China Cracks Down on BriberyChina Cracks Down on Bribery
July 1, 2010
In China, bribes are sometimes offered and accepted for the sale and procurement of medical devices, pharmaceuticals, and other healthcare products. Managers who accept bribes for the use of specific medical devices, as is the case with pharmaceuticals and related products, procure them exclusively or instead of other products. Doctors who accept bribes to buy, use, or refer the use of medical devices have been known to prescribe or even overprescribe procedures using the devices. As a result, products supported by bribery sell more quickly and at a higher price than products for which lower or no bribes are paid, regardless of the device’s inherent value or effectiveness. The overall effect is that prices rise for all medical devices.
There is an effort to modify Chinese law to eliminate bribery in relation to cai wu (literally, cash and valuables) or bribery by other means (e.g., tourism) by expanding efforts to make it harder to offer and accept bribes. It is part of a general evolution of China’s judicial concepts and legal system. This evolution is inseparable from China’s business, cultural, and economic environment, as privatization and rapid economic growth create change that requires new judicial and cultural frameworks. Manufacturers of medical devices and diagnostic products need to become familiar with all the provisions of the new antibribery regime, so that they and their sales agents can ensure that their activities in China comply with these complex and demanding regulations and market requirements.
Bribery is a major concern for all multinational companies. Integrity Interactive, which helps global corporations manage and reduce the risk of compliance failures, recently announced the results of the 2009 version of its annual study on the top 12 corporate compliance concerns expressed by global companies. According to the study, companies are putting greater focus on outward-facing compliance concerns in the world at large as they focus on preventing legal problems for themselves. The leading corporate ethics and compliance concern for 2009 was antibribery requirements.1 Understanding these requirements can help companies avoid the difficulties caused by an investigation for charges relating to official corruption.
As more multinational business activity continues to focus on China, it is unfortunate that bribery is pervasive there. In addition, bribery remains a worldwide problem. In a 2008 Ernst & Young survey, nearly one-quarter of respondents said their organization faced pressure to make illegal payments.2 A 2007 study by the Carnegie Endowment estimated that around 10% of Chinese government spending, contracts, and transactions are used as bribes, kickbacks, or theft, and the problem is also coming from foreign firms.3 In the 2008 Corruption Perception Index issued by Berlin-based Transparency International, China scored 3.6, which indicates that corruption is very intensive and rampant.4 The Chinese Communist Party Central Committee issued a 36-page policy paper in 2004 calling corruption “a life and death struggle” for the party.5
Some people attribute the existing level of corruption to political reasons. Others take it as a matter of culture. To quote one recent academic study, “[s]ome people hold the view that China’s corruption problems have their root deep in the Chinese culture. They argue that the Chinese people, as well as most of their counterparts in other Asian countries, have a long tradition of placing personal connections above the law, and that this is the real source of corruption.”6 No matter what the reasons are, the problem cannot be cured very easily.
The Battle against Bribery
Government authorities are financially motivated to fight bribery, which might give a false positive impression of their efforts. The Administration for Industry and Commerce (AIC), the central body that administers China’s companies and enterprises, is assigned an annual target for how large an antibribery fine should be imposed and collected. For example, by 2006, Wuxi AIC, Chong’an Branch, had five subsidiaries and one economic examination team, for a total of six investigation units. Each unit was assigned an annual task—each subsidiary was required to collect as much as RMB 1 million in fines while the economic team was to collect as much as RMB 2.5 million in fines. As a result, Wuxi AIC, Chong’an Branch was required to collect fines of RMB 7.5 million per year. In 2004, Chong’an Branch reached that target and exceeded the goal in 2005 by collecting RMB 8.4 million. During the first half of 2006, Chong’an Branch collected RMB 5.8 million in fines.7
Companies in China, whether foreign-based or domestic, risk running afoul of antibribery and corruption rules, according to a report by KMPG Forensic. “[W]ith the recession, companies are having to fight harder than ever to win new contracts, and as a result, there could be an increased pressure on those in the front line to override antibribery and corruption laws.”8 Adding to the difficulty is the uneven nature of law enforcement in China, as different governmental authorities may have different opinions regarding what bribery is. Some definitions of bribery are either extremely harsh or difficult to understand.
For example, the Yi Chang City Women and Infants Clinic was investigated and fined for engaging in commercial bribery because of actions that might be allowed for nonprofits in other countries. The clinic, in proportion to the sale price of the pharmaceuticals that it purchased from certain pharmaceuticals suppliers, took some donations of cash and an air conditioner from the suppliers in 1998 and 1999. The clinic accounted the cash donation under the entry of “other revenue,” and the air conditioner under the entry of “fixed assets.” Yi Chang AIC determined that the clinic took a commercial bribe from the suppliers and fined them accordingly.
