Companies must start tackling fraud in life sciences now … or face huge consequences when the new law takes effect in September, says Trevor Francis, Serious Fraud Partner at Blackfords LLP.
The global life sciences sector is famously notorious for falling foul to corruption. 2016 saw Transparency International, the NGO dedicated to ending the injustices of corruption, publish a report identifying the pharmaceuticals industry as a sub-sector particularly vulnerable to economic crime.
It highlighted areas including bribery and corruption, sanctions violations, money laundering, tax evasion, fraud as being particularly prevalent areas that needed addressing.
Nearly a decade on from the findings, the UK government is still seeking to find ways to tackle these crimes. With fraud the most common type of financial crime in the UK, the government launched the Counter Fraud Functional Strategy 2024-2027 which focuses on fraud against the public sector, as well as the Economic Crime Plan (2023-2026) and Fraud Strategy which look at establishing actions for both public and private sector parties.
‘Covid-Fraud’ became headline news during the pandemic with the public up in arms as they became aware of the ease at which fraud could be carried out with little to no accountability. The Cross-Government Fraud Landscape Annual Report 2022 highlighted that in 2020-21 alone government departments, and connected bodies, reported a £124.6 million of detected fraud. In a bid to tackle this, the Economic Crime and Corporate Transparency Act 2023 (ECCTA) has been introduced.
The ECCTA aims to deliver reforms on tackling economic crime and improving transparency over corporate entities.
This has allowed the UK government to move faster when imposing sanctions, as well as creating a register of overseas entities and reforming the unexplained wealth order (an important legal tool in the UK that compels individuals to explain the source of their wealth when there are reasonable grounds to suspect that it has been obtained through illegal means).
The Act introduces the corporate criminal offence of Failure to Prevent Fraud which applies to all large-incorporated bodies, subsidiaries, and partnerships; large not-for-profit organisations; and incorporated public bodies. As ‘large organisation’ is defined by meeting two of the following criteria: (1) a turnover of more that £36m, (2) a balance sheet of more than £18m (3) more than 250 employees, the pharmaceutical industry will likely be affected across the board.
Coming into force in September 2025, the offence of Failure to Prevent Fraud will mean that a relevant body may be guilty of an offence if an employee, agent, subsidiary or associated person commits a fraud offence intending to benefit the relevant body or person to which it provides a service i.e. paying a bribe.
Marking a clear shift from individual liability and responsibility, this legislation will require big pharma to implement robust fraud prevention procedures and ensure that all subsidiaries, senior executives and board members demonstrate a strong commitment to tackling fraud.
Failure to do so could mean prosecution whereby the onus will be on the organisation to prove, on the balance of probabilities, that reasonable procedures had been in place, or that there was not a reasonable expectation at the time to have them in place.
The ECCTA will no doubt make it much easier for regulators to prosecute companies and their officers for the actions of their employees or third-party contractors.
Fines for breaching the legislation are unlimited and could prove very costly indeed for big pharma. The legislation does provide for prevention procedures that were introduced by the Government in 2023 as a framework of six principles that should be adopted to avoid criminal liability, these are:
- Top level commitment
- Risk assessment
- Proportionate risk-based prevention procedures
- Due diligence
- Communication (including training)
- Monitoring and review
Organisations should be mindful to go even further in strengthening their current internal governance, anti-fraud training, whistleblower protections, internal audits and use of third parties for due diligence.
Any investigation or proceeding under the Act will very likely attract a raft of negative press attention which will spook investors, health care providers and patients themselves. Any suggestion of misleading clinical results, false advertising, or bribery to achieve medical approvals would clearly create massive negative publicity, ruin consumer trust and inevitably hit profits.
This reputational damage could harm the company in irretrievable ways even if ultimately found not to have breached any law. Public relations management from day one of any investigation would be of the upmost importance, as would strong legal representation both of which would be added short term expenses but could save the company millions in the long run.
Though relatively new legislation, and still in the process of having various elements rolled out over the next couple of years, there will be no excuses for not implementing change ahead of the deadlines.
Any adverse involvement could, and most probably would, pull in other regulatory bodies such as the Medicines and Healthcare products Regulatory Agency and/or the Financial Conduct Authority depending on the offence being investigated.
The impending implementation of the Failure to Prevent Fraud Offence, alongside the broadening of corporate criminal liability, highlight the necessity of assessing exposure to fraud and other economic crime.
We would urge everyone in the life sciences sector, and beyond, to ensure that they carry out enhanced due to diligence and evaluate who is performing services on their behalf with the potential of exposing the company to unwanted risk and investigation before it is too late.
