The possible introduction of a United States-type False Claims Act (FCA) in Australia will see a sharp increase in allegations of fraudulent conduct in many industries, particularly for those in the pharmaceutical industry.

The cost of fraud to the public purse arising from fraud is well documented. Many of the large-scale cases of fraud successfully litigated or settled under the FCA in the US have been against large pharmaceutical companies, most prominently arising from marketing prescription drugs for non-approved, off-label uses.

Many are calling for a more pro-active approach to fraud issues in Australia, and incentivising whistleblowers (especially in the pharmaceutical industry) may be an easy first step for the Australian Government to take.  Organisations operating in Australia need to ensure their own internal controls and compliance programs are top-notch to guarantee a swift response to allegations and to avoid costly and potentially damaging questions being raised by regulators in the case of unjustified allegations.

Conversations with risk and compliance officers and those with governance oversight need to start now as such areas are increasingly in the spotlight when it comes to how organisations manage their affairs, particularly in relation to their compliance obligations.

 The US experience

The United States’ experience has shown that legislation like the FCA can reap large financial benefits for the government and also greatly increase the number of whistleblower allegations. According to statistics published by the US Department of Justice, almost US$40 billion has been recovered using the FCA in the last 25 years in the United States.

A claim filed under the FCA is filed under seal (in confidence), giving the US government time to investigate the claim. Unlike whistleblowing to the media, the company being investigated does not know that an investigation is under way and so the likelihood of hiding or destroying evidence is reduced.

Without the initial whistleblower suits filed under the FCA, the US government is unlikely to have sufficient evidence, prepared prior to the commencement of proceedings, to persuade the company involved to quickly move to plea bargain discussions.

For example, in 2013, several qui tam (or whistleblower-made) suits led to the US government settling an FCA case against Par Pharmaceutical, a large American pharmaceutical company, for alleged large-scale reckless and unsafe off-label marketing of drugs (approved for use by late stage AIDS patients) to cancer sufferers and aged residents of long-term care facilities.  In addition to its settlement agreement of the civil claims, Par Pharmaceutical also entered into a plea bargain with the US government under which it pleaded guilty to a misdemeanour offence under the federal Food, Drugs and Cosmetics Act.  Par Pharmaceutical agreed to pay a total of US$45 million, of which the US government received approximately US$40 million and of which the 2 whistle-blowers, who were first to file their claims, received US$4.4 million. 

Relevance for Australia

Australia is not immune to this kind of fraud. Many of the claims made and sustained under the FCA in the US, often for hundreds of millions of dollars, relate to multinationals that also operate in Australia and regularly contract with the Australian Government.

The strong recovery trends against such frauds in the US are in large part because of the FCA and the existence of qui tam claims. Such legislation has the potential to recover a significant part of the funds lost each year through fraud in Australia, in addition to the ancillary benefit of deterring fraud. It also has the potential, however, of bringing to light a number of allegations that might otherwise not have been raised.

Currently, Australia has no incentivised whistleblower programs. The prospect of a reward for whistleblowers will see a sharp rise in the number and type of whistleblower tips received, across a range of industry sectors. The main lesson to be learnt from the US experience is that organisations, particularly in the pharmaceutical industry, need to ensure that its employees channel as many tips of reported violations through internal reporting mechanisms in the first instance. Smart organisations should also be cultivating a culture where employees trust the internal compliance program. This should be coupled with a comprehensive action plan for a rapid response to whistleblower tips.

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