Eight years ago, I was interviewing executives of a prospective Chinese distributor for my employer, a publicly-traded medical device company based in California.
“We understand that it is hard to do business in China without paying kickbacks to physicians and hospital administrators” I observed. “How do you handle this?”
Without hesitating, one of the executives replied. “We use subagents.”
Needless to say, my company engaged a different distributor. But we did so in the face of a serious challenge: how do you talk seriously with distributors about compliance, and how can you expect them to respond?
A lot has changed in eight years. Within a few years after the interview mentioned above, several large device manufacturers had announced settlements with the U.S. authorities under the Foreign Corrupt Practices Act, involving allegations that the manufacturers used distributors and other intermediaries to funnel improper payments to government officials. Around the same time, a medical device marketing executive was prosecuted in the United Kingdom for authorizing payments to distributors that were used to provide cash and other benefits to Greek physicians. And the Chinese government cracked down on corruption in the pharmaceutical sector, accusing companies of making improper payments to physicians through travel agents and conference organizers.
In light of enforcement trends, compliance officers around the world are beefing up safeguards against corruption by third party intermediaries. For many, the task has been daunting. A large company may have hundreds or even thousands of distributors and sales agents around the world; in some cases just identifying them and implementing written contracts has been a massive undertaking. Small companies have fewer intermediaries, but also have fewer resources for managing their overseas agents and distributors.
So where are we today? The task remains monumental, but companies now have much more guidance available. The US Department of Justice and the UK Ministry of Justice have both released anticorruption guidance documents that provide high-level guidance on screening of distributors and agents. For the medical technology industry, Eucomed and AdvaMed have developed joint guidance for third party sales and marketing intermediary (SMI) relationships and additional tools for educating SMIs.
Slowly but surely, a new normal has emerged. Many companies now screen proposed SMIs with background checks and anticorruption questionnaires, train SMI personnel on compliance, and require them to certify to their compliance with company policies. Contracts contain robust anticorruption clauses and audit rights. And many companies are conducting risk assessments to determine where and how to focus their screening, training, monitoring and auditing resources.
These efforts are paying off in lower corruption risk, and increasing awareness among distributors and sales agents.
About a year ago, I conducted in-person training for a client whose distributor representatives had flown in to company headquarters from all around the world. I was amazed by the attentiveness of the group, and the sophistication of their questions. Most of them seemed to have a firm understanding of basic anticorruption principles, and appropriate ways to interact with health care providers. More importantly, they wanted to know more, because they understood that compliance was key to their success as business partners.
There are still plenty of thorny problems and open questions. Here are a few:
- Which intermediaries should be subject to companies’ SMI policies and procedures? Distributors and sales agents only? All intermediaries involved in sales and marketing activities? What about other third parties, such as attorneys and regulatory consultants?
- Can you always take questionnaire answers at face value? When should you look deeper? How should you handle agents that provide incomplete answers to questionnaires, or refuse to answer sensitive questions on privacy or business secrecy grounds?
- Who should you train? All SMI personnel, or just select employees?
- Should you require SMI’s to follow your company’s policy, or rely on their own?
- How do you handle screening, training and auditing of agents in countries where your company has no personnel or resources?
- And my personal favorite: how do you handle subagents?
The fact that people are asking these nuanced questions shows just how far our industry has come in a short period of time. And that’s thanks in large part to the joint efforts of MedTech Europe and AdvaMed.
Managing SMI relationships features prominently in the agenda for this year’s Global Medical Technology Compliance Conference in Athens May 19-21, 2015. I hope you’ll come and join the discussion!
-Carolyn M. Bruguera, General Counsel and Vice President of Consulting Services, R-Squared Services and Solutions, Inc.