China's new anti-bribery agency announces pharma probe

China’s State Administration for Market Regulation (SAMR) has announced the launch of a nationwide campaign to crack down on unfair competition and commercial bribery in the pharmaceutical, medical device and educational sectors. The campaign comes at a time when the Chinese government has enacted key amendments to its Anti-Unfair Competition Law (AUCL) and is gearing up for tougher enforcement of its anti-bribery laws.

Introduction

On 17 May 2018, China’s newly-established SAMR announced the launch of a nationwide five-month campaign to crack down on unfair competition, with a focus on commercial bribery in the pharmaceutical, medical device and education sectors in the PRC. The campaign will leverage recent amendments to the PRC’s AUCL, which has clarified the scope of the commercial bribery offence and increased the penalties for commercial bribery. The announcement comes after several bribery scandals have rocked the Chinese pharmaceutical industry, and as Chairman Xi Jinping’s government intensifies its crackdown on corruption both at the local and national PRC government level. The SAMR’s announcement likely signals that China is gearing up its enforcement efforts and looking into those industries that are most prone to corruption risk, particularly the pharmaceutical industry.

China’s new regulatory landscape

The creation of the SAMR is the result of a sweeping government restructure in China, which has seen the SAMR assuming the role previously played by five separate government agencies, including the State Administration for Industry and Commerce (SAIC). The SAMR’s focus on the pharmaceutical industry is particularly significant given the Chinese government’s recent establishment of a new State Drug Administration (SDA) (under the purview of the SAMR) to oversee the regulation of drugs, medical devices and cosmetic products. Additionally, China has given the SAMR antitrust regulation powers, previously enforced by three separate Chinese agencies.1

With this restructuring, it appears that the Chinese government has nominated the SAMR as the key market regulator, tasked with overseeing everything from drug safety through to the management of intellectual property rights, anti-competitive behaviour and corporate bribery. In the anti-bribery space, the SAMR’s powers will extend to the bringing of civil actions against companies operating in China for bribery and unfair competitive behaviour under the recently amended AUCL.

SAMR’s anti-bribery campaign

The SAMR’s announcement states that the agency will be focusing its five-month probe on the following three enforcement areas:

1. commercial bribery in the pharmaceutical sector, the education industry and at state-owned enterprises (SOEs);
2. infringement of trade marks and trade secrets; and
3. false and misleading online advertising.

Of particular note is the SAMR’s focus on activities of the pharmaceutical and medical device industry, a sector which is traditionally prone to high bribery risks. In its announcement, the new agency states that its campaign will centre on the purchase and sale of medicines and medical equipment in the PRC, and the payment of bribes to both private counterparties and public officials. It will also target bribes paid to health care providers (HCPs) or government officials through third parties and agents.

China’s Anti-Unfair Competition Law

China’s revised AUCL, which came into effect on 1 January 2018, prohibits individuals and entities from giving money or property to a business counterpart or public official, or using other means to obtain a business opportunity or competitive advantage. Private and public bribery is prohibited as well as bribery via a third party (an individual or entity). Companies should also note that employers will be held vicariously liable for their employees’ acts of bribery.

The fines for commercial bribery under the AUCL range from RMB100,000 to 3,000,000 (approximately USD15,000 – 466,000). Those found liable may also face confiscation of illegally obtained income and, in the case of serious offences, the revocation of business licences. Although the SAMR only has jurisdiction to bring civil enforcement proceedings, it can also refer cases to the Public Security Bureau or the Chinese Procuratorate for criminal prosecution under the PRC Criminal Code.

Additionally, failure to comply with the AUCL may also increase the risk of an investigation by the U.S. Department of Justice, the Securities and Exchange Commission or the UK’s Serious Fraud Office for violations of U.S. or UK anti-bribery laws.

Key takeaways for pharma and medical device companies operating in the PRC

Although the SAMR has not identified which specific companies it will focus its anti-graft campaign on, pharmaceutical and medical device companies with operations in China should expect increased regulatory scrutiny. In particular, pharmaceutical and medical device companies in China should:

• prepare for heightened dawn raid activity in China and ensure they have a protocol in place to react to dawn raids. Companies that already have such a protocol in place should ensure it is up-to-date and that employees responsible for responding to a dawn raid are adequately trained;
• consider the need to conduct risk assessments to identify the most significant risks faced by their business and put in place controls to monitor and mitigate such risks. Specifically, internal controls around travel and entertainment, conference sponsorships for HCPs, meetings with doctors, as well as gifts and hospitality to government officials and hospital staff should be reviewed and tightly monitored for corruption red flags;3
• conduct anti-bribery due diligence on third parties, including downstream distributors and contract sales organisations. Depending on the risk profile of the third parties, fees paid to such entities should be reviewed and audited annually to ensure that distribution margins/commissions are not used to pay bribes;
• check that their anti-bribery and compliance policies are translated into Chinese and that all employees are educated about the implications of the AUCL; and
• ensure they have a panel of in-house or external legal counsel they can turn to in the eventuality of an inquiry by the SAMR. Legal counsel selected should have appropriate expertise and a good understanding of the local regulatory environment in China.

Finally, companies outside the pharmaceutical sector should also be aware of the risk of being caught up in the SAMR’s anti-graft probe. Although one part of the probe is focused on commercial bribery in the pharmaceutical industry, the campaign extends to anti-competitive behaviour generally, as well as violations of trade mark laws and false advertising. Therefore, companies engaged in business dealings with Chinese SOEs or other government agencies and educational institutions could also find themselves the subject of inquiries by the SAMR.