After a sidetrack into the ethical train wreck detailed by the SEC Cease and Desist Order re: KPMG yesterday, I am returning to the blog post series I am running based upon the New York Times (NYT) reporting by Alexandra Stevenson and Sui-Lee Wee, in a piece entitled “Selling CT Scanners with Bricks of Bills in China”, which detailed allegations of ongoing bribery and corruption in the Chinese healthcare industry. The story highlighted companies which have previously gone through Foreign Corrupt Practices Act (FCPA) investigations and/or enforcement actions; including General Electric Company (GE), Siemens Aktiengesellschaft (Siemens), Koninklijke Philips Electronics N.V. (Phillips) and Toshiba Corporation (Toshiba).
All of this occurred with full knowledge of the events surrounding GlaxoSmithKline PLC (GSK) in China in 2013 and 2014. (Indeed, I even wrote a book on the saga GSK in China: Anti-Bribery Enforcement Goes Global.) Yet it appears that everyone involved in this new round of alleged corruption learned from the prior prosecution of GSK. Unfortunately the lessons do not appear to have been do not pay bribes or even do not violate the FCPAbut rather use a different bribery scheme.
The types of bribery schemes in China are also well known. In a Financial Times (FT) article, entitled “Bribery built into the fabric of Chinese healthcare system”, reporters Jamil Anderlini and Tom Mitchell wrote about the ‘nuts and bolts’ of how bribery occurs in the healthcare industry in China. These bribes were funded by the China business unit through the creation of fake invoices for conferences, travel, gifts and entertainment that were reimbursed by the UK corporate headquarters. The FT article also included a diagram that visually represented the two methods used to pay bribes in China by GSK representatives, the Directand Indirectincentives methods. Whichever method was used, the goal was the same – to boost sales.
In the Direct incentives method, a third-party representative of a company provided cash to the department head of a clinic or hospital. The department head would in turn pay it to the physicians to encourage them to prescribe the company’s medical products. But a third-party representative could also contact a physician directly and reward them with “gifts such as storecards, vouchers and travel” expenses. Other direct methods might include the opening of bank accounts or charge accounts at luxury goods store and then the company would hand “the debit card or VIP card directly to the recipient.”
The Indirect incentives method tended to be “used by larger pharmaceutical groups with stricter governance procedures.” Under this bribery scheme there were two recognized manners to get benefits into the hands of prescribing physicians. The first is to have cash incentives paid to a third-party representative, such as a travel agency, which would then “pass on some of these rewards to the physician directly.” Another method was for the company itself to make a “lump sum sponsorship paid to hospitals”. The hospitals would then distribute perks “to the doctors as a monthly or annual bonus.” Another indirect method noted was that companies might organize overseas conferences and site visits, which might “include free first class travel and five-star accommodation.”
However, the funding of the bribery schemes were changed for the corruption reported in the NYT piece, where Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations said, “Corruption is endemic in the health care sector in China.” The article further noted, its investigation “found that one or more layers of middlemen often worked with hospital directors to set prices that included bribes and kickbacks. A review of more than a dozen recent deals from Siemens and G.E. shows that the price was at least 50 percent higher or even double when they involved a third-party distributor, according to hospital and corporate documents.” The article quoted Wade Weems, a former United States prosecutor and lawyer for Kobre & Kim LLP, who stated, “Layering a distributor or vendor in between creates more space and creates the possibility for those vehicles to harbor slush funds or falsify documents along the way and funnel bribes.”
Yet these third-parties used some very basic mechanisms to deliver the corruption payments. One Siemens representative known only as “Jin” put “stacks of cash into boxes and delivered them to the trunk” of a car of a corrupt hospital director. In another case involving a Siemens sales manager and a third-party representative, “used an importing firm called Anhui Yameiya Import and Export Trade Company. Yameiya, which is based in Anhui, has been named in several other corruption cases involving equipment made by Siemens and G.E…. But Yameiya is involved in dozens of recent transactions as a middle agent for Siemens, G.E., Philips and Toshiba equipment, according to publicly available procurement documents from Chinese hospitals.”
It was through the use of these third-parties that the money needed to create a pot of cash to fund the bribes was created. This mechanism was seen in “another case from 2016, Gao Xuezhong, the president of a hospital in Anhui Province, was convicted of taking bribes from a Siemens sales contractor and from a Siemens sales manager named in court as Mr. An. The bribes included cash as well as homes for Mr. Gao’s wife and for his daughter. At one point, Mr. Gao and Mr. An marked up the price of a $1.3 million M.R.I. machine to $1.7 million. They and intermediaries pocketed the difference.” The NYT also reported on another transaction involving Siemens where “Siemens won a bid to sell an M.R.I. machine to the Chinese Academy of Medical Sciences in Beijing in 2016, the price was $2.8 million. In another deal, in which Siemens sold the M.R.I. machine through a third-party broker called Chongqing Kangtian Medical Equipment, the price was $4.7 million.”
The NYT article re-emphasized the need for great due diligence and vigilance in sales in the medical device industry in China. We all know from the GSK case and a raft of FCPA enforcement actions the extent of bribery and corruption allegations. Tomorrow we will consider some of the red flags raised in the bribery schemes reported by the NYT.
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