The clinic brought administrative litigation against the Yi Chang AIC for its decision, which was upheld by the courts. The AIC and the courts determined that the clinic did not appropriately account for the donations. By accounting for the donations as “other revenue” and “fixed assets,” the clinic did not account donations to set off the costs of purchasing pharmaceuticals. The clinic should have recorded the donations as discounts for the goods it purchased or credited administrative expenses with the donations. Because the clinic failed to do this, the Yi Chang AIC and the courts detemined that the clinic was booking the donations “off the accounting book” and “secretly.” Therefore, the clinic was taking a commercial bribe.9
This difference in interpretation should be kept in mind in the following discussion about the specifics of China’s new antibribery effort.
Centralized Procurement Systems
As part of the effort to curb bribery and reduce the prices of certain drugs, China’s central and local governments are establishing online, centralized procurement systems. They are also implementing procedures to blacklist businesses that offer bribes and are punishing doctors for taking bribes for purchasing or prescribing healthcare products.
In January 2009, several government agencies, including the Ministry of Health and the State Food and Drug Administration, issued jointly the “Opinions on Strengthening the Centralized Procurement of Drugs by Medical Institutions.” These rulings are intended to regulate the procurement processes of medical institutions, control unreasonably high prices, and regulate purchases and sales in order to restrict and prohibit commercial bribery and reduce the high cost of medical supplies.
Implementing centralized, online medical procurement is under the direction of local government at the provincial level. Going forward, all not-for-profit medical institutions under government jurisdiction at the county level or above, or owned by state-owned enterprises (including state holding enterprises), must participate in this centralized procurement process that, in principle, will be conducted once a year. All other medical institutions are also encouraged to participate.
Pharmaceuticals. The drug central procurement system features a procurement catalog that will include, with some specified exemptions, almost all drugs and other medical products used by medical institutions. Listings in the catalog are secured by means of public tendering and bidding, online auction, collective bargaining, and listing online. Medical purchases that have been made collectively several times at consistent prices may be directly listed online. Manufacturers will authorize specific products listed in the system to be sent to medical institutions by manufacturers or trading enterprises. Some experts in China estimate that the number of pharmaceutical companies will decrease by one third as a direct result of the reform.10
Medical Devices. On June 21, 2007, the Ministry of Health issued the Circular of the Ministry of Health to Further Strengthen the Administration on the Centralized Procurement of Medical Devices. Similar to the drug procurement system, all nonprofit medical institutions must participate in the device procurement system. The medical devices to be centrally procured include medical equipment and consumables. According to the circular, the device procurement system consists of three levels—central, provincial, and city. The Ministry of Health is responsible for the central procurement related to category A major medical equipment and high-priced medical consumables such as heart pacemakers and heart interposition devices.
The central procurement system at a provincial level is responsible for the central procurement of category B major medical equipment and the high-priced medical consumables other than heart pacemakers and heart interposition devices. The systems at the provincial and city levels are responsible for the central procurement of other medical devices, which will be cataloged by the provincial departments of health.
When equipment isn’t in the catalog for the central procurements, the central procurement should be applied if the equipment is procured in bulk, and the provincial departments of health will make a standard.
Category A and category B major medical equipment refer to equipment with a price above RMB 5 million (approximately U.S. $720,000). However, category A major medical equipment is more capital intensive in investment and operation, more complicated in technology, and has a higher increase in medical expenses compared with category B.
According to the “Rules Regarding Maintaining Records of Commercial Bribery in Medical Sales” issued by the Ministry of Health in 2007, each provincial health department must maintain and publish a bribery blacklist of manufacturers or traders of healthcare products. By law, medical institutions cannot purchase any medical products from blacklisted companies for two years. Companies are added to the list if they
?Provide financial or other benefits to medical institutions or their representatives.
?Were convicted of bribery as a criminal offense.
?Were investigated and punished for bribery by the discipline supervision authorities.
?Received administrative punishment for bribery from the relevant authorities.
?Fulfilled other criteria as may be stipulated by provincial health administrative departments.
Local governments are vigorously implementing the blacklisting rules. For example, on November 11, 2009, the Fujian Provincial Department of Health published a list of six pharmaceutical and medical device companies from inside and outside the province that engaged in commercial bribery within Fujian.
Plugging the Loopholes
Bribery may trigger criminal liability for the parties that give or take bribes. There are two categories of criminal bribery in relation to individuals. Originally, only state employees could be found guilty of having accepted a bribe, but the law has been changed to include individuals not employed by the state. If the recipient of a bribe works for the state (for example, as a public official working in a state-owned enterprise), he or she would commit what is known as the crime of taking a bribe, which domestic Chinese lawyers usually refer to as the crime of a state employee taking a bribe. If the recipient of a bribe does not work for the state (such as a general manager who does not have the status of a public official and works in a privately owned Chinese enterprise or in a business that receives foreign investment), he or she would commit what is known as the crime of a nonstate employee taking a bribe. The distinction is significant because the punishment for state employees is much harsher than for nonstate workers.
