By Liu Xiangwen, Monique Carroll and Zhu Yuanyuan King & Wood Mallesons’ Dispute Resolution Group

Much has been written on bribery and corruption in China, including the differences between criminal bribery and commercial bribery, and of course, the need for an effective compliance programme. However, foreign companies operating in certain complex or sensitive industries in China need to do more than instil an anti-corruption policy. What is needed is an in-depth understanding of the unique legal environment in their industries. This is because in some industries, particular conduct or business models permitted elsewhere, may be very sensitive and considered bribery or corruption. We recommend that companies operating in China adapt their compliance programme to account for industry specific regulations and sensitivities and undertake regular internal compliance audits as a check on the effectiveness of the compliance programme and to ensure that it remains up-to-date.

Acquiring in-depth industry knowledge

There are a number of industries which have unique regulations aimed at preventing bribery and corruption, in addition to China’s general anti-bribery and corruption laws (i.e. the Anti-unfair Competition Law, the Trial Regulations of the State Administration for Industry and Commerce on Prohibition of Commercial Bribery and the Criminal Law).

The pharmaceutical industry is a sensitive industry subject to additional regulations.[1] For example, whilst China’s general anti-bribery and corruption laws do not prohibit properly recorded price discounts, discounts given to public hospitals in China (e.g. on the purchase of medicines and equipment) will raise bribery and corruption issues. This is partly the result of the medicine and equipment pricing policy in China.

This policy requires Chinese public hospitals to purchase medicine and equipment by public ‘bidding’ (ie tendering) to ensure transparent pricing and eliminate indirect payments or gifts as inducement to the public hospitals. The successful tenderer must therefore supply the goods to the hospitals strictly in accordance with the terms of the successful. Any deviation from these terms, such as free equipment or training programs, will be considered contrary to the law. The following examples are real applications of the pricing policy.

  • Where a pharmaceutical company supplies medicine to a public hospital at a discounted price (compared to the bidding price) the hospital, rather than patients, obtain the benefit. This is because, according to the pricing policy, hospitals generally add a fixed mark-up to the bid winning price of medicine when selling the medicine to patients. Chinese law-enforcement authorities therefore consider the price discount as a bribe offered to the hospital for the purchase of the  medicine.
  • According to the State Administration for Industry and Commerce, where a pharmaceutical company offers free medical equipment to hospitals who also purchase from it medicine or related products, the offering of the equipment is commercial bribery, even if the equipment is properly accounted for and recorded.  Hence, “buy one get one free”, a common sales strategy in many other industries, is likely to be commercial bribery in China’s pharmaceutical industry.

Implications for an effective compliance programme

If you are operating inChina, it is essential that you not only localise your compliance programme so that it addressesChina’s general anti-bribery laws, but also your industry and business model. How your business operates, including internal management controls and dealings with third parties, will affect your compliance risk.

The importance of a compliance programme which takes into account your entire business, is illustrated by the following example.

A company’s compliance programme and anti-bribery policy may properly require employees to refuse demands for bribery, if they realise that a potential client or a governmental official is expecting or asking for a bribe or other corrupt payment. However, the company’s template sponsorship agreement for public hospitals provides that if future activities or events held by the hospitals require sponsorship, the hospital must give the company the first option to sponsor the activity or event. As involuntary sponsorship of and donations to public hospitals may be considered bribery, the template agreement indicates that the company’s compliance policy may not be effective.

Accordingly, in preparing your compliance programme we recommend that you have experienced lawyers review the terms and performance (including relevant financial records) of your key contracts with customers, suppliers and third parties to identify whether these contracts are compliant with the full range of anti-bribery and corruption laws in your industry, or create significant compliance risk. In the process, they will also gain an understanding of the company’s management controls and be able to opine on whether these are likely to be sufficient to control the risks identified.

The review process will lead to a more effective compliance programme targeted to actual business operations. The review process can also identify areas for improvement in business performance and management from a compliance perspective.

In our experience, conducting a business review in preparing a compliance programme is the most important aspect of compliance.

Internal compliance audits 

Regular internal compliance audits are also essential for testing the continual adequacy of your compliance policy, as well as, detecting non-compliant behaviour before it is reported to regulators. The nature of your internal audit will depend upon your industry and business model and the specific risks faced as a result. We recommend designing the ongoing audit process with the assistance of lawyers experienced with compliance investigations in that industry. They will have up-to-date knowledge of relevant laws and enforcement approaches of regulators and will be experienced at identifying anomalies in the terms and performance of your contract. Lawyers with an understanding of Chinese culture and business relationships will also be able to provide guidance as to how to include third parties (such as business partners, distributers and customers) in the audit. Doing so can be the key to really understanding how the business operates and therefore the compliance risk.

[1] Other such industries include construction, finance, insurance and government procurement.