As evidenced by several important export control enforcement cases in the sector during the past few years, the consequences of non-compliance at stake are significant, including loss of export privileges, heavy fines and even prison sentences. More importantly, the media seizes stories of actual or alleged “export scandals” which draws critical public attention and may significantly affect the company’s reputation.

The ‘blind spot’ or being fined millions for excessive optimism

The life science and healthcare industry operates in one of the most highly regulated environments. Nowadays, LSHC organisations of all sizes deal with a complex and changing set of global, regional, country, and industry-specific laws and directives that span a drug or device’s developmental and commercial lifecycle.

As an example, one may think of product specific restrictions on the movement of controlled substances such as narcotics, psychotropics, biologics, precursors and the like. Depending on the concerned product and its related rules and regulations, generic and/or transaction based license requirements may apply when these products are being imported, exported or even in transit.

However, one of the important international trade considerations affecting the LSHC sector often remains overlooked: export controls and trade sanctions.

During the past few years, we have witnessed an increase of export controls enforcement cases targeting LSHC companies active across the MedTech, BioTech and Pharma sectors. Authorities all over the world are committed to raising awareness about security risks and sanction obligations. Recent international tensions and the reinforcement of sanction regimes, the scope of which already includes life science and healthcare, additionally highlight the importance of considering export controls obligations.

The legal consequences of non-compliance can be substantial, including significant fines, loss of export privileges or even prison sentences.  Sanction scandals draw critical public attention, harming a company’s reputation. Beyond what is at stake for companies, non-compliance can cause significant harm to society: export control violations can endanger international security and risk people’s lives.

The legal consequences of non-compliance can be substantial, including significant fines, loss of export privileges or even prison sentences.

A few years ago, a MedTech Company made a settlement of almost USD 8 million with the US trade sanctions enforcement authority - The Office of Foreign Assets Control (OFAC). All of the company’s activities are not unusual for the LSHC sector: their efforts and products are focused on improving medical care, striving for innovation while putting patient centricity at the core of their business model, including delivery to sensitive countries or bringing highly needed solutions to markets and patients in need. From a trade sanctions perspective, the company did not conduct any business that should be considered very sensitive regarding national security or foreign policy: the activities can otherwise be licensed.

The company had to settle for USD 8 million, as they could not prove to the authorities that the lack of major sanction violations was due to anything beyond luck. The substantial sanction amount is due to the company not having sufficient and adequate prevention mechanisms in place and is not purely a consequence of past violations. The authorities expect companies to demonstrate that they have the necessary level of awareness on potential risks and adequate controls are set in place.  

Every LSHC company should think about the following elements:

Business in sensitive countries: morally obliged and legally limited

One of the sector’s biggest challenges is that the life science industry operates in many sensitive destinations, subject to strict trade sanctions. This is of course a natural market position, as the LSHC industry has important social responsibilities that go beyond regular commercial considerations.

Conducting business in sensitive regions (e.g. Crimea, Iran, Syria, Sudan, Cuba) would require close attention to a diverse range of restrictions, exclusions, financial limitations, restricted products and services, pre-approval licensing requirements, etc. Even when business activities would in fact be allowed in these areas, different financial restrictions remain applicable and should be considered separately. LSHC companies are then obliged to acquire deep knowledge of sanction requirements and continuously pay special attention to details, to avoid crossing the thin line between “allowed” and “forbidden” business. This exercised scrutiny is what the company in the above example could not prove.

To add an additional layer of complexity, business activities in the LSHC industry may be affected by more than one country jurisdiction. For instance, a life science company may be obligated to comply with both EU and US export controls for the same transaction. This is because US rules have extra-territorial applicability and extend to cover US persons, goods, technology and companies, wherever located.

Despite the efforts required to comply, LSHC companies cannot afford to withdraw from business in sensitive regions in order to protect their reputation. Society, represented by the media and human rights organisations, pays special attention to sensitive regions and will often hold businesses accountable for a shortage of medical supplies and needed equipment.

Do not negotiate with terrorists

Typically, LSHC companies do not perceive a real risk of encountering issues with blacklisted entities in their legitimate business: it seems unlikely that terrorist or criminal organisations would be active in the sector. However, sanctions are imposed on people, companies, organisations, banks or even vessels, and are not limited to lists of the most dangerous individuals. For example, a LSHC company cooperates with a large foreign research institute for the development of new medical technology. The research institute, although well known, can still be a listed entity with whom different business activities are restricted. The argumentation for this could be that authorities want to monitor and control any business with this entity, because they have reasons to believe it is involved in prohibited military research. Unfortunately, such information is often difficult to find through a basic web search, yet companies are required to comply with the limitations.

Within the sector, sanctioned entities can be both subcontractors, brokers, carriers and (most often) banks. Dealing with any sanctioned entities might bring considerable fallout, from a legal or reputational perspective.

With the ever-increasing lists of sanctioned entities, sanctioned party list screening is an obligatory element for trade compliance. Currently, LSHC companies are operating in a smaller and highly connected world, where patients and healthcare practitioners can order products directly. These online sales significantly increase the risks of dealing with sanctioned parties. In addition, the sanctioned lists are updated on a near daily basis, leading to the need to perform checks, almost in real time, for each transaction.

