Managing Sanctions and Export Control Risks in the Health Care Industry

by Ropes & Gray LLP

Ropes & Gray LLP

Over the past 15 years, pharmaceutical manufacturers, medical device companies, and other participants in the health care industry have been regular targets of U.S. Foreign Corrupt Practices Act (“FCPA”) enforcement actions brought by the U.S. government. FCPA cases levied against health care companies have commanded significant attention, and many companies have responded by implementing robust anti-corruption compliance programs consisting of policies and procedures, employee training, risk-based due diligence, and proactive compliance testing and monitoring.

Recent settlements suggest that a new trend may be emerging: the U.S. government bringing enforcement actions against health care companies for violating economic sanctions and export control laws. Like the FCPA, U.S. economic sanctions and export control laws have broad extraterritorial application. Many health care companies are large organizations with expansive international operations and distributors and end users dispersed throughout the world. These attributes make health care industry participants likely to confront sanctions- and export control-related regulatory challenges, and natural targets for enforcement actions.

Penalties for violations of economic sanctions and export control laws can be severe. In addition to civil fines and criminal penalties, running afoul of these laws can result in non-monetary consequences such as loss of export privileges, the imposition of compliance monitorships, U.S. Securities and Exchange Commission reporting obligations, and reputational harm. Recent settlements illustrate these consequences are not merely hypothetical.

This article discusses sanctions- and export control-related risks affecting the health care industry, as well as steps that companies may take to mitigate their exposure.


A. Indirect Exports to Restricted Countries

Many U.S.-based health care companies with international operations are aware of the restrictions and licensing requirements associated with exporting products to sanctioned countries. To deal with this risk, these companies have designed compliance programs to prevent direct sales to countries subject to comprehensive sanctions or wide-ranging export controls. It is therefore unsurprising that many enforcement actions targeting health care companies have involved indirect exports to entities in restricted countries.

During the last decade, a number of U.S.-based pharmaceutical and medical device companies have been subject to enforcement actions for selling products to embargoed countries through foreign affiliates or third parties. The most notable of these enforcement actions involved U.S. and foreign affiliates of Alcon, which entered into coordinated settlements with the Office of Foreign Assets Control (“OFAC”) and the Bureau of Industry and Security (“BIS”) in July 2016 to resolve alleged violations of sanctions and export control laws. OFAC and BIS alleged that an Alcon subsidiary in Switzerland purchased U.S.-origin products from an Alcon U.S. affiliate and subsequently reexported those items to Iran and Syria. The Alcon entities ultimately agreed to pay a fine of over $9.4 million to resolve their potential liability.

More recently, in February 2017, United Medical Instruments, Inc. (“UMI”), a U.S.-based supplier of ultrasound equipment, agreed to pay over $500,000 to OFAC in order to resolve alleged violations of the Iranian sanctions.1 As in the Alcon case, OFAC alleged that UMI exported products to Iranian end users via intermediaries in third countries. Other companies also have entered into settlement agreements with OFAC, BIS, and the Department of Justice based on similar fact patterns.

These settlements underscore the importance of robust due diligence, ongoing monitoring, and periodic auditing of supply chain activities. For example, before exporting products, a company should identify the ultimate destination and end user of the products, as well as any intermediate parties—such as distributors and sales agents—involved in the transaction. Companies should exercise heightened diligence if a party to any transaction is located in a known gateway to sanctioned countries (e.g., China, the United Arab Emirates, Turkey) or do not have well-established reputations. Companies exporting products to third-party distributors and sales agents may seek contractual protections, such as covenants, to comply with applicable sanctions and export control laws and to refrain from doing business with embargoed countries or parties targeted by list-based sanctions. Finally, companies should perform ongoing monitoring and periodic audits of their compliance with applicable sanctions and export control laws. Depending on a company’s risk profile and the availability of resources, monitoring and auditing activities may be performed either in person or remotely.

B. Violations of Licenses and Exemptions

Another potential avenue of liability for health care companies is the provision of products or services that exceed export authorizations. OFAC has issued general licenses—and BIS maintains license exceptions—that authorize transactions that otherwise would be prohibited by U.S. sanctions or export control laws. These general licenses and license exceptions, which vary in scope and are updated periodically, usually contain limitations. For example, OFAC’s general license that allows for the exportation and reexportation of certain medicine and medical devices to Iran does not cover exports or reexports to military, intelligence, or law enforcement purchasers (e.g., military hospitals), or to parties included on the Specially Designated Nationals List. These carve-outs to licenses can create compliance challenges, particularly for companies with limited compliance resources.

OFAC and BIS also grant specific licenses authorizing transactions that are not within the scope of existing general licenses and license exceptions. Specific licenses typically are limited by activity, end user, and duration. Companies that intentionally or inadvertently violate the terms of a specific license—for example, by engaging in activities outside the scope of the license or making sales that are within scope but occur after the license has expired—risk incurring liability.

