In the FCPA enforcement world, corporate disclosures of potential violations carrying significant messages. Cubist Pharmaceuticals (Cubist) disclosed in a Form 10-Q that its subsidiary, which it acquired last year, Optimer Pharmaceuticals (Optimer) may have violated the FCPA in payments made to a research laboratory in 2011.

Cubist’s disclosure is another in the continuing saga of pharmaceutical and medical device companies that have long-suffered FCPA investigations and enforcement actions. The so-called “industry sweep” which is ongoing was the result of significant cooperation provided by many of the early victims of FCPA enforcement in the international pharmaceutical and medical device industries.

Foreign doctors and medical officials are invariably foreign officials under the FCPA because they work for the government. They also are seriously underpaid for the valuable work that they do. That is a recipe for disaster because they expect to be compensated in “unique” ways by global pharmaceutical and medical device companies. Foreign doctors and medical officials are demanding when it comes to medical conferences, research grants, clinical trials, and a host of traditional mechanisms for compensating doctors that have been shut down in the US domestic market.

The Cubist disclosure, however, is important because it represents one of the few times that payments made to a state-owned research laboratory, involving a grant, has been identified as a potential FCPA violation.

Pharmaceutical companies have been criticized for moving research and clinical trials from the United States to foreign locations. This move has been the subject of FDA and regulatory criticism. The reason for moving research and clinical trials overseas has been the lower cost and reduced regulation of running such programs.

From an FCPA perspective, foreign research grants create serious risks if the entity running the research program is a state-owned laboratory or clinic. That specific risk has been the subject of warnings from law firms, FCPA commentators and everyone in the FCPA space for years.

Cubist’s recent disclosure confirms what everyone was talking about – be careful who is conducting your research and running your clinical trials and carefully review any financial arrangements to make sure they pass muster under the FCPA.

Cubit’s disclosure is interesting because of a long and painful saga the company went through in assessing the impact of a potential FCPA violation.  When it acquired Optimer the FCPA violation was under investigation and was part of the overall valuation of the acquisition and risk involved in the transaction. Cubist acquired Optimer in October 2013 for approximately $550 million, and had taken into account the valuation of the potential FCPA violation.

Companies have to design and adopt acquisition due diligence policies and procedures. The risk of successor liability continues to plague the merger and acquisition process.  Here, Cubist was well aware of the issue but the acquisition and integration process has been hindered by the uncertainty surrounding the continuing investigation.

Cubist noted in its disclosure that “remedial” actions already have been taken. That is an important step to resolving any enforcement action, especially where a due diligence review failed to identify a potential FCPA problem.