Research paper
Pharmaceuticals Policy and Law 19 (2017) 17–31 17 DOI 10.3233/PPL-170451 IOS Press
The prevention and detection of corruption in pharmaceutical companies
Dominic Peltier-Rivest John Molson School of Business, Concordia University, Montréal (Québec), Canada Tel.: +1 514 848 2424; ext: 2778; E-mail: D.Peltier-Rivest@concordia.ca
This paper analyzesthree recent cases of pharmaceutical corruption and develops a governance frame- work, using the fraud diamond theory [7], for the prevention of corruption. Pharmaceutical companies rely heavily on marketing strategies to gain the loyalty of prescribing doctors and patients [32]. These aggressive marketing activities sometimes take an illegal twist by turning into corruption. In 2011, John- son & Johnson agreed to pay US$70 million to settle Department of Justice charges related to foreign bribery. This paper shows that the following strategies are effective at preventing pharmaceutical corrup- tion: Offering employee assistance programs and revising performance goals tied to sales or stock prices; using transformational leadership; offering and certifying employee training on key company policies and anti-bribery legislations; using open-door policies and anonymous reporting mechanisms; assessing corruption risks associated with doing business in the world’s poorest countries and contracting with third-party agents; implementing proper anti-corruption controls such as segregating the research funding function from the sales division; and detecting common corruption schemes, such as fictitious marketing agreements with off-shore entities and sham contracts with doctors, through the analysis of relevant red flags. This paper contributes to academia and the forensic accounting profession by discussing strategies and red flags analyses that should be implemented by pharmaceutical companies to prevent corruption. It extends previous research by tying together various strategies into a single framework for the preven- tion of pharmaceutical corruption. This framework will help deter pharmaceutical corruption and improve internal controls in this industry.
Keywords: Corruption, bribery, governance, compliance, risk management, fraud, prevention, detection, internal controls
1. Introduction
The pharmaceutical industry is in crisis due to the increased globalization, the lack of new products, the development of new therapeutic fields, the aging world popula- tion and the development of the generic drug market [32]. Pharmaceutical companies compete on the characteristics of their products and invest a significant amount of capital into research and development. In fact, the development and commercializa- tion of a new drug is estimated to take over 12 years and requires around US$1.3 bil- lion in capital [32]. Pharmaceutical companies also heavily rely on marketing activ- ities to gain the loyalty of prescribing doctors and patients [32]. These aggressive marketing activities sometimes take an illegal twist by turning into corruption. Past research has shown that physician interaction with pharmaceutical companies is as- sociated with increased drug prescriptions and changes in prescribing practices [34].
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18 D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies
For example, doctors are paid generous honoraria by pharmaceuticals to serve as speakers, consultants, developers of educational materials or members of their advi- sory boards [30]. These honoraria often create obligations towards pharmaceutical companies which conflict with the doctor’s obligations towards his patients [30].
The cost effectiveness of drug treatments has also become a major concern for most governments and private insurers who are struggling with rising health care costs and often recommending the prescription of generic equivalents. This ad- ditional pressure on pharmaceutical companies’ revenues also encourages corrupt practices [32].
Corruption has enormous economic consequences. Corruption increases the price of pharmaceutical products because the cost of bribes is usually added to prices by corrupt organizations. Corruption may also result in the manufacturing of lower quality products by organizations who obtain sales contracts fraudulently [9]. More precisely, corrupt sales and fraudulent marketing strategies may take precedence over sound medical decision-making and may lead to drugs being sold for unapproved and unsafe uses [23]. Corruption may also have a damaging effect for the corrupt organization itself, thus making its timely internal detection essential. Under the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA), the government can prosecute a pharmaceutical company even if it had no knowledge of corrupt payments, but failed to properly address potential red flags [31].