Companies can take several steps to mitigate the risk of non-compliance with applicable licenses and license exceptions. First, companies may designate one or more employees as the primary point(s) of contact for trade compliance matters, including license-related inquiries, to promote accountability and consistency in approach to interpreting the licenses. Assessing the scope of applicable licenses and exceptions can be technical—ideally, such determinations should be made by appropriately qualified personnel. Second, companies may train employees to confirm that a contemplated transaction is permissible pursuant to a license (or exception codified in the Export Administration Regulations) with a designated trade compliance contact before moving forward with the transaction. Finally, companies with extensive international operations may establish a central repository for housing export licenses and authorizations. In addition to expediting access to export authorizations by relevant personnel, creation of a centralized repository may facilitate ongoing monitoring of compliance with license conditions.

C. Failure to Identify Clinical Trial-Related Risks

Clinical trials present a host of complex—yet frequently overlooked—export compliance considerations. Many items used in the conduct of clinical trials may be subject to export control restrictions—for example, electronic devices (e.g., laptops, tablets, and cell phones) with encryption technology used for data collection, biological agents, and laboratory equipment. Further complicating compliance efforts, a single clinical trial may have trial sites in multiple foreign countries, each with its own export and import control regimes and requirements. Finally, the prospect of increased sales—which frequently drives violations of sanctions and export control laws by health care companies—is more attenuated in the clinical trial setting. As a result, clinical trial-related activities may receive less scrutiny from compliance and audit personnel.

Many clinical trial sponsors choose to outsource, to varying degrees, export and import compliance-related tasks to third parties, such as technology suppliers or contract research organizations. Depending on the circumstances, delegation of export compliance activities, such as obtaining licenses, may not relieve the sponsor of responsibility for ensuring compliance with applicable laws. For this reason, an important step in mitigating clinical trial-related export and import compliance risks is the careful selection and vetting of prospective third party services providers. Companies involved with clinical trials also may seek contractual protections and/or indemnification provisions from third parties. In addition, sponsors and vendors alike may consider consulting with vetted, in-country resources in unfamiliar jurisdictions (e.g., local counsel, customs brokers), to ensure compliance with local laws.

D. Historical Liability for Acquisition Targets

Pharmaceutical and medical device companies frequently acquire other health care companies. A company that purchases a health care target with known (or unknown) liability for economic sanctions or export control violations may assume the target’s liabilities, depending upon the relevant facts and transaction structure. For example, Ellman International, Inc. (“Ellman”), a U.S.-based manufacturer of devices used in surgical and aesthetic procedures, was purchased by a private equity group in 2008. Unbeknownst to its purchasers, Ellman had violated the Iranian sanctions by (1) indirectly exporting products to Iran through a distributor in Dubai, and (2) engaging the services of an Iranian physician. Upon discovering these potential violations, Ellman’s new owners self-reported the Iran transactions to OFAC. In January 2013, Ellman agreed to pay $191,700 to resolve its liability stemming from its pre-acquisition conduct.

Appropriately, many prospective purchasers of health care companies seek to mitigate historical liability risk through pre-acquisition due diligence and negotiation of trade-related representations in purchase agreements. Pre-acquisition due diligence and contractual protections are important—but not necessarily sufficient—risk mitigation steps for transactions involving higher risk targets. In many cases, the representatives of targets who participate in the due diligence process are unfamiliar with the target’s trade compliance controls or lack sufficient insight into the target’s supply chain to respond effectively to sanctions- and export-related inquiries. And, as discussed above, violations frequently arise in the context of indirect exports, which are unlikely to be reflected in the sales and financial information provided in response to written diligence requests. Finally, while many prospective targets will represent that they are not aware of any historical violations of sanctions or export control laws, such representations are only as reliable as the strength of the targets’ existing compliance controls. For example, historical sanctions violations would be difficult to identify if a target lacks formal restricted party screening procedures.

Where comprehensive, pre-signing sanctions and export control diligence is impracticable—or a prospective target presents an enhanced risk profile—purchasers should consider conducting supplemental diligence after signing, to identify and address any ongoing violations. In addition, where existing controls are insufficient, purchasers should require the newly acquired target to promptly implement appropriate compliance enhancements. Enforcement actions show that U.S. regulators are willing to give meaningful credit to purchasers that remediate the underdeveloped compliance programs of acquired companies. For example, in the Ellman case, OFAC treated the purchaser’s’ prompt disclosure and remedial efforts as mitigating factors when calculating the applicable penalty.


U.S. regulators are carefully scrutinizing companies’ compliance with sanctions regulations and export control laws, violations of which may result in significant penalties and disproportionate reputational costs. U.S. sanctions and export control laws impose strict liability for civil violations , and regulators commonly allege multiple violations per transaction. Due to their size and geographic footprint, health care companies are potentially attractive enforcement targets for regulators.

Because investigations of violations of sanctions and export control laws tend to span multiple years, it is likely too early to assess whether we are at the early stages of an industry sweep (similar to previous FCPA-focused sweeps of the health care industry). As an upfront investment in compliance could stave off a future, high-profile settlement, health care companies may benefit from assessing their existing controls and addressing any potential deficiencies.

1. UMI had entered into a settlement agreement with BIS in 2013 related to the same or similar conduct. OFAC agreed to accept payment of only $15,400 if UMI satisfied the terms of the BIS settlement, including (1) satisfactory completion of a two-year probation period, and (2) prompt implementation of an export compliance program.

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.

© Ropes & Gray LLP | Attorney Advertising

Written by:

Ropes & Gray LLP

Ropes & Gray LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.