a US pharmaceutical company to make a donation to a charity. Although the request can be perfectly legal under the Russian anti-corruption law, insofar as the donation does not materially benefit the government official, it may constitute a violation of the FCPA and the UK Bribery Act.

Some of the other distinctions created by the Russian anti-corruption law include criminal liability for both offering and accepting bribes, liability for acting as an intermediary to channel bribes and the lack of defense for companies under administrative (i.e. non-criminal) regulations for having corporate anti-corruption compliance procedures in place, although such procedures are increasingly encouraged by the Russian government.

Balancing among different anti-corruption regimes can be a difficult act.   With the increasing number of countries implementing their own anti-corruption legal frameworks, conflicts will increase, raising difficult compliance questions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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