In April 2011, the U.S. Securities and Exchange Commission (SEC) filed a set- tlement with Johnson & Johnson to resolve charges for violations of the Foreign Corrupt Practices Act (FCPA). The SEC alleged that employees of Johnson & John- son’s subsidiaries paid bribes to public doctors and administrators in Greece, Poland and Romania to reward them for ordering or prescribing the company’s products (SEC litigation release #21922). Johnson & Johnson agreed to pay US$70 million to settle SEC charges and Department of Justice criminal charges.
The purpose of this paper is to analyze three recent cases of pharmaceutical cor- ruption and develop a governance framework, using the fraud diamond theory [7], for the prevention of corruption. This paper answers the following research ques- tion: Which strategies should be implemented by pharmaceutical companies to pre- vent corruption. This paper contributes to academia, the internal auditing and the forensic accounting professions by discussingstrategies and red flags analyses that should be implemented by pharmaceutical companies to preventand detect corrup- tion. It extends previous research by tying together various strategies into a single framework for the prevention of pharmaceutical corruption. This framework will help deter pharmaceutical corruption and improve internal controls in this industry. The timely detection and reporting of legal violations to the appropriate authorities demonstrate a pharmaceutical company’s willingness to correct its problems, which may be considered as a mitigating factor in determining penalties and sanctions [18].
This paper shows that the following strategies are effective at preventing phar- maceutical corruption: Offering employee assistance programs and revising perfor- mance goals tied to sales or stock prices; using transformational leadership; of- fering, monitoring and certifying employee training on key company policies and
D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies 19
anti-bribery legislations, such as the U.K. Bribery Act and the U.S. Foreign Cor- rupt Practices Act; using open-door policies and anonymous reporting mechanisms; identifying and assessing corruption risks related to doing business in the world’s poorest countries and contracting with third-party agents; implementing proper anti- corruption policies, such as separating the educational grant and research funding functions from the sales and marketing divisions; and detecting corruption schemes by analyzing proper red flags. Furthermore, this paper identifies the following com- mon pharmaceutical corruption schemes: Fictitious marketing agreements with off- shore entities, sham contracts with doctors, bribes paid through charitable donations, bribes paid through falsified expenses reports, bribes paid through slush funds, and bribes concealed through false journal entries.
The remainder of the paper is organized as follows. The pharmaceutical corrup- tion cases section reviews three recent cases of pharmaceutical corruption. The pre- vention of pharmaceutical corruption section analyzes various strategies for the pre- vention of corruption based on the fraud diamond theory [7]. The detection of phar- maceutical corruption section identifies common corruption schemes and explains which red flags pharmaceutical companies should be on the look-out for. Finally, the conclusions section summarizes the paper’s main findings.
2. Pharmaceutical corruption cases
The literature is abounding with cases of conflict of interest and corruption in the pharmaceutical industry. Even gifts of negligible value, given by pharmaceuti- cal companies, have been shown to influence the prescribing behaviour of physi- cians [6,13]. The literature shows that gifts and bribes not only change the pre- scribing behaviour of physicians, but they also lead to the prescription of unneeded drugs [15,34]. The three cases of pharmaceutical corruption described below clearly illustrate the extreme proportions that gift-giving and bribes can take as well as the substantial legal sanctions suffered by the corrupt organization itself. These cases are based on American federal civil lawsuit documents publically available on the U.S. SEC litigation website.
2.1. Case #1: Eli Lilly and company
Eli Lilly is a global pharmaceutical company founded in 1876 and headquartered in Indianapolis, USA. It employs approximately 39,000 people world-wide, conducts clinical research in more than 55 countries and has manufacturing plants located in 13 countries. It reported net sales of US$23 billion and a profit of US$4.6 billion in 2013 [16]. On December 20, 2012, the U.S. Securities and Exchange Commission (SEC) charged Eli Lilly with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China and Poland (SEC litigation
20 D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies
release #22576). Lilly’s Russian subsidiary paid millions of dollars to off-shore en- tities, despite knowing nothing about these entities beyond their addresses and bank account data, for alleged “marketing services” to induce pharmaceutical distributors and governmental entities to purchase Lilly’s drugs. These deals included US$2 mil- lion to an off-shore entity owned by a government official and US$5.2 million to off-shore entities owned by a person related to a member of Russia’s Parliament (SEC litigation release #22576). These off-shore entities rarely provided any service and were used to divert bribes to government officials to obtain new business for the subsidiary (SEC litigation release #22576). Furthermore, employees of Lilly’s Chinese subsidiary falsified expense reports to provide spa treatments, jewellery and cash payments to government-employed physicians (SEC litigation release #22576). Finally, Lilly’s Polish subsidiary made payments totalling US$39,000 to a charitable foundation that was administered by the head of one of the regional health agencies in exchange for the official’s recommendation to put Lilly’s drugs on the governmen- tal list (SEC litigation release #22576). Lilly agreed to pay US$29 million to settle all SEC charges.
