Lessons on Whistle-Blowing

Amidst the excitement of the hijacking that wasn’t, the Bangladesh election, and the US build up against the Taliban, not many readers would have noticed a news item about an out-of-court settlement for $ 875 million reached by two top drug multinationals, Abbot Laboratories and Takeda Chemical Industries, with US prosecutors.

Yet I think it holds several valuable lessons for us in India. The two companies had an American joint venture called TAP Pharmaceutical Products, which manufactured Lupron, a drug for treating prostate cancer and infertility.

Now, all drug companies woo doctors in a big way, for doctors are the ones who prescribe high-priced drugs for patients. But TAP went beyond mere wooing: it gave kickbacks to doctors to prescribe Lupron.

The kickbacks included free trips to resorts, medical equipment, and cash in the form of “educational grants”. TAP also gave doctors free samples of Lupron, and then helped them get reimbursements from the government’s Medicare and Medicaid programmes at the rate of hundreds of dollars per dose.

Dr Gerstein, a urologist at Tufts Associated Health Maintenance Organisation, had decided to use a rival drug for patients serviced by his organisation, and was offered $ 65,000 in “educational grants” to switch to Lupron. He reported the matter to the federal authorities.

Independently so too did Douglas Durand, a former vice-president of TAP. Federal investigators went into the matter and instituted criminal and civil charges against TAP and six of its top managers.

TAP has now been settled out of court, paying a whopping $ 875 million. This is the largest such settlement ever.

US law entitles whistle-blowers those who expose corrupt and illegal practices to a share of fines and damages. So, Dr Gerstein, Durand and Tufts will share $ 95 million of the settlement. This is a clear case where honest pays.

Several lessons flow from this for India.

First lesson: In the US, supposedly a free market, businesses have to follow hundreds of detailed laws and rules that protect consumers and ensure a level playing field for all competitors. Free markets do not mean absence of government.

They mean freedom for people to enter any business, but also an activist government that creates rules for a level playing field, and enforce the rules rapidly and honestly.

In the US, entry into business is easy, but anybody who transgresses rules can suffer extraordinary penalties. By contrast India created a licence-permit raj where entry into any business was very difficult.

But once a businessman got a licence, he could break any number of rules and get away with it because the state was too weak and corrupt to punish him. Money, muscle and influence could stave off prosecution. And even if prosecution took place, legal delays ensured that all concerned died of old age before the case was decided past all appeals.

Economic reform in India has pulled down many entry barriers in business. But, as the TAP case illustrates, our liberalisation is woefully incomplete. The state is even more weak and corrupt than earlier, and the courts even less effective in enforcing the rule of law.

What TAP did in the US is positively tame compared with the manipulations our captains of industry routinely indulge in.

Second lesson: if you really want to discourage dishonesty, the penalties must be high. TAP had to pay $ 875 million (almost Rs 5,000 crore). Other companies in tobacco and asbestos cases have had to pay billions.

This has bankrupted some big American companies. But in India, the maximum penalty for several crimes is so low as to make crime very attractive indeed. In the 1992, securities scam, for instance, the maximum fine for banks disobeying the rules on financing brokers was, if memory serves me right, just Rs 25,000.

Third lesson: it is not enough to have penalties for dishonesty. You also need rewards for honesty. India needs a whistle-blower’s law, giving a share of all major fines to those who expose illegal practices.

Note that the $95 million awarded to the three whistle-blowers in the TAP case was infinitely more than the bribes offered to them.

Such a system truly rewards honesty, apart from penalising dishonesty. The combination will promote good corporate governance more effectively than any number of CII committees on the subject.

Fourth lesson: none of this will work without swift justice. The most urgently required reform in India today is not economic reform but legal reform. We need to ensure that cases, inclusive of all appeals, are disposed of within a few years. Only then will fines for wrong-doers or rewards for whistle-blowers have any practical meaning.

Fifth lesson: the TAP case was settled out of court. We too need a system where cases are settled out of court, greatly speeding up case disposal. But this can happen only if two conditions are met.

First, cases must end quickly: the prospect of an early verdict concentrates minds wonderfully on out- of-court compromises.

Second, judges need to deliver verdicts with such consistency that, once evidence is presented, both sides have a pretty good idea what the verdict will be.

But if different judges come up with totally different interpretations of the law, if higher courts regularly upset decisions of lower courts, then there is every incentive to keep litigating till the last possible appeal.

We need more speed and far more consistency from our judges. That is a long agenda for reform. Yet it will be no more than the start of a decent justice system.

What do you think?