In the past few weeks, the anti-bribery and anti-corruption storm (“ABAC Storm”) in the Chinese healthcare industry has intensified. From medical companies, medical institutions and industrial associations to M&A transactions and the stock market, all have been affected by the latest storm. In this article, we review actions taken by the Chinese Government and the related policies that have been introduced as well as provide strategies to navigate through the changes.  

Overview of actions and policies in ABAC Storm

Based on currently available public information, we summarise some significant governmental actions as well as related regulations and policies worth noting in this latest ABAC Storm.

• In November 2022, the State Administration for Market Regulation (“SAMR”, which is a super-ministry that covers product and consumer protection regulation, advertising, antitrust, among other areas) released 5 typical cases investigated and punished in special law enforcement actions against unfair competition, including two cases in the healthcare industry concerning offering commercial bribery by payment of research grants and kickbacks.
• In February 2023, the Central Commission for Discipline Inspection of the CPC (“CCDI”, which is the highest internal control institution of the CPC) and the National Commission of Supervision of China (“NCS”, which is the highest anti-corruption supervisory authority in China and shares the joint office with CCDI) published articles addressing transfer of illegal interests in the healthcare industry, specifically criticising bribery practices such as paying kickbacks and inflating procurement prices.
• In February 2023, the Shenzhen Stock Exchange (“SZSE”) issued the Report on the Regulatory Work Concerning Commercial Bribery in Medical Companies listed on SZSE. By reviewing the medical companies listed on SZSE, the report exposed 6 main forms of commercial bribery in the healthcare industry, including but not limited to selling medical products through offering kickbacks, transferring illegal interests through conference sponsorship, and inflating prices through false transactions.
• In May 2023, 14 governmental departments including the National Health Commission (“NHC”, which is the primary regulatory authority for medical institutions and HCPs in China) jointly issued the Key Points for the Work of Correcting Malpractice in the Medical Products Purchase and Sales and Medical Services in 2023, emphasising the need to address prominent corruption issues in the healthcare industry, particularly to rectify the malpractice in industrial organisations and in the purchase and sale of medical products.
• In July 2023, the NHC, along with the Ministry of Public Security, the National Audit Office (“CNAO”, which is the supreme audit institution for the revenue and expenditure of governmental departments and related organisations in China), the SAMR, and the National Medical Products Administration (“NMPA”, which is the primary pharmaceutical and medical devices regulatory authority in China) and other governmental departments, held a video conference and initiated a one-year nationwide concentrated rectification campaign against corruption in the healthcare industry. The CCDI/NCS and other related governmental departments participating in the campaign attended the conference.
• In July 2023, the NHC and 3 other governmental departments jointly issued the Key Tasks in the Second Half of 2023 for Deepening the Reform of Medical and Health System. It called for strengthening comprehensive supervision in the healthcare industry, including to continuously improve industrial ethics, facilitate the establishment of long-term mechanisms for addressing corruption issues in the national healthcare industry, and enhance the supervision of unfair competition in the healthcare industry.
• In July 2023, the Amendment (XII) to the Criminal Law of the PRC (Draft) was announced. This draft addressed the issue that punishment for bribers is relatively weak. It increased the criminal punishment for serious bribery crimes, including by adding provisions related to corruption by personnel of private entities.
• In July 2023 the CCDI/NCS held a mobilisation meeting, emphasising the need to stimulate the intrinsic motivation of entities to fulfill their responsibilities by using external supervision forces, and to carry out systematic governance in all areas with full coverage in the healthcare industry.
• In July and August 2023, it was reported almost 200 hospital leaders, as well as several controlling shareholders of listed companies, had been investigated so far this year. In addition, the Shanghai Stock Exchange and the Beijing Stock Exchange separately issued the issuance and listing review trends to agencies. These focused on the sales and promotion activities of medical companies and requires the verification of key issues such as the legality and compliance as well as the authenticity of expenditure in the sales and promotion activities of medical companies under different distribution models.
• On 7 August 2023, the website of the CCDI/NCS published an article titled “In-Depth Attention | Precise Punishment for Units Bribery,” targeting the issue of units bribery (i.e. bribery by legal entities), with the healthcare industry being mentioned once again.

In addition to the above actions at national level, local governments have also taken action. For example, in July 2023 a document titled the Work Plan for Reporting and Returning Unreasonable Remuneration in Guangxi Zhuang Autonomous Region People’s Hospital circulated widely on the internet. According to multiple media reports, such plan requires all medical staff in the hospital to voluntarily report and return all unreasonable remuneration received, such as lecture fees, training fees, and seminar fees received between 2018 - May 2023. Indeed, another document titled the Specific Audit and Investigation Report (Draft) for the pharmaceutical products and the high-value medical consumables manufactured, sold and used in Guangdong Province has also been widely spread online. Such report revealed details of corruption practices in the healthcare industry with many well-known medical companies named in the report. Additionally, disciplinary inspection and supervision authorities in various regions are exploring the implementation of a “blacklist” system for bribers. In the past few months, health authorities in Beijing, Fujian, Hainan, Shanxi Provinces and other regions have published hotlines on their official websites to support the campaigns addressing corruption issues in the healthcare industry.

