China Compliance Update: Commercial Bribery Risks Remain Very Real in China

Overview


McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai. This China Law Alert was authored by MWE China Law Offices lawyer Leon Liu and McDermott lawyers Glenn Engelmann and John Kocoras.

The enactment of new legislation, as well as new and continuing investigations, demonstrates that Chinese regulators have not slowed down their efforts to ferret out corruption in the pharmaceutical sector and related industries.


It has been several months since publicity began about aggressive investigations of potential bribery in the pharmaceutical industry in China. Despite the passage of time and dwindling international media attention, Chinese regulators have not slowed down their efforts to ferret out corruption in the pharmaceutical sector and related industries. Chinese authorities’ determination is reflected not only in new and continuing investigations, but also in the enactment of new legislation. Several recent developments warrant attention.

New Rules: A System of Bribery Records

Recently, the National Health and Family Planning Commission of China announced that it would establish a record of medical device manufacturers, agencies and individuals charged with bribery by authorities, or sued, punished or otherwise investigated for bribery. Organizations and individuals with a single negative record will be barred for two years from selling their products within the province at issue, while two negative records within five years could have such organizations and individuals barred from selling their products nationwide. The rules will formally enter into force beginning 1 March 2014.

The new rules clearly indicate that the emphasis on anticorruption in China is not going to diminish with the end of pending investigations of large foreign companies. As with US rules excluding companies from participating in government health care programs as a result of certain misconduct, these rules are likely to cause companies in China to increase their focus on ethical practices and strict compliance with law.

Who’s Next?

The Chinese government’s focus is not limited to foreign companies; it continues to pay close attention to domestic Chinese companies. For example, one of the largest Chinese pharmaceutical companies, Shanghai Pharmaceuticals, appears to be in the spotlight. Recently, its subsidiary Qingdao Growful Pharma was accused of bribing hospital staff to prescribe its drugs. The subsidiary company is alleged to have spent approximately RMB 766,500 (USD 126, 200) on bribes between January and June 2013, according to public reports. Shanghai Pharmaceuticals reportedly has opened an internal bribery probe after a report by an unidentified whistle-blower, maintaining that it has a very strict internal control system.

Separately, Sinopharm Group Company is addressing similar issues reportedly involving a former vice president and a former general manager of one of its units. Both reportedly were detained by Shanghai authorities in January 2014 as part of a corruption investigation. According to press reports, the probe likely was triggered by a whistle-blower, and the company reportedly invited Shanghai authorities to investigate.

The Trouble with Partners

Many large companies operating in China actually have internal controls and compliance policies, yet sweeping anticorruption allegations suggest dramatic controls and policy failures. What have sophisticated companies in China overlooked?

One answer could be a failure to investigate and supervise appropriately the business partners, agents and third-party vendors widely relied upon in Chinese business. Even with large and reputable partners, companies can easily become linked to an anticorruption investigation through a relationship with a third party. Companies need to remain vigilant not only in vetting third parties, but in on-going oversight and updated diligence.

Conclusion

China’s current regulatory environment continues to present new challenges in controlling global risks arising from operations in China, and all signs indicate these risks will only increase. Recent developments place a premium not only on knowledge of acceptable business practices in China, but strongly indicate that companies revisit their internal compliance systems and practices. Many Chinese authorities are sending loud signals that there is a new era of anticorruption enforcement in China; those same authorities will expect that same new era to dawn within Chinese business.