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China Cracking Down On Pharmaceutical Corruption




by:
Ling Zhang
Sheppard, Mullin, Richter & Hampton LLP - Beijing Office

 
March 26, 2014

Previously published on March 25, 2014

Stricter Blacklist Regime

On December 25, 2013, the National Health and Family Planning Commission of China (“National Health Commission”, former Ministry of Health) issued the amended Provisions Regarding the Establishment of Commercial Bribery Blacklist in the Pharmaceutical Purchase and Sales Industries (“Blacklist Provisions”), which came into effect on March 1, 2014.

According to the Blacklist Provisions, each provincial health commission shall establish and publish a blacklist recording the bribery in the pharmaceutical industry, while the official website of the National Health Commission is required to forward the bribery records published by provincial health commissions for wider range of audiences. Pursuant to the Blacklist Provisions, a bribery record shall, subject to the severity of the circumstances, be listed in the blacklist when the pharmaceutical producers, business operators or their agents (“Pharmaceutical Enterprises”) offer monetary or other interests to persons in charge of the medical organization, pharmaceutical purchasers or medical staff for their purchase or usage of relevant medicines, medical equipment or consumables. Once the Pharmaceutical Enterprises have records listed in the bribery blacklist (“Blacklisted Enterprises”), the products of the Blacklisted Enterprises shall be restricted in the bidding and purchasing process of public and government funded medical institutions (“Applicable Institutions”).

If one Blacklisted Enterprise has one record in certain provincial blacklist, the Applicable Institutions in the provincial territory shall not purchase its medicines, medical equipment or consumables for two years, while the Applicable Institutions out of the provincial territory shall lower the evaluation of the Blacklisted Enterprise during the bidding and purchasing process. If one Blacklisted Enterprise has more than one blacklist record within five years, all the Applicable Institutions nationwide shall not purchase its medicines, medical equipment or consumables for two years.

Other than the “blacklist regime”, the Blacklist Provisions also requires an integrity sales agreement to be signed along with the master sales agreement, in which the names of the sales representatives shall be clearly listed and anti-bribery clauses shall be included.

Pharmaceutical Bribery Regulatory Initiative of China

The announcement of the Blacklist Provisions marks a new round of pharmaceutical bribery regulatory initiative in China. As reported by China Business News, one authoritative source said during the interview: “The common practice in pharmaceutical business has been disclosed by the GlaxoSmithKline event since the summer of 2012. The relevant authorities consider it necessary to do some real regulatory work in this business.” According to China Business News, the relevant authorities state that the regulatory initiative to crack down on pharmaceutical bribery would last for three years, and the regulatory scope would expand from foreign-invested enterprises to domestic enterprises.

One of the biggest pharmaceutical companies, Sinopharm Group Co. Ltd., a HK listed state-owned enterprise, announced on January 12, 2014 that its former vice president Mr. Shi Jinming was detained by the People’s Procuratorate of Shanghai Pudong New District of China in the evening of January 10, 2014 for an investigation in relation to a corruption allegation against him, and the former general manager of wholly-owned subsidiary Sinopharm Holding Distribution Co. Ltd., Mr. Xu Yizhong is also involved in such investigation.

Coincidentally, on January 8, 2014, one prosecutor in Hubei Province disclosed to the media that the relevant law enforcement departments had arrested seven sales representatives of Gan & Lee Pharmaceuticals, including its provincial sales manager, regional manager and hospital representatives. As disclosed by the prosecutor, due to the large amount of bribery, the Gan & Lee case has been considered as major economic crime cases and will be handled seriously.

Foreseeable Regulatory Programs in Other Business Industries

It is foreseeable that China authorities will go after corruption in more business sectors. As said by president Xi Jinping, “anti-corruption is the pre-condition to fulfill the ‘Chinese Dream’”.

For all companies doing business in China, to be prepared for such anti-corruption programs is necessary. Otherwise, the enterprises will increase the chances of being in serious trouble—a proper anti-corruption policy must be well prepared and delivered to all the employees and third-party agents. Proper and sufficient training must be conducted to let the employees and third-party agents confirm that they understand the policies.

No enterprise wants to create corruption related problems in China. Take GlaxoSmithKline as an example, it is rumored that Chinese authorities will impose a RMB 20 billion (around USD 3.3 billion) fine on GlaxoSmithKline for the corruption crime. In addition to the rumor of the large fine, the sales revenue of GlaxoSmithKline for prescription medicines and vaccines for the third-quarter 2013 in China had decreased by 61%. Taking anti-corruption compliance seriously is not only morally necessary but also economically obligatory for enterprises doing business in China.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Ling Zhang
 
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