The SEC civil action document reveals major internal control weaknesses at Lilly at the time. More precisely, Lilly’s internal controls failed to provide reasonable as- surance that the company maintained accountability for its assets, that its transactions were executed as per management’s authorization, and that its books and records were accurate (including its foreign subsidiaries’ accounts). Furthermore, Lilly did not properly verify intermediaries with which the company was doing government- related business. It relied solely on information provided by intermediaries in the paperwork, but did not engage in analyzing the surrounding circumstances of these transactions. Despite the knowledge that certain emerging markets carried a very high risk of corruption, Lilly’s audit department (in Indianapolis) did not design any specific procedure to assess the risk of bribery in its foreign subsidiaries’ sales de- partments. Transactions with government-related entities and those with off-shore entities did not receive any closer attention for possible anti-bribery law violations. Internal auditors relied mainly on the existence of the paperwork without assessing the surrounding circumstances and terms of these transactions. Finally, Lilly did not have an expanded anti-corruption training program throughout the organization.
2.2. Case #2: Pfizer Inc
Pfizer is a multinational pharmaceutical company founded in 1849 and headquar- tered in New-York, USA. It hires 77,700 employees world-wide and reported over US$51 billion in sales and US$22 billion in profits in 2013 [20]. On August 7, 2012, the U.S. Securities and Exchange Commission (SEC) filed a settled enforcement ac- tion against Pfizerfor violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia and Serbia bribed foreign doctors and public officials toincrease prescriptions and
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obtain regulatory approval for the company’s pharmaceutical products (SEC litiga- tion release #22438). Pfizer tried to conceal these bribes by improperly recording the transactions in its accounting records as legitimate expenses for promotional ac- tivities, marketing, training, travel and entertainment, clinical trials, conferences and advertising (SEC litigation release #22438). For example, Pfizer employees in Croa- tia created a bonus program for senior Croatian doctors employed by governmental health care institutions. Once a doctor agreed to prescribe Pfizer’s products, a per- centage of the value purchased by the doctor’s institution would be funnelled back to the doctor in the form of cash payments and international travel (SEC litigation release #22438). Pfizer agreed to pay US$26 million to settle the above SEC charges.
As per SEC’s legal document, Pfizer failed to design and implement an effective internal control system that would detect and prevent the above illegal payments. Pfizer and its subsidiaries also failed to accurately record the transactions associ- ated with the above inappropriate payments. These falsified journal entries were first recorded in the subsidiaries’ books and later consolidated in Pfizer’s accounts. Fur- thermore, Pfizer did not have global anti-corruption compliance policies and pro- cedures, specific anti-corruption internal auditing reviews and comprehensive anti- corruption training sessions throughout the organization.
