China: China's New Rules On Donations To Healthcare Entities - Implications For Multinational Companies

Last Updated: 30 December 2015
Article by Todd Liao

In August 2015, the PRC Health and Family Planning Commission (the "NHFPC"), the agency responsible for regulating the Chinese healthcare industry, issued the Administrative Measures on the Acceptance of Public Welfare Donations of Healthcare and Family Planning Entities (Trial Version) (the "2015 Donation Measures"). The 2015 Donation Measures took effect on October 20, 2015 and replace the predecessor regulation -  Provisional Measures on Receiving Social Donations and Sponsorships by Healthcare Entities, which had been issued by the Ministry of Health prior to its merger creating the NHFPC  (the "2007 Donation Measures").  The 2015 Donation Measures are directed at Chinese healthcare entities, such as public hospitals, universities, healthcare professionals, medical associations, etc. ("Healthcare Entities"), not multinational companies, but by outlining the circumstances in which Healthcare Entities may accept donations, these measures should provide greater clarify to multinational companies in determining how to structure compliance programs regarding donations to Healthcare Entities.

In recent years, sponsorships and donations to Healthcare Entities have been the focus of multiple anti-corruption enforcement actions in China.  While such activities are widespread and even expected in China's healthcare industry, they have nonetheless become high-risk activity for multinational companies in light of increased enforcement of anti-bribery laws both domestically in China and internationally.  China's healthcare industry is dominated by state-owned enterprises, with the result that many Healthcare Entities qualify as public officials or institutions for purposes of anti-bribery laws. As a result, interactions with Healthcare Entities in China have become a focus of anti-corruption proceedings, both by Chinese authorities, as in the case of GSK, and by foreign authorities, as in the U.S. SEC's enforcement action against Bruker Corporation.  Such enforcements have been driven in part by the ambiguity of Chinese regulations regarding donations to Healthcare Entities.  The 2007 Donation Measures provided little clarity or transparency to such donations, which made it difficult in turn for multinational companies to implement effective compliance programs. 

In this light, the 2015 Donation Measures are a welcome development.  They offer more specificity and guidance on what donations to Healthcare Entities are considered permissible by the NHFPC.    Specifically, the 2015 Donation Measures (i) extend the scope of healthcare entities for whom donations are regulated; (ii) adds further restrictions and permissible purposes for accepting the donations; (iii) clarifies internal procedures for Healthcare Entities in accepting donations; and (iv) requires greater transparency in Healthcare Entities using and reporting donations.  These regulations will assist multinational companies in designing effective compliance programs for interactions with Healthcare Entities in China, and compliance with the 2015 Donation Measures could also provide a defense for many foreign anti-bribery laws, such as the U.S. FCPA or U.K. Bribery Act. 

Healthcare Entities

The 2015 Donation Measures apply to the "healthcare and family planning entities" (the "Healthcare Entities") in China.  Specifically, the scope includes both not-for-profit public institutions (such as hospitals, universities or scientific research institutes), and "social organizations for public good," which includes medical associations, public welfare foundations, charitable associations and other civil organizations, all of which are supervised by the NHFPC.  The 2015 Donation Measures significantly extends the scope of subject entities compared to the 2007 Donation Measures, which had a far narrower scope generally interpreted to be limited to public hospitals.  As such, the 2015 Donation Measures provide greater clarity on interactions with the many varieties of public entities in China's healthcare industry.

Requirements for Donations

The 2015 Donation Measures define the term "donation" as "support and assistance in the form of funds, goods, etc. provided to healthcare entities voluntarily and not for return." This definition most clearly includes charitable donations and other common forms of sponsorship provided to healthcare institutions, such as sponsorships for speaking events, clinical studies, and symposiums. However, business arrangements with healthcare institutions where consideration is exchanged between the parties are not included in the scope of the 2015 Donation Measures, which would likely include exhibition booths, satellite symposiums, and clinical study results.  However, the types of activities covered will depend on the details of underlying arrangements, and whether the provisions to healthcare institutions are "voluntary" and with nothing received in return.

The 2015 Donation Measures require that a donation be for the purpose of carrying out activities that benefit the public, which is defined as one of the following types of activities: (i) reducing expenses for medical treatment of impoverished patients, (ii) healthcare education of the public, (iii) training of healthcare professionals, (iv) academic activities in the healthcare area, (v) scientific research in the healthcare area, (vi) infrastructure and equipment of healthcare entities, and (vii) other not-for-profit public welfare activities in the healthcare area.

Conversely, the 2015 Donation Measures prohibit Healthcare Entities from accepting the following types of donations: (i) donations that violate Chinese laws and regulations, (ii) donations that involve for-profit commercial activities, (iii) donations intended as commercial bribery or that raise concerns of unfair competition; (iv) donations associated with the procurement of goods or services by Healthcare Entities, (v) donations where the donor has incidental rights to the economic interests, scientific research, industry data, or intellectual property rights related to the donation, (vi) donations where the donated products do not meet the national standards in terms of quality, environmental protection, etc., (vii) donations that carry political or ideological purposes, (viii) donations that harm the public interests and infringes other citizens' legitimate rights and interests, (ix) donations that amount to extortion from the donor, and (x) any donations that could create a conflict of interest with an institution that supervises or enforces government decisions.  Among the above-mentioned prohibitions, items (v) and (vii) were newly added, the remaining items are a restatement of preexisting prohibitions in the 2007 Donation Measures.

