Complex distribution networks, varied pricing and powerful customers make the pharmaceutical industry particularly vulnerable to fraud and corruption. Nigel Layton, Partner and Head of Healthcare & Life Sciences, and Darya Oglezneva, Director, at Mazars pose the question: what are the specific threats and how can organisations best address them?
Pharmaceutical companies supply hugely important products all around the world to many different kinds of client, from small pharmacies to government health departments.
To serve such a diverse and far-flung customer base, these companies often rely on a complicated chain of distributors: primary distributors may transfer a product to secondary distributors — who may transfer it to yet further distributors — before it ends up with the retailer or hospital that finally supplies it to the end user.
All these links in the chain make it difficult to keep control and track sales processes. And this difficulty in maintaining oversight — along with other inbuilt characteristics of the pharmaceutical trade — creates a high risk of corrupt activity of different kinds.
Product diversion schemes
One common type of criminal activity in pharmaceutical distribution chains is product diversion. This type of fraud exploits the fact that pharmaceuticals may have very different prices for different customers: if a product ostensibly sold to one buyer is diverted to another who will pay more, those making the sale can pocket the difference. This fraud comes in a number of different forms.
Ordering more products than requested: If a distributor has a customer with a high level of discount, such as a government buyer, the distributor can increase an order placed by that customer and sell on the extra product at the market rate. In some cases, the whole initial contract could be fake with no order having been placed.
Moving products across borders: Because of currency fluctuations and the limits placed on drug prices by some governments, it may be possible to get a lot more money for a pharmaceutical in one country than another. So, it can be extremely lucrative to buy a product and illegally ship it across a border to sell on.
Selling products never meant for sale: Pharmaceuticals are often supplied at no cost at all — whether as a charitable donation or a sample to secure future sales. These unpaid-for goods can often end up on the market.
A related crime is organised theft. Thefts can be done, for example, from trucks or warehouses with the collusion of employees. Thefts also occur at hospitals, which often hold stocks of high-value pharmaceuticals and have weak access controls, enabling unscrupulous employees to steal items and sell them on the side.
Bribery of officials
Another characteristic that makes the sector vulnerable to bribery and corruption is that a large proportion of its sales are either made to or require the approval of governments and state-owned entities. Because of this, distributors may be tempted to pay bribes to secure big contracts. To disguise such bribes, distributors will sometimes pay them as donations to a charity connected to the official being paid off.
Alternatively, distributors may hide bribes by describing them in the books as a religious payment. Religious payments are considered to be customary in some regions and may even be a legal requirement. As a result, they often receive little scrutiny when authorisation is sought, and so can be an effective cover for illegal payments.
Payments to retailers
It’s not just payments to government officials that need careful scrutiny. Payments are often made to pharmacies and retailers to help promote products in legal ways, such as by ensuring they are placed at eye level or are given price labels in a different colour to help attract customers.
There are problems with such services, however; their fair market value is difficult to determine. Plus, it’s not easy to confirm whether the service paid for was ever delivered, especially after the end of a particular promotional campaign.
Another problem is that payments made for legitimate promotional activities can be channelled into other efforts, such as paying incentives to sales staff to push certain products, which is illegal in many jurisdictions.
Tackling corruption in pharmaceuticals
Much anticorruption legislation — such as the UK Bribery Act 2010, the US Foreign Corrupt Practices Act and France’s Sapin II law — has been designed to make organisations take responsibility for the conduct of their overseas networks.
There are obvious steps that businesses can take to ensure compliance and reduce crime: for example, running detailed background and integrity checks on distributors and commissioning third-party audits.
Beyond these, this is one area where technology is increasingly playing a part, with artificial intelligence (AI) now being harnessed, for example, to help scrutinise due diligence checks. But vital for companies in this sector — and just as important as any new technology — is a high level of vigilance and scepticism … and a keen awareness of the risks.