2.3. Case #3: Johnson & Johnson
Johnson & Johnson was founded in 1886 and has its headquarters in New- Brunswick, USA. It operates in more than 60 countries and employs more than 128,000 people. In 2013, it reported more than US$71 billion in net sales and nearly US$14 billion in profits. Its adjusted profits have increased for the last 30 consec- utive years and its dividends for the last 51 years in a row (Johnson & Johnson, 2014). On April 8, 2011, the U.S. Securities and Exchange Commission (SEC) filed a settlement with Johnson & Johnson to resolve charges for violations of the Foreign Corrupt Practices Act (FCPA). The SEC alleged that employees of Johnson & John- son’s subsidiaries paid bribes to public doctors and administrators in Greece, Poland and Romania to reward them for prescribing or ordering the company’s products (SEC litigation release #21922). The bribery was carried out through a variety of schemes, including the use of slush funds, sham civil contracts with doctors and off- shore companies (SEC litigation release #21922). Johnson & Johnson agreed to pay US$70 million to settle SEC charges and Department of Justice criminal charges.
According to SEC’s civil action document, Johnson & Johnson failed to imple- ment proper internal controls to prevent and detect corruption. The bribery involved employees and managers at all company levels and fictitious documents were rou- tinely created to conceal it. Johnson and Johnson also failed to conduct due diligence on its foreign distributors. Finally, Johnson and Johnson, through its officers, agents and subsidiaries, failed to maintain records and accounts which accurately reflected its transactions and disposals of assets.
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3. Prevention of pharmaceutical corruption
Corruption is a key aspect of fraud, along with asset misappropriation and fraud- ulent financial statements. The ACFE [2] defines corruption as “an employee mis- using his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit”.1 Examples of cor- ruption include bribery, contractual bid-rigging, extortion and conflicts of interest. Transparency International [29] defines bribery as “the offering, promising, giving, accepting or soliciting of any advantage as an inducement for an action which is il- legal or a breach of trust”.2 This means that, under most legislation, just soliciting or promising to pay a bribe may be considered as an act of corruption. Moreover, under the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act, the government can prosecute a pharmaceutical company even if it had no knowledge of corrupt payments, but failed to properly address potential red flags [31]. These two Acts also contain internal control provisions that require companies to maintain robust internal controls and compliance policies to prevent bribery [35].
This paper uses the fraud diamond theory [7], which applies to both first-time (accidental) fraudsters and repeat (pathological) offenders, to analyze the preven- tion and detection of corruption schemes in the pharmaceutical industry. According to the fraud diamond theory, a financial pressure, an ethical rationalization and a pperceived opportunity are causal factors for accidental fraudsters, whereas a crim- inal mindset, arrogance and a perceived opportunity are contributing factors for re- peat offenders (who do not require a financial pressure and a rationalization when committing repetitive financial violations). Consequently, pharmaceutical companies should address the risk of corruption by implementing a prevention framework [19] that relieves financial pressures/criminal mindsets, improves personal ethics and re- duces perceived opportunities in all entities under the company’s jurisdiction (see Table 1).
3.1. Alleviate pressures
To alleviate financial pressures and fraudulent mentalities, pharmaceutical compa- nies should offer psychological employee assistance programs and regularly revise their employees ’compensation plans and performance goals. More precisely, con- fidential psychological assistance programs help employees resolve their personal problems before they become incentives to perpetrate corruption. Recent statistics show that businesses which offered employee assistance programs suffered fraud losses that were 44% smaller than other businesses [2].
1ACFE [2, p. 10]. 2Transparency International [29, p. 5].
D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies 23
Table 1 Pharmaceutical corruption’s prevention framework
Alleviate pressures Offer employee assistance programs
Revise unreachable performance goals tied to sales or stock prices
Improve ethics Use transformational leadership
Offer employee training and monitor through certification
Reduce perceived opportunities Use open-door policies and anonymous reporting mechanisms
Identify& assess global corruption risks Implement anti-corruption controls
Detect corruption schemes through red flag analyses
Revising compensation plans and performance benchmarks, as soon as justified by changing market conditions, also allows companies to remove potential corrup- tion incentives. Excessively large bonuses and expense accounts may send a signal to sales agents that the pharmaceutical company is encouraging sales through customer incentives and extravagant entertainment [18]. Furthermore, the pharmaceutical in- dustry faces strong incentives to manipulate sales and tamper with clinical test results because a failing drug often results in the loss of significant resources invested in re- search and development [21]. In fact, the development and commercialization of a new drug is estimated to take over 12 years and require around $1.3 billion in capi- tal [32]. Consequently, news of negative drug outcomes usually causes a significant decline in the market value of the pharmaceutical company’s stock [21]. Moreover, the cost effectiveness of drug treatments has become a major concern for most gov- ernments and private insurers who are struggling with rising health care costs and often recommending the prescription of generic equivalents. This additional pres- sure on pharmaceutical companies’ revenues encourages corrupt practices to boost sales [32]. Therefore, pharmaceutical companies should eliminate or revise unreach- able performance goals tied to unrealistic sales levels or stock prices.