New Procedures for Public Healthcare Entities and Donations

The 2015 Donation Measures clarify and revise the procedures that Healthcare Entities must follow before accepting donations.  The 2015 Donation Measures require that Healthcare entities create a "Donation Management Department," and all donations must be processed centrally through such departments.   The Donation Management Departments should also decide whether and how any donations will be used by Healthcare entities.  The 2015 Donation Measures prohibit other departments of healthcare entities, or individual functionaries, from accepting donations directly.  While donors are permitted to designate a general use for a donation (i.e., training of healthcare professionals, academic research, etc.), donors cannot designate individual recipients.  Instead, Healthcare Entities are required to organize a meeting of employees and management to determine the recipients of donations. 

The 2015 Donation Measures also require that Healthcare Entities establish a pre-acceptance evaluation and due diligence procedures for potential donations, which will be carried out by Donation Management Departments.  This would essentially establish a process that mirrors the due diligence procedures of many multinationals in their compliance programs, but with a public entity conducting such due diligence on the private party proposing a donation.  The evaluation criteria in the 2015 Donation Measures for such due diligence largely reflects evaluation of the prohibitions outlined above, including an evaluation of (i) the necessity and feasibility of the donation, and (ii)  the background of the donor and the business relationship between the donor and donee. Healthcare Entities may also involve third parties and regulators in the due diligence process.  It would be advisable that multinationals ensure that their own internal compliance programs and due diligence procedures regarding donations to public Healthcare Entities at least account for the new requirements in the 2015 Donation Measures.
 
The 2015 Donation Measures also require that donations to Healthcare Entities be made in accordance with a written agreement, which must specify:  (i) the identity of the donor, (ii) the type, quantity, quality, and value of the donation, (iii) a declaration that the funds or property are from "legitimate sources", (iii) the designated purpose for the use of the donation, including any related budget proposals or project plans, (iv) the management requirement for the donated funds or goods, (v) the timeline, location, and method for the implementation of the donation, (vi) the rights and obligations of the two parties, (vii) dispute resolution mechanisms, and (viii)  liability for any breach.  Of note, the 2015 Donation Measures do not define the meaning of the term "legitimate sources", though similar terms in other laws are often interpreted as meaning that that the funds or goods to be donated are legally owned by the donor and can be disposed of by the donor without restrictions.

Regarding the method of donations, the 2015 Donation Measures provide that, "in principle", cash donations must be made via wire transfer and that such transfer be made directly to the bank account of the Healthcare Entity, not to the bank account of individual functionaries of a Healthcare Entity. When assets or property (e.g. medicines or devices) are donated, the value of such assets should be appropriately evaluated with fair market value, as confirmed by notarization in the donation agreement.  The 2015 Donation Measures "encourage" the use of outside agencies to determine and attest to the fair market value of donated assets.  In addition, the recipient Healthcare Entities are required to issue formal receipts (the "fapiao for donation for public welfare") to the donor.
The 2007 Donation Measures had only very basic procedural requirements for Healthcare Entities, and the new procedures outlined in the 2015 Donation Measures seek to ensure greater transparency and process in Healthcare Entities accepting donations.  

Disclosures and Audits

The 2015 Donation Measures contain a new section on disclosure requirements. Healthcare Entities must now publish annual reports on donations accepted by them on March 31 of each year, with such disclosures detailing (i) the amounts/types of donations accepted, (ii) the identity of donors, (iii) the use of such donations, (iv) the Healthcare Entity's procedures for reviewing donations, and (v) contact information for the Healthcare Entity's Donation Management Department.  The 2015 Donation Measures also require that Healthcare Entities answer any public inquiries regarding donations.  These requirements represent a significant shift from the 2007 Donation Measures, which had little disclosure requirements and generally resulted in information on donations remaining confidential and inaccessible to the public, with the result that multinationals also had little sense of common market practice in donations.  This information will now be subject to greater public scrutiny, and may also raise attention of authorities under anti-bribery laws.  Conversely, multinationals will also have access to additional information to get a sense of common/acceptable market practice in making donations to Healthcare Entities. 

In a related vein, the 2015 Donation Measures also require that Healthcare Entities perform periodic audits of donated funds and include information regarding the use of such funds in their annual financial reports to regulatory authorities.  What's more, the New Measures require Healthcare Entities, upon the completion of a donation project, to provide feedback to the donor company on how they managed and used the donation.

Enforcement Considerations

The NFHPC regulates Healthcare Entities, and as such, the 2015 Donation Measures are directed to and binding on Healthcare Entities, not multinational companies.  The Administrations of Industry and Commerce (the "AIC"), through its local branches, is responsible for enforcement of China's anti-bribery laws, including various forms of commercial bribery prohibited under the PRC Unfair Competition Law.  Because the AIC and NFHPC are considered to have equal authority, it is unclear whether the AIC will follow the 2015 Donation Measures when pursuing enforcement actions against multinational companies.  The AIC has considerable discretion in determining whether donations to Healthcare Entities violate Chinese anti-bribery laws, but it is likely that the NFHPC's 2015 Donation Measures will influence AIC's investigations in future.  

Additionally, the more detailed guidance under the 2015 Donation Measures should help multinationals operating the in China's healthcare industry to design stronger compliance programs regarding donations to Healthcare Entities.  Equipped with knowledge of acceptable donations for Healthcare Entities, multinationals can cater their own internal procedures to reflect such requirements, and multinationals should have increased access to greater information on acceptable donations in future thanks to new disclosure requirements.  The 2015 Donation Measures should also provide a strong defense in any investigation by the AIC.  And for those foreign anti-bribery laws with a defense for local law, such as the U.S. FCPA and U.K. Bribery Act, compliance with the 2015 Donation Measures should also provide multinationals with a strong defense for donations to Healthcare Entities in China being permissible under local law.

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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