China’s Anti-Graft Campaign: Implications for Multi-Nationals Operating in China

by Dechert LLP

Chinese anti-corruption efforts historically targeted recipients of bribes, particularly government officials. In the past year, however, Chinese authorities have initiated a very public crackdown on bribe payers in the life sciences industry, commencing investigations into the conduct of a number of multi-national companies operating in China as well as their China-based senior executives. Recent developments indicate that enforcement actions may soon commence against a number of these senior executives. This OnPoint considers life sciences investigations in the context of China’s anti-graft campaign and the implications for multi-nationals in China.

Enforcement Actions and Regulatory Developments Targeting the Life Sciences Industry

The current enforcement focus on the life sciences industry commenced in June 2013, when Chinese authorities, apparently acting on a tip from a whistleblower former employee, commenced investigations into allegations that a multi-national life science company paid bribes to doctors and employees of government-owned hospitals and government officials. Arrests were made at the time, and accusations have recently been leveled at various executives of the multi-national company’s China operations. At the same time, investigations into other life science companies (foreign and domestic) were also commenced and are currently pending.

In addition to being subject to heavy fines, prosecutions and convictions, if entered, can have serious operational consequences for the life sciences companies and their senior executives. Both could be blacklisted and barred from bidding for contracts under the Regulations on Establishing a Commercial Bribery Blacklist for the Purchase and Sale of Medicines introduced by the National Health and Family Planning Commission (the NHFPC) at the end of 2013. Senior executives could also be sentenced to lengthy prison terms.

In tandem with the enforcement actions, Chinese authorities have also introduced regulatory measures to penalize and deter bribery and to provide guidance to the life sciences industry, among them the blacklisting scheme referred to above. Under this scheme, a company or an individual convicted of bribery would automatically be included on a provincial blacklist and barred from bidding for contracts with government-funded life sciences institutions for two years in that province, as well as on a national blacklist, following which their bids in other provinces would be given lower priority. The same company or individual, if convicted of bribery again within a five-year period, would also be barred nationwide from bids with publicly funded life sciences institutions for a period of two years.

Another measure is the Nine Prohibitions to Strengthen the Ethical Conduct in the Healthcare Industry, which was issued by the NHFPC and became effective on 26 December 2013. The Nine Prohibitions prohibit conduct that directly addresses issues uncovered in the wide-ranging investigations undertaken by the Chinese authorities and provides guidance on the “do’s” and “don’t’s” when interacting with life sciences professionals and institutions.

For life sciences institutions, the Nine Prohibitions prohibit, inter alia:

  • linking the compensation of life sciences professionals to the revenue created by prescriptions of drugs or by medical examinations;
  • implementing a commission system for prescribing drugs, and undertaking medical examinations or other medical services;
  • participating illegally in advertisement or promotional events for medical, food, health or other products, and disclosing personal data of patients (this also applies to life sciences professionals);
  • accepting conditional donations that affect fair competition, or are linked to product purchases; and
  • accepting overseas trips or disguised trips sponsored by companies (this also applies to life sciences professionals).

For life sciences professionals, the Nine Prohibitions prohibit, inter alia:

  • accepting commission when introducing patients to examination, treatment of other providers or for the purchase of drugs;
  • producing statistics of drug consumption for commercial purposes, or assisting sales staff of drug producers with the collection of statistics; and
  • seeking improper benefits or accepting kickbacks or entertainment provided by companies producing or distributing drugs, medical appliances, materials or other medical products.

China’s Anti-Graft Campaign Not Restricted to the Life Sciences Industry

The enforcement actions and regulatory developments referred to above, whilst focused on the life sciences industry thus far, should be considered in the context of China’s anti-graft campaign that was launched by President Xi Jinping in December 2012.

Shortly after the launch of the campaign, the Supreme People’s Court and the Supreme People’s Procuratorate issued the Interpretation of Several Issues Concerning the Specific Application of the Law in the Handling of Criminal Bribery Cases on 26 December 2012, which focused exclusively on bribe giving and set out certain aggravating factors that could elevate bribes to a “serious” or even a “very serious” case. These aggravating factors include, inter alia, situations when a bribe is offered to “state functionaries who have supervisory and administrative responsibilities for food, drugs, production safety, environmental protection, etc. in order to engage in criminal conduct that would seriously harm public interests and violate the safety of people’s lives and property.

The Interpretation foreshadowed that Chinese authorities would increase their enforcement activity against bribe payers and placed particular emphasis on bribes that affect the safety and livelihood of its people. In line with the Interpretation, the first wave of enforcement activity targeted the life sciences industry where corruption not only threatened drug safety but also negatively impacted the competition between the various drug makers and affected drug pricing for Chinese citizens.

It is likely that the enforcement activity, together with appropriate regulatory developments, will shift to other industries where corruption would similarly affect the safety and livelihood of people, including through anti-competitive behavior which distorts prices, lowers product safety and eliminates competing and potentially better and safer products.

Multi-national companies that are subject to a high level of government regulation, require approvals, licenses and permits, interact with business counterparts that are state-owned enterprises and/or operate in fiercely competitive markets and are pressured to adopt customary practices that may not be compliant with applicable laws are at most at risk of investigations and enforcement action.

How to Keep SAFE: Proactive Management of Risks

In light of these developments, multi-nationals operating in China must remain vigilant and proactively assess and minimize any risk exposures they may have in their operations in China. Here are four things that multi-nationals in China should do:

  • Study the legal and business environment in which they operate (including the applicable local laws and customs and how they interplay; the nature and purpose of interactions with government, state-owned and/or controlled entities, third parties and customers).
  • Assess the compliance risks of their business operations, evaluate their existing compliance programs to see if they satisfy local law requirements, and identify areas for improvement.
  • Fix areas identified for improvement and move to remediate the compliance risks. The Nine Prohibitions, while targeted at the life science industry, provide useful guidance on conduct that the Chinese authorities would not accept as appropriate and/or legal.
  • Enhance their existing compliance programs, retrain their employees and third parties, and stress-test the enhanced compliance program and their employees to minimize exposure risk.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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