3.2. Improve ethics
Pharmaceutical companies that actively promote ethics at work can make fraud stresses and guess their common rationalization that corruption is morally accept- able. Employees of companies that encourage ethical thinking generally experience greater cognitive dissonance about committing corruption [7]. Dishonest employees will eventually negatively influence a proportion of honest ones, but honest people also influence dishonest ones [28]. To promote ethical thinking, senior management must lead by example and adopt an ethical tone in all their communications and actions. However, for ethics to permeate all organizational levels, lower-level man- agers have an active role to play by using transformational leadership to promote the moral development of subordinates and the alignment of individual and organiza- tional interests [17]. The moral development and interest alignment of all employees
24 D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies
can be fostered by providing them with flexible goals and clear guidelines, commu- nicating openly, being sensitive to different work styles, encouraging teamwork, and promoting the diversity of perspectives and skills [12].
Furthermore, regular anti-fraud training increases fraud prevention awareness and makes organizational policies more accepted. It also alleviates the ethical rationaliza- tion that some employees use to morally justify corruption. Tracking and certifying employees’ understanding of key policies and important laws is an effective method to increase compliance [31]. Employees should be required to go through a minimum number of training hours per year as a condition for satisfactory performance review and continued employment [18]. Past research shows that organizations which of- fered employee anti-fraud training incurred fraud losses that were 36% smaller than other organizations [2].
Both the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act forbid the bribery of foreign public officials. These two Acts also contain internal control pro- visions that require companies to maintain robust internal controls and compliance policies to prevent bribery [35]. However, the U.K. Act goes further by forbidding facilitation payments (for routine non-discretionary actions)as well as general com- mercial bribery [35]. Even though the U.K. Serious Fraud Office has indicated in the past that “small one-time” facilitation payments would probably not be prosecuted as a matter of legal discretion [35], allowing facilitation payments sends the wrong message to employees who may find it difficult to distinguish them from outright bribes. Furthermore, research shows that facilitation payments are counterproduc- tive to efficient business management, lead to higher costs and more time spent with bureaucrats negotiating regulations and permits [14]. In the U.S., the Anti-Kickback Statute also criminalizes the payment by pharmaceutical companies of any incentive to encourage or reward the referral or generation of health care business [18,33]. Overall, any compensation, from a pharmaceutical company to a purchaser, which is explicitly or implicitly related to a sale (including post-sale discounts) maybe poten- tially considered as an illegal kickback or bribe [18]. Moreover, educational grants and research funding awarded conditionally, in whole or in part, on the purchase of products or referral of health services is a violation of anti-bribery legislations even if the purpose for the educational or research program is legitimate [18].
In addition to anti-bribery laws, training programs should also explain how em- ployees may use the company’s anonymous reporting program and describe the rel- evant legal protections for whistleblowers. The company’s code of ethics and the relevant professional associations’ codes should be covered as well. For example, the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Eu- ropean Federation of Pharmaceutical Industries and Associations (EFPIA) both de- veloped their own codes of ethics which forbid deceptive practices and outright gifts and bribesto healthcare professionals [33]. However, these self-regulating ethics codes are only meaningful if they are actively enforced by pharmaceutical compa- nies [30]. Furthermore, these codes generally allow pharmaceutical companies to
D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies 25
provide health care professionals with hospitality during promotional and scien- tific events and to hire them as consultants under various roles such as speakers, researchers and members of advisory boards [8].
