Minimizing Export Control Risks in the Healthcare Industry with Exclusions Screening

Hospitals, like other entities in the healthcare industry, understand how stringent the U.S. government is when it comes to monitoring regulations. The penalties for not implementing proactive compliance testing, staff training, and proper due diligence policies are too great to ignore.

Export control examples include exclusions screening as required by the Office of the Inspector General (OIG), the General Services Administration (GSA), the Office of Foreign Assets Control (OFAC), the Bureau of Industry and Security (BIS), the Drug Enforcement Agency (DEA), and State Medicaid among others. Additional requirements include controls placed on the shipping of products and samples overseas and the sharing of technologies with foreign parties.

Hospitals often work internationally with broad connections that traverse borders. They might hire international staff, purchase supplies from third-party vendors, or work with foreign distributors to provide their medical services. It’s for these reasons why export control compliance requirements apply especially to their operations, including exclusions screening, and it makes sense for them to read up on medical compliance when it comes to exports.

The cost of non-compliance greatly overtakes the price of preventing it, and it goes beyond just monetary fines:

• Civil or criminal litigation.
• Loss of export privileges.
• Obligations to report to the U.S. Securities and Exchange Commission.
• Damaged reputation with clients and partners.
• Requirements to set up compliance measures immediately.

Penalties like these have been meted out before, and healthcare companies are on their toes over what they can do to minimize the risk of non-compliance.

This article will cover many of the risk areas involved in medical export controls, as well as more general institutional compliance topics related to GRC (governance, risk, and compliance). For the medical field, we’re talking about due diligence when working with third parties and collaborating with international entities.

The U.S. government places export controls on embargoed countries as well as excluded parties (also known as denied parties). While direct sales to these regions and entities is obviously banned, many medical manufacturers have found that even indirect sales can still cause legal issues.

For instance, making a sale to a sanctioned country through a third-party affiliate is prohibited, as evidenced in this 2016 case. BIS and OFAC fined the company over $9.4 million for several reasons:

• The company had a history of pharmaceutical violations in the past dating back to 2008.
• It executed unlicensed exports of surgical and other medical products to distributors located in Iran and Sudan, sanctioned countries.
• It had never solicited the export license from a governing agency before performing these actions.

In the OFAC report, the case was not helped by the company’s apparent lack of a compliance program, a fact that the government agency considered when deciding on the penalty. The takeaway here is that many of these problems can be mitigated just by implementing monitoring policies, due diligence procedures such as exclusions screening, and medical supply chain audits.

Clinical trials are a point of contention when it comes to staying compliant. This pattern is due to a few factors:

• Needed resources: The supplies and materials used in clinical trials can often be subject to export regulations, such as electronic devices, laboratory equipment, and encrypted data.
• International participation: Clinical trials often occur at multiple sites around the world, all with their own laws.
• Revenue generation: The need to raise sales is brought up often during the clinical trial phase, which can lead to violations of export sanctions in some instances.

If you outsource some parts of the clinical trial to third-parties, ensure that the prospective service providers you choose are not a denied party and that they have strong legal compliance postures beforehand.

It’s common for pharmaceutical corporations to acquire or merge with other healthcare firms. The acquirer in this case ultimately takes on the legal liabilities of the target business.

One case of note here occurred some years back involving a manufacturer of devices used in surgical procedures. The company in question had violated Iranian sanctions by doing business with the embargoed country before. The private equity firm that had purchased it subsequently found out the facts and reported the issue to OFAC, but a significant fine was still levied as a result.

So what’s the answer to preventing incidents like this? Due diligence certainly helps, but it can be complicated in international commerce, where indirect exports are common and often poorly documented and foreign trade controls are too complicated to understand comprehensively.

What you should do is perform supplemental due diligence checks after acquiring the target firm. Address any ongoing violations within the firm and request changes to its policy to enhance compliance. The U.S. government has been known to reduce penalties for businesses who show this proactive effort to improve their own compliance, and self-disclose.

For more comprehensive information about effective compliance in the healthcare industry, download our white paper or visit our Resource Center.

Healthcare and medical compliance relies on a holistic yet comprehensive approach to governance, risk, and compliance. Mitigating risk of non-compliance, for instance, requires you to be diligent at all steps of a transaction or business relationship.

Are you interested in automated features like exclusions screening, OFAC compliance auditing, and export classification to help you stay compliant? Get in touch with Descartes today to find out how our platform and its solutions can improve your compliance program.

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