It has long been debated whether a doctor who isn’t employeed by the state could be criminally liable for committing the crime of a nonstate employee taking a bribe, because a doctor is more of an independent practitioner than an employee of a company or enterprise. In addition, some hospitals are not considered a company or enterprise in China, but instead are considered not-for-profit organizations. To resolve these issues, in November 2008, the Supreme People’s Court and the Supreme People’s Prosecuting Institute jointly issued a judicial interpretation, the “Opinions on Several Issues on Application of Laws on Handling Criminal Cases Regarding Commercial Bribery.”
This judicial interpretation stated that a doctor could be subject to criminal liability for taking a bribe for prescribing healthcare products. The interpretation also emphasizes that if the recipient of a bribe works in a medical facility, the person could also be criminally liable. The specifics of the crime and penalty depend on whether the person charged is an employee of the state. It is clear that the Chinese government is closing ambiguities in the law and making it increasingly difficult for doctors to accept bribes.
Monitoring Cai Wu
Criminal law prohibits anyone (both state employees and employees of businesses or enterprises) from taking advantage of their position to demand cai wu or receive cai wu in order to confer illegitimate benefits on the giver. The use of cai wu as a bribe is also prohibited under the administrative law framework. Cai wu tends to consist of cash or valuables that are usually tangible. Previously, nontangible items, such as entertainment in the form of travel or events, were not considered to be cai wu or to be a means of bribery under the criminal law. The judicial interpretation has now changed the definition of what constitutes cai wu in relation to bribery under the criminal law, as the scope has broadened to cover “gifts” that are financially quantifiable and have rights of property. Such financial interests and rights could include improvements to houses and apartments, membership cards with financial value, cash substitutes or coupons, and travel.
If a medical device company, or any other provider of healthcare products, pays for a doctor to take a vacation, that vacation may make both the company and the doctor criminally liable for bribery. Because judicial interpretations are applicable retrospectively, those who have engaged in activities that fall within the new definitions may face criminal investigations for their actions in the past. As a result, the exposure to compliance and reputational risk has increased for companies and enterprises active in the medical products market in China.
Changing practices that are as engrained as cai wu and companies collaborating in discussions of business conduct mark the start of a new era for doing business in China. The changes indicate that China’s legal and regulatory system is fully capable of conforming and supporting established international norms of doing business. Medical device manufacturers that export to China, as well as their business agents in that country, will ultimately benefit from such efforts to integrate China into the global legal and business system. Any temporary disruptions in business strategies to accommodate such a change will be far outweighed by the positive effect of this integration process.
1. “Bribery Tops List as Number One Risk Concern of Global Companies for 2009,” Supply Demand Chain Executive, December 30, 2008; available from Internet: www.sdcexec.com/online/article.jsp?siteSection=16&id=10919&pageNum=2.
2. “Corruption of Compliance—Weighing the Costs: The 10th Global Fraud Survey,” Ernst & Young, May 2008: available from Internet: www.ey.com/GL/en/Newsroom/News-releases/Media---Press-Release---Senior-executives-see-jump-in-anti-corruption-enforcement.
3. Sue Lannin, “Foreign Companies ‘Bribe’ Their Way into China,” ABC News, July 2009; available from Internet: http://www.abc.net.au/news/stories/2009/07/23/2634561.htm.
4.Corruption Perception Index, Transparency International; available from Internet: www.transparency.org/policy_research/surveys_indices/cpi/2009.
5. “China Leaders Warn of Corruption,” BBC News Online, September 2004; available from Internet: http://news.bbc.co.uk/2/hi/asia-pacific/3692530.stm.
6. Shuntian Yao, “Privilege and Corruption: The Problems of China’s Socialist Market Economy —New Perspectives on Transition Economics: Asia,” American Journal of Economics and Sociology 61, no. 1 (January 2002): 279.
7. Guichi City Administration for Industry and Commerce, “The Study and Inspect Report of Administrations for Industry and Commerce in Maanshan City, Wuxi City and Suzhou City,” available from Internet: www.gcgs.gov.cn/NewsView.aspx?id=2364.
8. “Companies Failing to Take Bribery and Corruption Risk Seriously,” Continuity Central; available from Internet: www.continuitycentral.com/news04711.html.
9. Yichang City Intermediate People’s Court about the Case on the Conflict Regarding the Administrative Punishment of Yi Chang Women and Infants Clinic v. Yi Chang City Administration of Industry and Commerce, the Administrative Judgment of Hubei Province (2000). Yi Zhong Hang Zhong Zi Di 28 Hao.
10. “Predict from Pharmaceutical Trade: the Medical Enterprises Will Shrink 1/3 in the Whole Country After the Medical Reform,” Chengdu Business Newspaper available from Internet: http://news.sina.com.cn/c/2009-11-28/044916681457s.shtml [in Chinese].
Henry (Litong) Chen, the commissioner of the economic committee of All China Lawyers’ Association, is a partner of MWE China Law Offices (Shanghai).
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