3.3. Reduce perceived opportunities
To reduce perceived opportunities, pharmaceutical organizations must create work environments that deter employees from committing corruption by increasing the perception of detection. In other words, corrupt employees must be afraid of getting caught. Past research shows that an increased perception of detection is inversely related to deviant behaviour [10]. Therefore, implementing open-door policies and anonymous reporting mechanisms, corruptionr isk management programs, targeted policies and red flag analyses are all effective mechanisms to reduce employees’ perceived corruption opportunities.
To prevent and detect corruption, pharmaceutical companies should use the mon- itoring abilities of their employees and external stakeholders [5]. Employees should be able to report the problems they encounter or observe [18]. Supervisors should serve as the first line of communication to foster dialogue and encourage an open- door policy [18]. However, anonymous reporting mechanisms should also be avail- able to employees, customers and suppliers who may want to anonymously report irregular activities and possible corrupt actions. Anonymous reporting mechanisms are mandatory for companies listed on stock exchanges in the U.S. and Canada, but they should also be implemented in other private pharmaceutical organizations. In fact, 54.1% of all corruption cases are detected through a tip, which is by far the most effective detection method [2].
Pharmaceutical companies should also implement global compliance risk man- agement programs which consist in identifying, analyzing and assessing the likeli- hood of corruption, and its potential loss significance, as well as in implementing targeted internal controls designed to prevent and detect corruption in all business activities/entities under the company’s jurisdiction. These compliance risk programs should be developed in light of organizational objectives, regulatory and legal re- quirements, and the overall pharmaceutical operating environment [7]. The under- standing of local culture (and applicable legislation) should not be left to subsidiaries alone, but it should be part of a global assessment of risk factors by the parent orga- nization.
Several corruption risks face the pharmaceutical industry. For example, pharma- ceutical companies increasingly operate in the world’s poorest countries which usu- ally lack the necessary policies and controls to prevent corruption [31]. Moreover, foreign health care professionals are often governmental employees and are consid- ered as “public officials” as per the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act [31]. Pharmaceutical companies also heavily subsidize independent re- searchers for conducting clinical research and third-party agents for marketing new
26 D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies
products through conferences and promotional meetings [31]. In fact, pharmaceuti- cal companies fund roughly 60% of all biomedical research, 70% of clinical trials and 50% of the costs of continuing medical education programs [33]. Furthermore, the large interaction between the pharmaceutical industry and governments, through- out the life cycle of medical products, is considered to be an additional risk of corrup- tion [30]. For example, governments in every country where the treatment is planned to be used must approve the drug before and after clinical trial tests, which increases the chances that local officials demand “fees” in exchange for their approvals [30]. Pharmaceutical companies should regularly analyze the above risks and appropri- ate internal policies and controls should be implemented in every business segment where the likelihood of corruption and its potential financial impact are deemed to be high.
Pharmaceutical companies should create specific policies and implement controls to govern independent researchers, third-party agents, and sales representatives who may be tempted to pay bribes on behalf of the company [31]. Companies should reg- ularly monitor their current and prospective agents using contractual right-to-audit clauses and background reviews. Third-party agents should be required to imple- ment their own anti-corruption measures and maintain accurate accounting records. Furthermore, a right-of-termination clause should be included in agents’ contracts in case one of them is found to have paid bribes or violated the pharmaceutical com- pany’s policies [29]. Offering any hospitality, consultation contract, research contract and speaker’s honorarium to practicing physicians should be forbidden to prevent such conflicts of interest from turning into corruption [30]. Finally, pharmaceutical companies should separate their educational grant and research funding functions from their sales and marketing divisions to prevent any improper use of funding as an incentive to boost sales [18].
