China’s Non-Prosecution Mechanism: A Raft In China’s Healthcare Anticorruption Campaign?

An Article to introduce China’s pilot adoption of its non-prosecution of compliant corporations (NPCC) programme, a similar diversion mechanism to the US’s deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs). The Article elaborates the importance of NPCC for healthcare companies in front of China’s anti-corruption campaign.

Non-Prosecution of Compliant Corporations (NPCC)

In this era of increasing tensions between China and the West, global pharmaceutical companies continue expanding into what is now the world’s second-largest pharmaceutical market. From 2023, however, even pharmaceutical companies already established in China have been sitting tight amid a one-year anti-corruption campaign that is sweeping China’s entire healthcare industry (see Practice Note, Bribery and Corruption (China): Overview: Recent Developments: Focus on Rule of Law to Tackle Bribery and Corruption). Participants in this industry are concerned about being targeted for prosecution during this one-year campaign, but for many companies and individuals, there does appear to be significant protection in a relatively new diversion mechanism that is increasingly popular among Chinese prosecutors and companies, that is, the non-prosecution of compliant corporations (NPCC (企业合规不起诉 (in Chinese language)).

The NPCC mechanism is mainly governed by documents released by the Supreme People’s Procuratorate (SPP), including:

• The Plan for Carrying out Pilot Work of Corporate Compliance Reform 2021.

• The Guiding Opinions on Establishing a Third-Party Compliance Supervision and Assessment Mechanism for Enterprises Involved in Criminal Cases (Trial Implementation) 2021 and its implementing rules.

• The Measures for the Compliance Construction, Assessment and Review of Enterprises Involved in Criminal Cases (Trial Implementation) 2022.

Under the NPCC mechanism, businesses involved in criminal cases may qualify to enter the NPCC mechanism if they plead guilty and are able to run their business operations as normal, along with their genuine promise to establish or complete their compliance system. This includes businesses that are suspected of committing a crime, as well as businesses whose actual controlling individuals are suspected of committing a crime closely related to the operation of the business.

The NPCC mechanism should not apply in circumstances including:

• Where the controlling individuals establish the business for illegal or criminal activities.
• Where the business commits crimes as its main activities after its establishment.
• Where business personnel commit crimes by misappropriating the name of the business.
• Where the business is suspected of crimes endangering national security or terrorist crimes.

The NPCC mechanism can be initiated by a procuratorate during the process of arrest review or indictment review, or by the business involved in a criminal case through an application to the procuratorate.

Compared to China’s previous purges in the medical sector, the current “centralised rectification work” is unprecedented in the following two ways:

• It extends to not only medical providers and hospitals, but involves six professional, administrative, marketing and ethical areas; its targets include kickbacks and other illegal activities in medication and medical device-procurement processes.

• Unlike previous campaigns, such as the one kicked off by the GlaxoSmithKline conviction in 2014, when many foreign companies felt unfairly targeted, this campaign does not seem to single out foreign firms from local ones.

Despite the absence of publicly available reports about foreign pharmaceutical companies being directly investigated in the current campaign, there are indications that some of their unethical and allegedly illegal practices have been exposed to Chinese authorities.

Foreign companies may face double jeopardy if their home country has an overseas anti-corruption law that governs their extraterritorial conduct, such as the US’s Foreign Corrupt Practices Act 1977 (FCPA). In a case against Pfizer currently pending in a US federal court, a whistleblower alleges that the company spent USD168 million on “potentially influential government officials” in China between 2019 and 2021. If the allegation proves true in the US court, Pfizer could potentially face criminal charges in China. (For related discussions, see Practice Note, Anti-Corruption Regimes in China, the UK and the US: a Comparative Guide.)

NPCC Interplay with Criminal Plea for Leniency Procedure

As a recourse for companies trying to survive the current purge, China’s NPCC is a similar diversion mechanism to the US’s deferred prosecution agreements (DPAs) and non-prosecution agreements(NPAs).

The NPCC mechanism gives companies investigated for alleged crimes a chance to resume normal operations on the condition that they complete compliance requirements within a set period. It is also often paired with another mechanism, that is, the plea for leniency procedure that is codified in its Criminal Procedure Law 2018. Like the US’s FCPA Corporate Enforcement Policy, now known as the Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP), the procedure sets forth strong incentives for corporations and their executives to voluntarily surrender, admit to wrongdoing and show remorse. (For information on the US FCPA CEP, see Practice Note, The Corporate Enforcement Policy.)

Under China’s plea for leniency procedure, all criminal offenders who plead guilty are eligible to receive punishment below the minimum of the statutory sentencing range or, in minor cases, to be exempted from punishment altogether. In certain cases, they may get a 60% sentencing discount for pleading guilty (Article 14, Notice of the Supreme People’s Court and the Supreme People’s Procuratorate on Issuing the “Guiding Opinions on Sentencing of Common Crimes (Trial Implementation)” 2021). Many provincial high courts’ guidelines offer a 20% sentencing discount for early pleas, which is reduced to 10% once the case goes to trial (Article 3(10), Guiding Opinions of the Jiangsu Provincial High People’s Court on Handling Criminal Cases of Guilty Plea and Acceptance of Punishment 2019).

