Don’t be Blacklisted: Be Aware of China’s New Anti-Corruption Regulations in the Healthcare Industry

October 2, 2014

By Ruilin Li

In recent years, multinational healthcare companies operating in China have been focusing on compliance efforts on FCPA and U.K. Bribery Act. However, the recent anti-corruption regulatory and enforcement developments in China mandate that multinational healthcare companies operating in China must now focus on compliance of China’s domestic law. China’s heightened anti-corruption efforts are reflected in the recent adoption of several anti-corruption measures: Circulars 49, 163 and 50. This article will summarize each of these circulars as well as some action items companies may want to consider in order to ensure compliance under the new measures.

Circular 50 came effective on March 1, 2014. It requires that relevant governmental health authorities at the provincial level establish a blacklist system to record pharmaceutical or medical device companies and individuals that have engaged in bribery. The relevant health departments have to timely publish the blacklist on its website and report to the National Health and Family Planning Commission within one month.

A pharmaceutical or medical device company and/or any individual will be put on the blacklist under any of the following circumstances:

  • conviction by a court for bribery, or conviction without criminal liability for minor bribery violations;
  • committing minor acts of bribery and the procurator decides not to pursue criminal charges;
  • being investigated and disciplined by Party disciplinary authorities based on the charge of bribery;
  • being punished/penalized by a local Administration for Industry and Commerce (AIC) or Food and Drug Administration (FDA) based on the charge of bribery; or
  • other circumstances provided under laws and regulations.

Before being blacklisted, the concerned company/individual will have an opportunity to defend themselves at a hearing. Different enforcement agencies, including the Party’s disciplinary agencies, local finance bureaus, AICs, commerce bureaus, FDAs and other agencies, are required to coordinate with each other in the investigation of commercial bribery cases.

Once a company/individual is blacklisted, the consequences are serious under Circular 50. Public hospitals and other hospitals receiving State funding in the same province will be barred from purchasing any goods or services from the company/individual for two years. If a company/individual is blacklisted two or more times in a five-year period, all public hospitals and other hospitals receiving State funding throughout the country will be barred from purchasing any goods or services from the company/individual. The blacklisted company’s name, address, legal representative, responsible person, and relevant information about the bribery act will also be published.

Circular 163 came into effect on February 26, 2014. It provides additional guidance on blacklisting procedures, establishing an aggressive timeline for the reporting and investigation of violators. More importantly, Circular 163 also provides a sample “Agreement on Integrity in the Sale and Purchase of Healthcare Products.” The sample agreement includes anti-bribery provisions for incorporation into commercial sales agreements. The sample agreement clearly states that the buyer cannot accept and seller is prohibited from offering kickbacks in any name or form, donations and sponsorships linked to procurement decisions, entertainment arranged and paid for by seller, and cash, securities and other valuable gifts.

Circular 49 became effective on December 26, 2013. While Circulars 50 and 163 focus on the supply-side of bribery in the healthcare industry, Circular 49 focuses on the recipients of potential improper payments: Chinese hospitals and medical personnel. Hospitals and healthcare professionals are prohibited from engaging in the following commercial activities:

  1. Linking physicians’ income to revenue generated from the sale of drugs or provision of healthcare services;
  2. Paying commissions to physicians based on the value of drugs prescribed and health services rendered;
  3. Charging additional fees or raising fee standards beyond the permitted national price cap for drugs or healthcare services;
  4. Accepting improper donations from healthcare companies;
  5. Participating in promotional activities or issuing illegal advertisements;
  6. Compiling medical statistical data for commercial purposes;
  7. The procurement, sale, and use of medical products through private channels;
  8. Accepting commissions or kick-backs in any form or attending activities held in commercial entertainment venues that are organized or sponsored by healthcare companies; and
  9. Accepting cash or valuable gifts from patients or their families.

The issuance of Circulars 49, 50 and 163 is a strong indication of the Chinese government’s determination to crackdown on corruption and bribery in the healthcare sector at the national level. Unlike the United States and some other foreign jurisdictions where a settlement with the law enforcement agencies to avoid formal charges is possible, China currently does not have a formal settlement process. Therefore, it is extremely important to establish and strengthen internal compliance policies and procedures to prevent any potential violations. Even if companies that have policies in place for compliance of FCPA, it is now time to review the legal and business environment as well as compliance policies, identify and evaluate associated risks, retrain employees and sale representatives/distributors, and enhance the existing compliance programs. For more information or assistance on evaluation how these recently adopted anti-corruption regulations affect your business activities or sales agreements, please contact me or a member of the Life Sciences team.