4. Detection of pharmaceutical corruption
The timely detection and reporting of legal violations to the appropriate authorities demonstrate a pharmaceutical company’s willingness to correct its problems, which may be considered as a mitigating factor in determining penalties and sanctions [18]. Timely detection also deters future acts of corruption by reducing employees’ per- ceived opportunities. Based on the three cases of pharmaceutical corruption analyzed in the second section of this paper, common corruption schemes have been identi- fied below. These schemes usually leave some traces (red flags or patterns) in the pharmaceutical company’s records. Since these red flags may be indicative of cor- ruption, they must be investigated to find the actual reason(s) behind them. To detect the payment of bribes in the pharmaceutical company’s records, the following red flags should be analyzed by internal auditors, forensic accountants or independent managers.
D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies 27
4.1. How to detect fictitious marketing agreements with off-shore entities
As in the Eli Lilly case, corrupt payments may be made through off-shore entities for alleged “marketing services” to encourage pharmaceutical distributors and gov- ernmental officials to purchase the pharmaceutical company’s drugs. To detect these bribes:
– Investigate all marketing agreements with unknown or unapproved entities. – Investigate all marketing agreements without support documents, such as an
approved service request (or purchase order) from the pharmaceutical company and an approved invoice from the marketing firm.
– Investigate all marketing expense invoices that show anomalies, such as a lack of details, signs of alteration, little or no online presence for the entity, similar addresses for different entities, consecutive invoice numbers, a drop box as a business address [3].
– Investigate all marketing expenses that fall into an abnormal pattern, such as expenses that represent a fixed percentage of a unit’s sales and expenses for round amounts [35].
– Investigate all payments made to bank accounts located in tax haven countries.
4.2. How to detect sham contracts with doctors
As in the Johnson & Johnson case, improper payments may be made through fictitious contracts with doctors to reward them for prescribing the pharmaceutical company’s products. To uncover these bribes:
– Investigate all consulting, educational and research agreements with doctors or unknown individuals.
– Investigate all agreements without support documents, such as an approved ser- vice request (or purchase order) from the pharmaceutical company and an ap- proved invoice from the doctor.
– Investigate all consulting, educational or research expense invoices that show anomalies, such as a lack of details and signs of alteration.
– Investigate all consulting, educational or research expenses that fall into an ab- normal pattern, such as expenses that represent a fixed percentage of a unit’s sales and expenses for round amounts [35].
– Investigate all consulting, educational or research agreements initiated or ap- proved by the pharmaceutical company’s marketing or sales department [18].
– Investigate all payments made to bank accounts located in tax haven countries.
4.3. How to detect bribes through charitable donations
As in the Eli Lilly case, corrupt payments may be made through charitable dona- tions to foundations administered by health professionals or governmental officials in exchange for their recommendations to purchase the pharmaceutical company’s drugs. To detect these bribes:
28 D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies
– Investigate all charitable donations made to unknown or unapproved entities. – Investigate all charitable donations to organizations that have doctors or gov-
ernmental officials serving on their board of directors. – Investigate all charitable donations without support documents, such as an ap-
proved payment request from the pharmaceutical company and a legitimate re- ceipt from the charitable organization.
– Investigate all charitable donation receipts that show anomalies, such as signs of alteration, similar addresses for different organizations, consecutive receipt numbers, a drop as a business address [3].
– Investigate all payments made to bank accounts located in tax haven countries.
4.4. How to detect bribes through falsified expense reports and international travel expense
As in the Eli Lilly and Pfizer cases, corrupt payments may be made through fraudulent expense reimbursement reports to obtain more business from government- employed physicians. To uncover these bribes:
– Investigate all expense reports submitted by unknown individuals and non- employees.
– Investigate all expense reports without support documents, such as legitimate receipts and paid invoices.
– Investigate all international travel expense reports without legitimate boarding passes from air carriers.
– Investigate all submitted receipts and invoices that show anomalies, such as a lack of details, signs of alteration, similar addresses for different organizations, consecutive invoice or receipt numbers, round amounts, a drop box as a business address [3].
