China: Pharma Investigations Show New Trends In Commercial Bribery Enforcement

Last Updated: 3 July 2014
Article by Chris Chen, Richard Ma and Xing Wan

A number of recent commercial bribery cases concerning multinational pharmaceutical companies have drawn extensive attention. On 14 May 2014, the Chinese police published the results of their year-long investigation into commercial bribery allegations against GlaxoSmithKline, and reportedly have transferred the case to the prosecutor who will bring a criminal case against the company and certain individuals.
In related developments, the Hangzhou office of Swiss pharmaceutical company, Roche, was subject to an unannounced on-site inspection by the local AIC on 21 May 2014, and Eli Lilly, AstraZeneca and Novo Nordisk were named in a Hangzhou Health Bureau internal document for suspicion of commercial bribery. Taken together with the country's recent investigation into domestic pharmaceutical companies such as Sinopharm and Sanjing Pharmaceutical Co., Ltd., these cases show that the government is engaged in a sustained anti-commercial bribery drive focusing on the medical and pharmaceutical industry.

New Trends

A close look at key aspects of the current anti-bribery drive shows that this round of investigations exhibits characteristics distinct from previous anti-bribery campaigns, and its influence extends beyond the medical and pharmaceutical industry itself. We identify the key characteristics of the current anti-bribery drive below.

Shift of Focus from Bribe Receivers to Bribe Givers

In 2006, the Chinese government organized a joint action of some 20 ministries and commissions including the Supreme People's Court, the Ministry of Public Security and the Ministry of Health to specifically target bribe-taking hospitals and medical institutions.  Now, after years of anti-bribery practice, the Chinese government has realized the importance of punishing both the giving and receiving of commercial bribes, and is instead, in the current anti-bribery drive, focusing on investigating pharmaceutical companies that are typically in the position of offering bribes.

Increasing Regulatory Scrutiny of Multinationals

In recent years, regulation of, and law enforcement against, multinational companies by the Chinese government have become increasingly intensified. In addition to the companies caught up in this latest round of investigations, many other well-known multinational companies have been investigated in China in recent years on suspicion of commercial bribery, including Morgan Stanley, IBM, Lucent, Wal-Mart, DPC and Siemens.
In addition, in the GSK case, the Chinese government brought prosecution cases against GlaxoSmithKline China, its pharmaceutical subsidiaries and senior officers overseeing the company's China operations. The accused individuals include both Chinese nationals as well as foreign senior managers who voluntarily returned to China to assist with the investigation, which has been rare in previous cases. Video of the interview with a GlaxoSmithKline senior manager who admitted his guilt was broadcast on CCTV. This unusually publicized process demonstrates that the Chinese government is paying particular attention to multinational companies and is increasing scrutiny of multinationals in anti-commercial bribery actions.

Focus on Pricing and Other Business Fundamentals

During the current anti-bribery drive, the Chinese government is also focusing on what it sees as root causes of commercial bribery such as product pricing and "transfer pricing". In the GSK case, some reports have alleged that the prices of GlaxoSmithKline drugs in China were substantially higher than prices for the same drugs in other countries, and that GlaxoSmithKline's commercial bribery activities in China were made possible by the enormous profits generated through transfer pricing. According to these reports, GlaxoSmithKline allegedly increased the price of pharmaceutical products imported to China by way of internal transfer pricing, which elevated the apparent cost of sales in China without increasing the actual cost to the company. In 2013, in an inquiry into pharmaceutical product prices, the National Development and Reform Commission was reported to have made special on-site visits to investigate production costs and pricing mechanisms of dozens of domestic and foreign pharmaceutical companies. Further inquiries are expected to extend to fundamental business issues, such as product pricing, in connection with the commercial bribery investigations.

Our Advice

This latest round of anti-commercial bribery investigations shows that, as a result of increasing competition in the Chinese market, multinationals are facing a more strict and complicated regulatory and compliance environment in China, and must strive to comply with the regulatory requirements while remaining competitive in the market. Drawing on our extensive experience advising multinational companies operating in China, we believe that the following guidelines are the keys to establishing and operating an effective compliance system in China.

Establish China-specific Compliance Systems

The "localization" of multinationals' global compliance mechanisms is critical. The first and foremost step in localization is identifying targeted "red flags" that signal the most risky circumstances and require heightened attention. Common red flags for Chinese companies include giving excessive gifts, having luxury business meals/entertainment, hosting and sponsoring various types of expensive conferences, retaining advisors and agents designated by interested parties, or hiring employees recommended by interested parties, etc. In response to these red flags, multinationals may formulate tailor-made reporting, recording, approval, and reimbursement procedures to minimize the risk of non-compliance.

Strengthen the Training and Education of Employees

A robust compliance system depends on the understanding and implementation of employees. Therefore, it is essential to strengthen training and education programs to ensure that employees fully understand compliance requirements and are held responsible for effective execution. In addition, in China's pro-employee legal environment, an employer could easily find itself in a disadvantageous position if a dispute arises between the employer and its employees due to misunderstandings regarding the company's compliance requirements. An effective safeguard in this situation is to have a regular, thorough and vigorous compliance training program in place that defuses confusion and misunderstanding.

Closely Monitor Any Enforcement Trends

In our experience, enforcement actions by the Chinese government tend to come in waves, and government actions in a given period may share similar characteristics and exhibit certain trends in terms of enforcement focus and policy considerations. We believe it is important for multinational companies to closely monitor any enforcement trends and therefore benefit from the timely analysis of enforcement actions, recognition of the specific characteristics, and prompt adoption of preemptive measures to address any potential issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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