Co-Authors: Nathan Kaiser and Jonathan Xi, Eiger Law, Shanghai, China
Over the past decade, multinationals in the life sciences industry, including pharmaceutical and biotech companies, have expanded their reach in China, the second-largest economy in the world. The pharmaceutical market in China was estimated at $108 billion in 2015, and it is projected to grow at a 9.1% annual rate to $167 billion by 2020.
With this growth, however, comes risk. Multinationals must ensure compliance with a variety of laws designed to prevent bribery of foreign officials and other illicit activity, which is still viewed by many as an undesirable, but common, part of doing business in China. Increasing this risk is the fact that many seemingly “ordinary” Chinese persons – due to their employment by a state-owned entity (SOE) or to their membership in the Communist Party of China (CPC) – qualify as foreign officials under the Foreign Corrupt Practices Act (FCPA), the U.S.’ primary anti-bribery statute.
Anti-bribery laws that may affect multinational life sciences companies operating in China include, most notably:
The FCPA has extraterritorial application, and reaches conduct in China. The FCPA applies to US citizens and companies (including foreign subsidiaries), any company listed on a US exchange or otherwise classified as a US “issuer,” and anyone who takes steps in furtherance of a foreign bribery scheme in the United States. Both companies and individuals may be held liable under the FCPA for bribery that occurs anywhere in the world. Indeed, individual executives continue to be criminally prosecuted and imprisoned for participating in or knowing about foreign bribery schemes. Potential penalties include significant corporate fines and individual imprisonment.
China’s Criminal Law and its Law Against Unfair Competition are interpreted by the Supreme People’s Court of China and the Supreme People’s Procuratorate of China. Neither law provides a clear and unified definition of bribery, but instead set forth various criteria applicable to different situations. Both companies and individuals may be held liable under either law for paying or accepting bribes, including through third parties. And, unlike the FCPA, the Law Against Unfair Competition applies to improper payments made to state-owned or private individuals or entities. Potential penalties include confiscation of property, fines up to CNY 3,000,000 (about $450,000) per violation, criminal detention, and up to life imprisonment.
The FCPA and Chinese anti-bribery laws, as well as other Chinese laws affecting multinationals in the life sciences industry, are enforced aggressively. In the US, for example, more than 40% of the 53 FCPA enforcement actions brought by US regulators in 2016 involved conduct that took place in China, more than any other country. In China, the “Tigers and Flies” initiative announced in 2013 by China’s President Xi Jinping – an anti-corruption campaign targeting both senior officials (tigers) and lower level bureaucrats (flies) – has reportedly ensnared more than 2 million officials over the past 5 years.
Noteworthy enforcement actions and developments include the following:
Life sciences companies operating in China should be aware that many (if not most) Chinese doctors, hospital administrators, and healthcare professionals qualify as “foreign officials” under the FCPA. Because China’s health care system is largely government funded and operated, life sciences companies should treat any interactions with Chinese health care with FCPA considerations in mind.
Life sciences companies also should monitor closely third-party intermediaries, such as consultants, sales representatives, contractors, and distributors, who are regularly used to help establish relationships and conduct business in China. Under the FCPA, companies can be held liable not only for bribes made by employees, but also bribes made indirectly through third parties operating on a company’s behalf. Indeed, the vast majority of FCPA enforcement actions involve illicit payments made indirectly by such third-party intermediaries.
US enforcement agencies have identified three common fact patterns that have led to FCPA liability for life sciences companies: (i) pay-to-prescribe schemes involving payments (or providing other things of value) to doctors or other health care providers in an effort to influence their choice of pharmaceutical or medical device; (ii) bribes to get drugs or medical devices on an approved government distribution list, insurance reimbursement list, or formulary; and (iii) bribes disguised as charitable contributions.
