Commercial bribery is the focus of regulation and enforcement in the pharmaceuticals and medical devices (“healthcare”) industry in China. In recent years, the Chinese government has issued multiple regulations and opinions progressively setting forth the “spiral-rise” requirements for integrity in the healthcare industry. With increased regulations year on year, healthcare companies need to stay alert to the risk of commercial bribery during business operations in China.
Typical Arrangements Potentially Involving Commercial Bribery
CSO committing commercial bribery
Healthcare companies generally sell and promote drugs and medical devices through contract sales organisations (CSOs). Since CSOs undertake the sales process on behalf of healthcare companies, some healthcare companies believe that they can exploit the CSO as a “scapegoat”, so that the CSO will be held responsible for any commercial bribery that occurs during the sales process. In practice, however, even if commercial bribery is committed by a CSO and the healthcare company is not directly involved in it, if evidence shows that the healthcare company failed to substantively review whether expenses incurred by the CSO were legally compliant, the regulatory authorities may find that the healthcare company behind the CSO ignored or tacitly supported the bribery and they may “pierce the veil” of the CSO to directly penalise the healthcare company.
Sponsoring of academic conferences
Sponsoring academic conferences is a common way for healthcare companies to enhance their brand influence. Leading healthcare companies regularly sponsor hospitals or societies to host domestic and international academic conferences and invite specific or unspecified doctors to participate. Some of these academic conferences may be sponsored in such a way as to conceal illicit transfer of benefits. This therefore needs to be judged on a case-by-case basis.
“Some academic conferences may be sponsored in such a way as to conceal illicit transfer of benefits.”
When determining whether sponsorship of an academic conference is a commercial bribe, the main factors to consider are whether the expenses incurred for sponsorship of the conference are reasonable and whether the sponsorship is likely to bring undue competitive advantage to the healthcare companies involved. Specifically, if the lecture fees for an academic conference are too high, excessive catering and accommodation arrangements are made, unnecessary travelling is involved, or the sponsorship is paid directly to the participants’ personal accounts, the conference could be seen as a means to transfer illicit benefits; and if a healthcare company causes product promotional content to be included in the conference materials, it might be suspected of using the conference to advertise its products to participants and seek unfair competitive advantage.
Bundle sales of consumables and reagents
If healthcare companies launch medical devices in medical institutions for free, or at low cost through retention-of-title sale, lease at low price or other ways, in an effort to bundle sales of consumables and reagents, such transaction will usually be treated as commercial bribery through an illicit transfer of benefits.
Giving and taking kickbacks
If healthcare companies secretly give improper off-the-books benefits to doctors or medical institutions through cash, in kind or other means, or offer money in the name of “research fees”, “promotion fees”, etc, such action will be considered as commercial bribery.
Major Penalties for Commercial Bribery
According to the Drug Administration Law, the Anti-Unfair Competition Law, and other relevant laws and regulations setting forth the administrative penalties, healthcare companies that engage in commercial bribery will have their illegal income confiscated and be fined by the regulatory authorities. If the circumstances are serious, the business licence of a healthcare company, the drug approval certificate of the relevant drug, the drug production licence or the drug business licence might be revoked. If an individual employee of a healthcare company engages in commercial bribery and the individual’s conduct is unrelated to the healthcare company, the regulator may directly punish the individual employee without penalising the healthcare company.
“Bribes to medical personnel by individuals which exceed RMB30,000, or by corporations which exceed RMB200,000, would meet the threshold for criminal investigation.”
Commercial bribery can even lead to criminal liability for the relevant personnel. In general, bribes to medical personnel by individuals, which exceed RMB30,000, or by corporations, which exceed RMB200,000, would meet the threshold for criminal investigation, and the relevant healthcare companies, persons directly in charge, and persons directly responsible could be held criminally liable.
If the medical personnel is regarded as a “state functionary”, bribes between RMB10,000 and RMB30,000 made by individuals, or bribes between RMB100,000 and RMB200,000 made by corporations, may also constitute a criminal offence under specific circumstances, such as bribing not less than three persons. Whether the medical personnel should be regarded as a “state functionary” is a complex issue, and if the bribe is offered in exchange for the medical personnel’s abuse of official powers, the medical personnel is likely to be treated as a “state functionary”.
“Healthcare companies that have identified red flags suggesting commercial bribery within the company are advised to keep a close eye on this…”
In addition to administrative and criminal penalties, if healthcare companies or their agents are listed in the adverse records of commercial bribery, they will be prohibited from selling drugs, medical devices or medical consumables to certain state-funded institutions in the same province for two years. Such prohibition will become nationwide if healthcare companies and/or agents are listed in the adverse records more than twice within five years.
To mitigate the risk of commercial bribery penalties, it is recommended that healthcare companies take measures to improve their compliance systems. In the case of external CSOs or third-party agencies hired for marketing activities, it is advisable for healthcare companies to conduct compliance investigations in advance and substantively review the marketing activities materials to avoid “piercing the veil” penalties.
In terms of internal governance, healthcare companies should adopt an anti-bribery policy, require employees to sign an integrity pledge, and conduct regular anti-bribery training to implement the compliance requirements. Healthcare companies that have identified red flags suggesting commercial bribery within the company are advised to keep a close eye on this and, if necessary, initiate an internal investigation.
The healthcare industry has a comparatively high incidence of commercial bribery and is also under the close scrutiny of the regulatory authorities. Healthcare companies that have committed commercial bribery will not only be subject to administrative and criminal penalties, but their market access for drugs, medical devices and medical consumables will also be negatively affected.
It is therefore essential for healthcare companies to establish a comprehensive anti-commercial bribery compliance system. Specialist law firms handle a variety of legal matters in the healthcare industry, including plenty of regulatory compliance matters regarding pharmaceuticals, medical devices, human genetic resources, etc; and many have experience in establishing regulatory compliance systems for clients in other industries, such as, real estates and construction, automotive, shipping, machinery and equipment, food and beverage sales, etc.
For further information, please contact:
HE, Lingyun (Jacky), Partner, JunHe