Driving Factors for NPCC Implementation

Unlike the FCPA CEP, the NPCC does not have a presumption of declination (that is, decision not to prosecute) in the absence of certain “aggravating circumstances involving the seriousness of the offence or the nature of the offender” (see Practice Note, The Corporate Enforcement Policy: Aggravating Circumstances). Nevertheless, in practice, this new mechanism has been embraced by prosecutors, defendants and, most recently, by the courts. Specifically:

• The SPP has released 20 “typical cases” related to the implementation of NPCC. Though China is not a stare decisis jurisdiction, prosecutors across the country are strongly encouraged to refer to these cases in similar fact patterns (see Practice Note, Case Guidance System in China: Typical Cases Issued by the SPC). In these cases, prosecution against all 26 companies, and 65 out of 74 individual defendants were eventually withdrawn. Only nine individuals were convicted, and all received mitigated sentences. These cases send a strong signal to Chinese prosecutors that, if applicable, the NPCC should be utilised in dealing with corporate crimes.

• Though the ongoing campaign in the healthcare sector appears widespread, the authorities have explicitly underscored their focus on “the key few” worst actors, with the intention to avoid impeding legitimate medical academic exchanges or normal communication between pharmaceutical/device representatives and healthcare providers. As of June 2024, most of those reportedly under investigation are leaders of local hospitals.

• In view of the challenges to stimulate domestic spending and demand, in August 2023, the State Council released a 24-point list of guidelines designed to improve the business environment for foreign investment, with a highlight specifically on biomedicine, and an indication to encourage foreign-invested enterprises to carry out new clinical trials of drugs in China (Opinions of the State Council on Further Optimising the Foreign Investment Environment and Increasing Efforts to Attract Foreign Investment 2023).

Given the above driving factors, it is likely that the NPCC will be generally applied to give most participants in the healthcare sector second chances to behave.

For most pharmaceutical companies, if they do get swept up in this campaign, there is a good chance that prosecutors will consider NPCC agreements instead of indictments. This view is supported by two considerations:

• Most companies are legitimate businesses operating on bona fide grounds, providing local employment and tax revenue, and their compliance errors tend to be rectifiable. These are often important considerations in prosecutors’ NPCC application formulas, as the publicised cases indicate.

• As a response to the public’s outcry on medical affordability and resource disparity, the ultimate goal of the campaign is to clean up, not dismantle, the healthcare sector. As the National Health Commission, the Ministry of Public Security and eight other national departments jointly reiterated, this campaign is more likely to carry out precise strikes on major corrupt targets than a sweeping investigation of all stakeholders in the field.

Features Distinguished from US Counterparts

While companies can look to NPCC agreements for some of the same protections that they are accustomed to seeking from NPAs and DPAs in the US, there are some important differences that must not be overlooked, including:

• Unlike DPAs and NPAs, which are practical compromises between powerful corporations and resource-limited prosecutors with a shared appreciation for efficiency, the NPCC is a top-down policy experiment initiated by the SPP. The NPCC’s justification in jurisprudence is still a matter of heated debate in China, as is its efficacy in decreasing corporate crime. Given its experimental and non-codified status, the NPCC’s rules and their implementation can be altered at any time, and may even be put on hold, voluntarily or not, by the SPP.

• Under China’s criminal law, both businesses and their executives are punishable for corporate misconduct. As some of the SPP’s typical cases have demonstrated, corporate executives may be held criminally liable even when the companies were not prosecuted after completing the NPCC plan. This is a dramatic difference from the US DPAs and NPAs, in which corporate executives have gone unpunished after fines of millions or billions of dollars were paid from company funds that in fact belonged to shareholders.

However, a handful of NPCC cases have dropped prosecution of both companies and individuals (known as “dual non-prosecution” (双不起诉 in Chinese language)). In one of the typical cases, prosecutors decided not to indict six companies or any of their employees after the completion of their compliance measures. Given the complexity of these cases and factual variance in each case, a decision of “dual non-prosecution” would not be based solely on the size of the business or the severity of the crime, but a comprehensive analysis of the individual case.

• Unlike in the US, where the requirement of a compliance monitor is completely up to the discretion of prosecutors, under China’s NPCC reform, compliance monitoring is always mandated. The SPP and other government regulators require a prosecutor to delegate a third-party supervision-and-evaluation organization (TSEO) to investigate, evaluate, supervise and inspect the compliance implementation (Guiding Opinions on Establishing a Third-Party Compliance Supervision and Assessment Mechanism for Enterprises Involved in Cases (Trial Implementation) 2021). The TSEO’s inspection may serve as an important reference for the NPCC decision.

Some critical details of the oversight process are yet to be put in place, such as how TSEOs should be funded and what forms oversight should take.

Enforcement Trends

In the four years since the SPP launched its NPCC pilot programme in 2020, nearly ten thousand cases have been handled by prosecutors across the country through this mechanism. As of March 2024, the SPP announced that among the 9,537 cases disposed through the NPCC process, 4,417 companies (including 8,547 individuals) received the non-prosecution award. For the cases that eventually went to court, over 90% of prosecutorial sentencing proposals were adopted by the judges if the defendants pleaded guilty. The combination of these two sets of statistics illustrated that early co-operation with the prosecutors was usually favorable to the defence.

However, as a cautionary note, the NPCC is not a one-size-fits-all approach for companies concerned. Given the complexity of fact patterns in each incidence, it is worth a carefully tailored case-by-case evaluation. Factors that are critical to a business’ future include:

• How much a business’ allegedly questionable practices have been exposed.
• To what extent the executives’ individual liability might be attached.
• What impact a voluntary surrender and NPCC could have on data export when a foreign parent company needs to have a proactive internal investigation to mitigate legal risks.

(For information on some of the most frequently encountered issues in connection with China-based compliance investigations, see Practice Note, Conducting Cross-Border Investigations in China.)

The Article is “Reproduced from Practical Law with the permission of the publishers.

For further information, please contact:

Leon C.G. Liu, Partner, JunHe

liuchg@junhe.com