I continue with the multi-part blog post series based upon the New York Times (NYT) article by Alexandra Stevenson and Sui-Lee Wee, entitled “Selling CT Scanners with Bricks of Bills in China”, which details 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). The article is not only a cautionary tale for those doing business in China but also many lessons learned for the compliance professional to consider in reviewing their company’s compliance program.
In yesterday’s post, I detailed the bribery schemes involved. They seemed to be based upon the use of distributors and other third-party sales representatives. The NYT noted that 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 article stated, “A review of more than a dozen recent deals from Siemens and GE shows that the price was at least more than 50% higher or even double when they involved a third-party distributor, according to hospital and corporate documents.”
When you have these types of mark-ups a set of red flags arises. Obviously, such a price uplift by distributors is cause for concern. Recall that under the distributor model, a company gives a discount to the distributor off the list price and the price differential from this discounted price and the final sales price is the profit for the distributor. In the cases cited by the NYT, this distributor model was turned on its head. Not only was there no discount provided to the distributor but the distributor apparently lifted the price far above the list price from one or more of the companies involved.
How can a company monitor the final price paid by the end using customer? One straight-forward manner is by requiring an end-user certificate. This is not simply another document required due to legal or compliance concerns (although it certainly fits that bill). If you do not know who the end user is, how can you honor your warranty or even service an expensive medical device? However, it also demonstrates the need for a robust business processes based upon legitimate information from the end-using customer.
Another red flag identified is the payment of bribes the old-fashioned way – cash stuffed into suitcases in the trunk of a car. The NYT article identified one Siemens sales representative “who testified in 2016 paying nearly $900,000 to a hospital director in the city of Qinzhou to secure the sale of a Siemens M.R.I. machine.” In another incident, one hospital administrator was “offered more than $1 million by two GE sales representatives to secure the sale of a CT Scanner for $4 million.” This same hospital administrator was later paid some $220,000 in “bricks of bills packed in a suitcase” from a GE sales contractor.
The question in all of these instances is ‘Where did this cash come from?’ Did anyone notice funds missing from petty cash? Did GE and Siemens representatives create a pot of money in the same manner that the GGSK business unit did by submitting false expense accounts on a massive scale? Is the problem, identified by Jeremy Gordon, director of China Business Services during the GSK scandal that “There is a disconnect between the global decision makers and the guys running things on the ground. It’s about initially identifying red flags and then searching for specifics.” Is it a failure of internal audit to under expenses submitted from China? Whatever the answer is, these were all huge pots of cash created to fund bribes.
The next red flag to consider are the Chinese players involved. The article makes clear that several of the same parties worked as distributors and other third-party representatives for multiple US and other Western companies. This is not as unusual as it may seem. One company named in the article, Anhui Yameiya Import and Export Trade Company, “has been named in several other corruption cases involving Siemens and GE.”
The NYT article re-emphasized the need for greater 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 why enhanced due diligence can be critical in unmasking the bribery schemes, identifying corrupt players and knowing with whom you are doing business in China.
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