Characteristics of this ABAC Storm

Corruption, as a typical unfair competition action which may result in criminal punishment, has always been a hot topic in the compliance field of the healthcare industry.  Compared to previous anti-bribery and anti-corruption actions, this new trend of ABAC Storm has shown unprecedented breadth, depth and strength. At present, the breakthrough is mainly in the hospitals and HCPs. However, the ABAC Storm does not stop at the medical and health institutions, it has been extended to the upstream manufacturers, distribution channels, as well as third-party organisations such as medical industrial associations. Unprecedentedly, this ABAC Storm gathers law enforcement resources and methods from multiple governmental departments at different levels in various regions and has been pushed forward across the regions.  The ABAC Storm reflects the below key characteristics:

1. The campaign does not stop at checking the documentations prepared and submitted by medical companies. It penetrates the formalism into the authenticity and reasonability of the payment concerned, thus bringing real challenges to medical companies only focusing on “formalistic compliance” practice. In recent years, due to the continuous crackdown on commercial bribery practices, some medical companies have adopted more concealed and complex methods to offer bribery under the disguise of various “legitimate appearances.” For example, some briberies have been offered through various forms of false payments, such as the payments through “fake conferences”, “fake transactions”, “fake costs” and “fake donations”. In addition, some medical companies offered briberies to hospitals and HCPs through third parties such as distributors or medical industrial associations. From the appearance, the documentations (e.g. the written contracts between medical companies and third-party academic conference organisations, vouchers issued by such organisations to medical companies) have been well-prepared and the formalities (e.g. the internal review and approval process) have gone through and been recorded by the medical companies. However, the payment concerned was for the purpose of offering briberies to hospitals/HCPs. Therefore, not only the domestic medical companies but also the MNC medical companies, which usually carry out academic promotion activities through promotion agencies/distributors under the RDPAC compliance structure, should pay attention. If the company only meets the “formalistic compliance” standards, which means it only has a legitimate appearance under its compliance rules, but without checking and reviewing whether the actions have been taken and whether the activities have been carried out legally and properly in nature, it is highly likely that it may face challenge down the road of this ABAC Storm.
2. Various and in-depth methods of investigation and evidence collection have been adopted, and the risk of criminal liability has been greatly increased. In addition to the usual regulatory departments for anti-corruption campaigns such as the NHC and the SAMR, more regulatory authorities, especially disciplinary inspection and supervision departments, state-owned assets regulatory departments, NMPA, the securities commission and the CNAO, have joined the force. These regulatory departments can adopt more types of and in-depth investigations - including criminal investigation and evidence collection - to solve the difficulties in detecting concealed commercial bribery and uncovering evidence. Certain old and new measures have been adopted in some regions such as requiring medical staff to proactively report unreasonable remuneration. There is no doubt these measures will be helpful for governmental authorities to uncover previously hard-to-detect illegal activities.
3. Medical companies may face more compliance challenges as more legal instruments have been adopted by the governmental authorities. In addition to the Anti Unfair-Competition Law, the Government Procurement Law, the Bidding Law and the Criminal Law, the governmental authorities began to use various legal instruments to squeeze the space of wrongdoings taken by medical companies. For example, in the above-mentioned report, the audit office held the view that medical companies which pay many commercial promotion agencies, meeting service agencies and consulting companies violated the Accounting Law, under which no organisation shall carry out accounting for false economic transactions or materials. The listed companies may be punished for disclosing false information in accordance with the Securities Law, and the third-party auditors of medical companies may be liable under the Certified Public Accountants Law.  Additionally, SZSE also mentioned in its report that the stock exchange commission will pay more attention to the distribution models and internal control of listed medical companies and will require agencies to verify medical companies in its fight against the false information disclosure activities of medical companies.

Tackling Strategies

This ABAC Storm is robust and it’s still only in an early stage. It remains to be seen how deep the storm will carry and how the governmental authorities will deal with certain technical issues.  However, as the breadth, depth and strength of this ABAC Storm has already reached an unprecedented level, it is highly likely that certain “industrial practices” widely adopted by the market players may be overthrown or at least adjusted. It is reported that as immediate actions in short term, many medical companies have already canceled upcoming medical academic conferences and even disbanded some of their medical representative teams. In the long term, it is recommended medical companies should conduct internal self-assessments based on their specific circumstances, review internal compliance policies and approval processes, and scrutinise business arrangements with suppliers, distributors and other third parties. Based on the above-mentioned characteristics, we suggest that medical companies should as a minimum adopt the below strategies during their self-assessment:

1. The self-assessment shall not only be limited to formalistic compliance requirements, but also to the compliance level in substance. The companies shall investigate thoroughly the programs not only by checking the documentations but also by other methods to find out whether there are “fake conferences”, “fake transactions”, “fake costs” and “fake donations”. Even for the “real conferences”, “real transactions”, “real costs” and “real donations”, the companies shall further check the reasonability of such items. For example, it is recommended to double check payments with high frequency and in large amounts to certain key hospitals and HCPs, the payment for HCPs’ work which belongs to the HCP’s routine work at hospitals, the payment for the HCPs’ service (especially IP creation-related service) which is difficult to prove. As for those medical companies that have already been reported or disclosed to any governmental authorities by hospitals or HCPs, they should immediately take actions to conduct a more thorough self-assessment.
2. Pay attention to preventing and responding to criminal risks. Many companies may lack awareness of criminal risks due to the limitation of their own experience or may have awareness but do not have a well-constructed criminal risk defense system. Once the criminal risks occur, they may be thrown into a passive position when dealing with certain significant issues such as whether the bribery action belongs to a unit action or an individual action.