4.5. How to detect bribes paid through slush funds
As in the Johnson & Johnson case, bribes may be paid to various health profes- sionals through slush funds. Slush funds are non-company accounts, or sources of illicit cash, used to divert money or pay bribes. To uncover these bribes:
– Investigate all payments made to unknown people, terminated employees, or retired employees (i.e., ghosts) listed on the payroll.
– Investigate all payments made to unknown or unapproved entities listed in ac- counts payable.
– Investigate all unjustified or undocumented payments made to known vendors. – Investigate all vendor invoices with the notation “extra charges” or “special
charges” [3]. – Investigate all payments made for an amount larger than that shown on the
vendor’s invoice or the amount on the pharmaceutical company’s purchase or- der [3].
D. Peltier-Rivest / The prevention and detection of corruption in pharmaceutical companies 29
– Investigate all unjustified or undocumented payments made to employees. – Investigate all payroll expenses without tax or social benefit withholdings [3]. – Investigate all payments traced to a cheque showing two endorsements [3]. – Investigate all unexplained, and large, cash disbursements and cheques made
payable to cash [3]. – Investigate all payments that fall into an abnormal pattern, such as payments for
a fixed percentage of a unit’s sales and payments for round amounts [35]. – Investigate all signs of unrecorded or skimmed sales (e.g., large inventory
losses, larger than usual cost of sales/sales ratio) [3].
4.6. How to detect bribes concealed through false journal entries
As in the Pfizer case, corrupt payments made to doctors and public officials may be concealed in the pharmaceutical company’s records through false journal entries. To expose these bribes:
– Investigate all journal entries that cannot be traced to support documents or legitimate invoices, especially those occurring at the end of the month/quarter/ year.
– Investigate all journal entries with the following code words in accounting records or in support documents: Incentive payment, goodwill payment, con- sulting fee, donation, commission payment, processing fee, team-building ex- pense, tea money, tipping money, facilitation payment, after-sales fee [1].
5. Conclusions
The ultimate goal of pharmaceutical companies is to discover and commercialize safe drugs that improve patients’ health conditions and save lives, while making profits to reward shareholders and reinvest in medical research [27]. However, the quest for profits has become obsessive in some cases, leading to the use of unethical and corrupt practices. Pharmaceutical corruption affects everyone through higher prescription drug prices, unapproved therapies and unsafe drugs [22]. Corruption also reduces public confidence in the health care system, undermines the judgment of health care professionals and puts the safety of patients at risk [22].
To prevent and detect pharmaceutical corruption, this paper introduces a gover- nance framework consisting of the following strategies: Offering employee assis- tance programs and revising performance goals tied to sales or stock prices; using transformational leadership; offering, monitoring and certifying employee training on key company policies and anti-bribery legislations; using open-door policies and anonymous reporting mechanisms; assessing corruption risks associated with doing business in the world’s poorest countries and contracting with third-party agents; im- plementing proper anti-corruption controls, such as segregating the educational grant and research funding functions from the sales and marketing divisions; and detecting
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common corruption schemes, such as fictitious marketing agreements with off-shore entities and sham contracts with doctors, through the analysis of relevant red flags.
Pharmaceutical companies compete on the characteristics of their products and invest a significant amount of capital into research and development. The crisis that the pharmaceutical industry is currently undergoing is caused in part by the increased globalization, the aging world population and the development of the generic drug market [32]. However, corruption, increased legal costs and stiff legal settlements also contribute to the crisis for pharmaceutical companies that don’t prevent and de- tect corruption before it reaches the proportions witnessed in the Eli Lilly, Pfizer, and Johnson & Johnson cases. Pharmaceutical companies cannot assume that all of their foreign subsidiaries will abide by their internal policies. Pharmaceutical companies that decide to exercise greater monitoring and adopt the prevention framework de- veloped in this paper will gain a definite advantage over their competitors.
Acknowledgments
The author thanks the participants of the 2015 Irish Accounting & Finance Associ- ation (IAFA) Conference and the 2015 European Network for Research in Organiza- tional and Accounting Change (ENROAC) Conference for their helpful comments.
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