 “All our products are made to help people; export controls are not relevant for us”

It is sometimes forgotten that the same elements that heal and protect people’s health and lives can also significantly endanger them if misused. The sensitivity of products is an important concern for the LSHC sector and a crucial element with respect to export control compliance.

LSHC practitioners are already well aware of the Chemical and Biological Weapons Conventions (CWC and BWC) requirements. Use and storage of certain chemical and biological agents such as anthrax follow strict safety procedures, and the same applies for cross-border movements.  Every transfer, whether intercompany or even intra-EU, would require a specific license for such “very sensitive” substances.

The so called “dual use goods” controls include very sensitive chemical and biological agents but also cover a much larger scope of products. Common biomedical or laboratory equipment that can be used in handling biological materials can also theoretically be used for the production of biological weapons. This is the “dual-use goods” concept, which comprises civil products that can potentially be used for military purposes or for the production of weapons of mass destruction.

• Dual-use equipment include certain fermenters, centrifugal separators, cryocoolers or spray-drying equipment, but also others such as protective and containment equipment. Technology related to such products can also be considered as controlled with the same measures.

• Medicines and pharmaceutical supplies would often be excluded from export controls, yet still certain medical products (including mixtures and API) containing toxins, pathogens or certain genetic elements can be considered as dual-use.

• Chemical and biological agents, including but not limited to those mentioned on the lists of CWC and BWC. Sodium fluoride would also be considered a dual use product. Mixtures with even a small percentage of controlled substances may also be considered as controlled.

The future violation happens now

Companies have the ultimate responsibility of preventing violations of export controls and sanctions. In response to the significant challenges that national authorities are facing in export controls enforcement, the detection and investigation responsibilities are progressively shifted to the business. This is also the reason LSHC companies are currently sanctioned for being “too optimistic” regarding the export control and sanction risks they face. It is no longer enough to state that products and business activities are unaffected by trade sanctions; this should be accompanied by an appropriate risk analysis and with measured controls in place.

Companies in the sector are expected to

• Have a clear overview of which of their products and activities might be sensitive

• Ensure compliance with the sanctions provisions imposed by multiple jurisdictions for both destination and entity controls

• Implement controls

• Create record-keeping procedures

• Follow the frequent updates in regulatory requirements
  

All of these requirements make it crucial for practitioners in the life sciences industry to understand the broader trends in export control and nonproliferation. In the case of our above-mentioned example, although the company had a certain level of awareness of sanction requirements, the implemented measures did not fully correspond to the scope of business activities and company size. They were obliged to establish a robust compliance program that includes the appropriate corporate export and trade sanctions compliance documents, enhanced trade compliance training, and enhanced compliance procedures for screening and requesting licenses. The company should prove that the measures are adequate for the scope of trade operations. Demonstrating clear awareness of potential risks is the only way to set the appropriate controls in place.

The sensitivity of products is an important concern for the LSHC sector and a crucial element with respect to export control compliance

What to do?

Achieving a good balance is essential. On one hand, a company should have the appropriate prevention and control measures in place. On the other, the company should avoid creating unnecessary operative burden by adding complex compliance processes when this would not be needed.

To achieve this balance, an assessment of product ranges would be useful in order to discover potentially sensitive areas, as well as proper classification if any controlled products are identified. In addition, it is important to evaluate the practical impact of both trade and financial sanctions on the particular company’s business. As mentioned above, LSHC is often treated separately under trade sanctions with particular provisions only applicable to the sector.

When the levels of risk are clear, a measured and fit to purpose Internal Compliance Programme, with the appropriate policy, procedures and tools, can help the business deal with export control challenges in a consistent, effective and efficient manner.  

The compliance framework does not necessarily need to be a separate and standalone structure. Typically, most LSHC companies already have suitable structures in place and appropriately skilled people able to deal with the challenges of export controls and sanctions compliance.

Yet, having the appropriate IT tools and systems to support the experts’ efforts is often the only way to effectively control business processes. This is especially valid for multinational LSHC companies where large amounts of transactions are processed daily and supply chain flows are complex. Sanctioned party lists screening requirements would be almost impossible to follow with purely manual validation.  New technological solutions such as artificial intelligence, Blockchain and advanced analytics are demonstrating a lot of potential in managing trade compliance.

With an efficient export control programme and supporting tools established, the company will be able to effectively manage operational export control risks with sufficient flexibility, to benefit from opportunities and deal with any future challenges. The export controls compliance organisation should be capable of quickly adapting to changes such as mergers and acquisitions, new product lines, new markets, and updates in legal requirements.

Deloitte’s Global Trade Advisory specialists are part of a global network of professionals providing specialised assistance to companies in export controls and trade compliance matters. Our extensive experience in the life science industry provides us with a unique understanding of the particular challenges the industry is facing, as well as the expertise to help provide the required solutions.

LSHC is often treated separately under trade sanctions with particular provisions only applicable to the sector.

Who to contact

• Dries Bertrand, Partner, Global Trade Advisory, dbertrand@deloitte.com