Drug and Medical Device Corruption Risks in China

pharma3Medical device and pharmaceutical companies know the risks of conducting business in China. Company after company has had to settle FCPA enforcement actions in China. Many of these enforcement actions include fact patterns that are pretty consistent.

At the heart of these bribery cases are distributors who are used to funnel bribery payments to healthcare professionals. The expectations and modes of operation are fairly consistent – lavish gifts, trips, sometimes cash, and other extravagant items are passed through the distributor to the healthcare professionals in exchange for increased orders of the company’s goods.

Drug and device companies that ignore this fact pattern, or fail to respond to these risks, are just asking for trouble. Based on the long record of enforcement actions, drug and device companies need to start with a robust and enhanced compliance set of controls.

The enhanced controls need to include a focused framework on financial controls. In the common bribery scenario, the company is able to fund the bribery scheme by passing money to the distributors through the use of sham companies, inflated invoices, fake receipts, unjustified marketing funds, false book entries, and other mechanisms to pass money by circumventing controls.

The elements of a robust, enhanced compliance framework are relatively easy to identify:pharma2

Due Diligence: A robust due diligence program for third parties and vendors in China requires an initial level of scrutiny that is more intense than other less risky countries. Each distributor has to be carefully screened, interviewed, and vetted, along with business references. Beneficial owners have to be identified and verified, and extensive representations and warranties are needed to ensure compliance by distributors, sub-distributors, and vendors. An initial due diligence strategy requires additional resources and personnel to carry out – it is money well spent and reflects a company’s commitment to ensuring compliance in a very risky environment.

Monitoring/Auditing: An effective monitoring and auditing program is a continuous effort to monitor individual distributors and rotate regular audits of each distributor. As a high-risk country, Chinese distributors have to be audited every 2 to 3 years depending on the size and number of distributors. At first glance, I am sure you think this is excessive but given the risks, DOJ/SEC’s knowledge of the China market, and the continuing focus in this area, an enhanced monitoring, random checks, and inspections and fulsome audits are basic requirements for operating in China.

Financial Review: A focus on money and disbursements in the company’s China operations is a critical facet of an enhanced compliance program designed to reduce risks in China. Initially, it is critical to design and implement financial controls to eliminate segregation of duty conflicts, adopt stringent delegations of authority, and vigorous review and sign offs on expenditures by trusted managers. On an ongoing basis, companies have to devote time to conduct random transaction testing, review of expenditures, and vendor onboarding processes.

pharmaCompliance and financial oversight of Chinese operations in the drug and device industries requires time and resources. It sounds difficult and maybe even overkill but this is a perfect example of a market where it is better to be proactive than reactive. Too many companies have fallen under the enforcement sword – it is almost incumbent on every company to enhance their compliance operations from the beginning and spend extra time and resources to prevent a problem from occurring.

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1 Response

  1. March 9, 2016

    […] discerns some lessons to be learned from the Qualcomm FCPA enforcement action. Mike Volkov looks at drug and medical device corruption risks in […]