ARE WE WITNESSING A PROLONGED ENFORCEMENT CYCLE?
A new leadership heralds change
China is currently witnessing an extended government campaign to tackle corruption on an unprecedented scale. The change in the Communist Party's leadership that began at the end of last year coincided with the arrest and indictment of the former Chongqing Party Secretary, Bo Xilai (the most senior official charged with corruption in recent memory). The wave of enforcement actions against corrupt officials that followed Bo's arrest has continued, recently leading to the head of the once powerful Ministry of Railways being sentenced to death for corruption. He is the most powerful former government official sentenced for corruption since President Xi Jinping became China's leader in March this year.
Recent regulatory and investigative action in China
However, the government's focus does not appear to be limited to public officials alone. In recent months, there have been a spate of regulatory and investigative enforcement actions by Chinese government authorities against companies in the private sector (including both multi-national companies and local Chinese companies), which are likely to have a major impact on the Life Sciences sector in China in the near and medium terms. These include:
- New regulations issued by the State Council which came into effect in May 2013 now impose tougher market entry requirements on infant formula manufacturers, including among others, requiring them to own their own milk sources, forbidding them to outsource production or use several brand names for the same infant formula. This has already led to a number of dairies being acquired by Chinese infant formula rands.
- China's anti-trust regulator, the National Development and Reform Commission (NDRC), announced in early July 2013 that it is investigating 33 Chinese domestic pharmaceutical companies and 27 international pharmaceutical companies operating in China (or their Chinese agents) with respect to the production costs of some of their products. The implication here is that similar to the NDRC's earlier investigation into the price of infant milk formula products, the NRDC considers the price of these pharmaceutical products are too high and are causing a financial burden on the public health insurance scheme.
- Reports of recent anti-bribery investigations against a number of international players in the pharmaceuticals industry led by the Chinese police, the Public Security Bureau (PSB), as well as the Administration of Industry and Commerce (AIC).
What it will mean for Life
Science sector players and multinationals operating in China?
In the past, government anti-bribery enforcement actions would target principally those government officials involved, rather than the companies that actually paid the bribes to these officials. The breadth of the latest investigations and regulatory intervention is, however, unprecedented, particularly as they involve so many government authorities and agencies (NDRC, PSB, and the AIC) who appear to be taking enforcement action concurrently. There has been no shortage of rumours coming out of the Chinese market in recent months as to how many foreign companies have been targeted by the government and the reasons that led to these investigations.
However, as modern socialist China enters into its fourth decade of economic development, there are complex and intertwined social, political and economic factors that are now driving this regulatory enforcement action by the government. With the public's interest on food safety and healthcare at an all-time high and the public becoming more willing to criticise corrupt behaviour, China's new leadership appears to be more willing to increase regulatory oversight on various high priority industries such as food, healthcare, real estate and construction, and telecommunications.
Eager to prove itself to the Chinese public and to establish a strong mandate to govern, greater regulation and stronger enforcement action is likely to continue into the second half of the new leadership's first five-year term in office (ending in 2017). This is likely to mean that practices that traditionally have been viewed as grey areas will be targeted and ultimately punished.
From a regulatory and compliance perspective, companies with a robust regulatory and compliance program and effective crisis management protocols will be in a strong position to respond to such government enforcement action, hopefully with as little potential negative impact on their business as possible. This should not be limited to a program that only responds to compliance issues as they arise. International companies operating in China will need to localise and update their approach to regulatory affairs and compliance, so that preventative measures are put in place across their entire business cycle covering:
- how market access efforts are managed (such as engagement of consultants to assist with product registration);
- review of sales and marketing practices (how these are monitored and audited for potential compliance breaches);
- interactions with government officials and State-owned enterprises;
- whether present compliance training materials and efforts are sufficient; and
- protocols for responding to government enforcement action and investigations (how a company should respond to a PSB or AIC investigation and what its standard operating procedures are in case of a raid on its business premises).
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