While numerous FCPA enforcement cases in China following these fact patterns have involved traditional bribery in the form of illicit cash payments, a fair number have involved the provision of other things of value to doctors and other health care providers. FCPA enforcement actions involving China have included, for example, giving lavish gifts, entertainment, meals, and, quite commonly, travel opportunities lacking a legitimate business purpose (such as “side trips” to Las Vegas, for example). Examples of potentially problematic conduct in China include:
The provision of gifts and other things of value, in particular, present heightened FCPA risk in China, as gift-giving is a well-engrained in Chinese business culture. Indeed, a recurring theme in our investigations is companies providing business courtesies to develop “guanxi,” i.e., informal social networks and influential relationships that facilitate business dealings in China. What may be viewed as developing guanxi with Chinese regulators, however, could be viewed by US regulators as attempts to obtain an improper advantage if the provision of business courtesies is excessive either in occurrences or amount.
There are, unfortunately, no bright lines and whether business courtesies are legitimate relationship building expenditures or corrupt payments designed to improperly influence is fact-specific.
In addition to FCPA risk, companies that engage in such conduct run the risk of triggering China’s Unfair Competition Law. Life science companies that engage in bribery will be listed in the bad business bribery records. Additionally, the local centralized procurement of pharmaceutical products management authorities will suspend the company’s drug procurement qualifications.
Donations to hospitals and medical facilities also raise risk under US and Chinese anti-corruption laws. Wary of providing business courtesies directly to doctors or other health professionals, many life sciences companies are increasingly donating equipment, pharmaceuticals, or monetary funds to medical institutions or subsidizing the publication of medical papers and research. Such donations, however, should be evaluated against the Measures for the Public Charity Donation to the Health Care Unit. These measures, issued in 2015, standardized the procedures under which health and family planning units are able to accept donations of public welfare and measures identify seven types of donations that are considered justified: (i) medical treatment fee relief, (ii) public health education, (iii) professional training, (iv) academic activities, (v) scientific research, (vi) public facilities and equipment construction, and (vii) other public non-profit activities. Potentially problematic donations include those that relate to commercial activity; involve the purchase of the donating company’s products; are made without a proper written donation agreement; are made directly to individuals or to internal operations within a health care unit; specifically identify the intended beneficiary for health planner training, health and family planning academic activities, or scientific research donations; and that do not require the recipient organization to issue the public welfare undertakings of the unit seal.
In addition, it is worth highlighting the risks associated with donations intended to sponsor academic activities. Many life sciences companies operating in China regularly invite or fund doctors to attend academic conferences, with the companies typically bearing the cost of the conference registration fee and travel accommodations. In 2016, however, the definition of property interests was revised to include items such as the payment of conference-related services and travel. These expenses arguably could be interpreted as “property interests” under China law. Accordingly, life sciences companies should be cautious when sponsoring doctors and health care professionals, particularly when conferences involve tourist destinations and luxury hotels.
China has developed a reputation for corruption, scoring relatively poorly in Transparency International’s Corruptions Perceptions Index. The challenges of conducting business in China, however, can be managed by understanding where bribery and corruption risks are likely to arise and by implementing the appropriate procedures to manage anti-corruption risk.
To that end, life sciences companies should consider the following:
David Simon is Partner, John Turlais is Special Counsel, and Kate Shoemaker is Associate, all at Foley & Lardner LLP. Nathan Kaiser is Partner and Jonathan Xi is Associate at Eiger Law.
1 These companies are Orthofix International (2017, 2012), Zimmer Biomet Holdings, Inc. (2017, 2012), Teva Pharmaceutical (2016), GlaxoSmithKline (2016), AstraZeneca (2016), Analogic Corp. (2016), Novartis AG (2016), SciClone Pharmaceuticals (2016), Bristol-Myers Squibb (2015), Bruker Corporation (2014), Bio-Rad Laboratories (2014), Stryker Corporation (2013), Koninklijke Philips Electronics (2013), Eli Lilly and Company (2012), Pfizer (2012), and Smith & Nephew (2012). https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml
This article was originally published by Pharmaceutical Executive.