By King & Wood Mallesons’ Compliance Group

Recently, allegations of a massive bribery scheme on the part of the Chinese unit of a famous British multinational pharmaceutical company have grabbed headlines in China and abroad. China’s Ministry of Public Security officially announced on July 11 that senior executives of this company are under criminal investigation on suspicion of using travel agencies to bribe government officials, hospitals, doctors, and medical industry associations in a scheme to increase sales. Some of the company’s senior executives and employees are also suspected of taking bribes from third party vendors.

According to the news reports, the national Ministry of Public Security began the investigation in late June, when local public security bureaus visited the company’s Shanghai, Changsha and Zhengzhou offices. Reportedly, company documents have been seized and some employees detained.

While this investigation is high-profile, it is by no means alone. In early July, the National Development and Reform Commission announced an investigation into the costs and prices charged by 60 domestic and international pharmaceutical companies operating in China.

These investigations of drug makers signal China’s intention to push forward with reforms in the healthcare sector, which will impact all companies operating in that space.

It is not just healthcare companies that need to take note of these investigations. Companies in other sectors can have high compliance risks if they, for example, frequently use third party intermediaries or have a high degree of interaction with government officials or State-owned enterprises. Companies that fit this profile are advised to pay attention to enforcement trends and take proper responsive measures.

In the current regulatory climate, companies are advised to stay focused on their compliance programs to ensure that they are robust and fully implemented. Recommended steps include the following:

Review and revise internal policies and procedures on, among other things, hospitalities, “dawn raid” guidelines in the event of government inspections, employee handbooks and manuals; and the process for handling “whistleblowers;”

  • Prepare a training course for employees on how to handle investigations;
  • Conduct compliance and legal risk assessment;
  • Review and “stress-test” internal control procedures on, among other things, financial and accounting practices;
  • Conduct proactive internal audits and investigations of suspected violations;
  • Conduct detailed due diligence on third party intermediaries such as agents and sales representatives;
  • Take prompt action if faced with evidence or allegations of wrongdoing.

Companies should exercise caution when an investigation has been initiated before embarking on any internal assessment and audit process.