Just when you were thinking things could not get any bigger after the Odebrecht/Braskem Foreign Corrupt Practices Act (FCPA) enforcement action, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced the fourth largest enforcement action of all-time involving Teva Pharmaceuticals Industries Ltd., (Teva) coming in at $519MM, consisting of a criminal fine of $283MM and profit disgorgement of $236MM. The disgorgement amount is the second largest ever. The company entered into a three-year Deferred Prosecution Agreement (DPA) that requires an independent compliance monitor. The company also agreed to a Criminal Information, issued by the DOJ, and a Complaint filed by the SEC.
According to the DOJ Press Release, “Teva Russia has signed a plea agreement in which it has agreed to plead guilty to a one-count criminal information, also filed today in the Southern District of Florida, charging the company with conspiring to violate the anti-bribery provisions of the FCPA. The plea agreement is subject to court approval. The case was assigned to U.S. District Judge Kathleen M. Williams of the Southern District of Florida and Teva Russia’s initial court appearance has been scheduled for January 12, 2017.”
The enforcement action involved multiple bribery schemes in several countries, using a variety of techniques to make illegal payments. The largest bribery scheme was in Russia but there were additional bribery schemes in Mexico and Ukraine. I will begin a multi-part series to look at the matter and provide lessons to be learned by the compliance practitioner going forward.
The amount of the fine is significantly higher than any other previous FCPA enforcement action involving a pharmaceutical company. The prior highest amount was Johnson & Johnson (J&J) at $70MM back in April 2011. This matter even eclipses the (approximately) $498MM penalty levied on the British pharmaceutical giant GlaxoSmithKline PLC (GSK) by Chinese authorities for violations of Chinese domestic bribery laws in the summer of 2014.
What could have led Teva to face such a large penalty? Quite simply it was the breadth and depth of their multiple bribery schemes. In Russia, there was a bribery scheme that metamorphosed during the pendency of the events. The overall bribery program ran from 2006 through 2012. It involved payments of bribes through a local Russian wholesale company which was owned by a Russian government official, up through 2009. At that time the scheme morphed when the Russian government modified some health care priorities such that Teva’s drug Copaxone would receive priority for use in the country.
This change led Teva to institute a new arrangement with the Russian company to become the exclusive wholesaler and re-packager for Copaxone. At this point the principal of the Russian company was under investigation for allegations of corruption. There were other red flags raised internally by Teva employees about the use of the Russian wholesale company and by business partners of Teva as well. However, none of these red flags were investigated or cleared.
The reason these red flags were not cleared was articulated by a Teva Russia employee, “We suggest to cooperate [sic] with [Russian Distributor] to launch Copaxone local production. Russian Distributor is headed by [Russian Official] a representative from [a region in Russia] to Council of Federation of Russian Federation. He is a Deputy Chairman of [a Federation Council Committee] and he has a position of Chairman of [another government committee]. . . . [Russian Official]’s political network makes him a strong partner from market access stand point. The plan is to utilize his contacts to secure our shares and minimize generics risks.” Clearly the company was on notice as to the Russian government official connection.
The bribery scheme was effected by giving discounts to the Russian wholesaler who then resold the drug to the Russian government. The amount of the discount was not reported. However, in Russia, from 2010 to 2012 alone, Teva received business valued at “approximately $197,530,681.”
There is one point which bears mention here as it is a first in FCPA enforcement actions. At some point between October 2008 and January 2009, Teva’s business risk insurer decided to stop insuring transactions with the Russian wholesaler. While it is not entirely clear from the resolution documents, it appears it was because of allegations against the company for corruption. Take a minute to ponder on this point because if a business insurer is so uncomfortable in doing third party business in the form of writing insurance, that is one very massive red flag. Even if the articulate business reason for declining to extend coverage was some other reason, it still bore investigation by Teva.
In Ukraine, the bribery scheme ran from 2002 through 2011 and involved payments of cash to a Ukrainian government official of more than $200,000 and payment for trips to Israel. The travel was business class and at least once include the government official’s wife. Interestingly, the payments were made by Teva until the end of 2009 and at that time the payments to the Ukrainian government official were made by Teva’s Ukrainian subsidiary. As noted in the Complaint, “although some of the compensation Ukrainian Official received from Teva was in cash, at least seven payments were wired through U.S. correspondent banks.”
Finally, were the bribery schemes in Mexico. After reading the resolution documents about the only thing one can conclude was that Teva’s Mexico business unit was definitely old school as they believed in bribery in the old fashioned way, cold hard cash paid out to doctors directly to prescribe their drugs. Teva also routinely entertained the same government officials. Perhaps most interestingly was that back in 2007, the company uncovered the bribery scheme in Mexico, after having been alerted to it by an anonymous whistleblower. This led to the termination of 11 Mexico business unit employees but with no corresponding enhancement in internal controls.
Partly in response to this scrutiny from the business unit’s past sins, it then moved payments from Teva Mexico to its distributors system. As stated in the Complaint, “Shortly thereafter, the Teva Mexico manager told a subordinate, another manager, that the money that the doctors had been previously receiving as part of the promotions budget would now be paid in cash by Teva Mexico’s Copaxone distributor in Mexico.”
Thereafter, “the Teva Mexico manager then gave the same subordinate a list of doctors, their phone numbers, and the amounts of money that they should be paid. The Teva Mexico manager then directed the same subordinate to call the doctors who had been receiving money from Teva and inform them that they would continue to be paid. Consistent with those assurances, Teva Mexico continued to pay Mexican doctors in 2012.” The payments made to Mexican officials were “between $9,600 and $30,000 each per year to influence their Copaxone prescription decisions. In 2012, Teva paid Mexican officials approximately $159,000.” The company generated over $16MM from sales of the drug in 2011 and 2012.
The DOJ Press Release noted the assistance of the Mexican Attorney General’s Office (Procuradura General de la República or PGR). There was no mention of assistance from either Russian or Ukrainian officials. Interestingly, the SEC Press Release cited the assistance of Financial Services Commission of the British Virgin Islands in developing the case. It was not apparent from the resolution documents as to the connection of the British Virgin Islands in this case. It may well be from a money-laundering angle.
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