Compliance lessons for JVs from Bristol-Myers FCPA settlement
Bristol-Myers Squibb (BMS) recently settled Foreign Corrupt Practices Act (FCPA) charges with the SEC for $14 million. The settlement resolved charges of bribery and related conduct committed by people at its majority-owned Chinese joint venture (JV). To understand the special challenges companies face in ensuring compliance at JVs, Corporate Secretary spoke with David Resnicoff, a partner in Miller & Chevalier’s FCPA practice, who was previously Associate General Counsel and Vice President, Ethics & Compliance at Baxter International from 2006 to 2011.
Corporate Secretary: BMS is a major company, and surely has a robust compliance program as a general matter. How can a sophisticated parent company apply its compliance structure to its majority-owned JVs?
David Resnicoff: Ensuring strong JV anti-corruption compliance programs for majority-owned JV's starts with strong compliance provisions in the JV agreements. These would include requirements to establish – with the participation of the majority JV partner -- the basic features of an anti-corruption program tailored to the nature, risk and scale of the JV, and including governance, policies, training, auditing and monitoring, and personnel practices. Audit rights, along with mandatory and real-time notice to the majority owner of any allegations of misconduct, are critical.
The greater the alignment between the JV partners on this from the get-go, the more integrated the JV compliance program. Typical features of a healthy relationship between the majority owner and the JV would be regular operational reviews of the compliance program, ad-hoc communication between JV management and compliance personnel and the majority owner on compliance issues as they arise, and auditing or assessments of the anti-corruption compliance program and controls.
CS: Would companies facing this challenge benefit from adding any particular experience on their boards?
DR: Most boards include members with substantial international experience usually including some experience with emerging markets. I think they understand the risk. What can be particularly effective is a board member with experience or familiarity with managing or operating an international compliance program to take the lead on exercising compliance oversight, much like deep audit experience can create a constructive relationship with Internal Audit.
CS: If BMS had been a 49 percent owner of the JV, would it have been on the hook for the penalties? To what extent does your advice relating to JV compliance programs apply when the JV partner is not a majority owner?
DR: Where JV ownership is 50 percent or less, the FCPA specifically requires that issuers proceed in good faith to use their influence, to the extent reasonable under the issuer's circumstances, to devise and maintain a system of internal accounting controls as defined in the statute.
This means a system of internal accounting controls providing ‘reasonable assurances’ that (i) transactions are authorized; (ii) transactions are recorded to allow for preparation of financial statements in conformance with GAAP or other applicable accounting principles, and for accountability of assets; (iii) access to assets is permitted only upon general or specific management authorization; and (iv) recorded assets and existing assets are compared at regular intervals and any differences are resolved.
The government will ultimately apply a two-part test as to whether the minority owner has exercised good faith: the degree of formal ownership – to likely include examination of actual operational control -- and the laws and customs of the country in which the JV is located. A demonstrable good faith effort creates a conclusive presumption that the requirements of the statute have been met. Where the SEC perceives that standard has not been met, it can assert liability. Of course, the degree of participation in or even constructive knowledge of potentially improper payments by the issuer would factor heavily in prosecutorial decision-making.
CS: The BMS JV was doing business in China. Is there anything special about China, from an FCPA compliance perspective?
DR: It is no secret that China is an exceedingly unique and challenging environment from a corruption standpoint. There is of course the cultural component of a relationship-driven society and economy. An additional substantial challenge is the sheer scale and diversity of the country geographically, demographically, and economically, with scores of densely populated urban areas, and vast rural areas spread over thousands of square miles. Add multiple layers of regulatory bureaucracy, and hundreds, if not thousands of sales reps selling to thousands of physicians, pharmacies and hospitals, and companies are faced with a real logistical challenge in terms of control.
That said, over the past decade, the number of in-house Chinese lawyers, compliance professionals and finance personnel who understand this environment has grown, and they can be terrific assets on a team designing and implementing effective compliance and financial controls tailored to the particular business at issue.
CS: You mentioned the pharmaceutical sales force as adding complexity to compliance. Can you elaborate?
DR: Healthcare is different than many other industries in the sense that it generally does not involve large tenders for multi-year projects, as with defense contracting or the extractives, though there are exceptions to that rule. While those industries have their own particular challenges, in pharma, the opportunity for corruption arises virtually every day for every sales rep in every interaction with a healthcare professional. In a sprawling market like China, the challenge is obvious.
However, the pharma and med device industries have shown that they are able to address similar risks in a similarly large and complex market here in the United States. With the same sort of focus, ingenuity and resources, China is not an insolvable puzzle. While it is impossible to reduce risk to zero, at the least companies can build a record of appropriate efforts to control the operations of their employees and their JV partners and substantially reduce the probability of a systemic corruption issue emerging.