Phusjon Group

Advisory services for business
7 minutes reading time (1311 words)

Fraud & Corruption in the Pharmaceutical Industry in China

Despite increased enforcement of the US Foreign Corrupt Practices Act ("FCPA") and China's own commercial bribery laws, fraud and corruption remains rife across many industries in China, especially in the pharmaceutical and life sciences industry where the benefits of bribery still seem to outweigh the risks.The most common typologies being: 
Sales teams bribing doctors to purchase their products Fictitious sales and fake contracts Tendering fraud and bid rigging Off label use of pharmaceuticals
In China there is widespread acceptance and an established sub-culture of bribery in many of the sales and marketing divisions within the pharmaceutical and life science industry. The root causes for this are many, but such bribery is mainly driven by:
Huge pressures placed on frontline sales teams to meet sales and performance targets; Buyers of drugs and medical devices, usually doctors, universally expecting kickbacks in exchange for purchasing products; and  Inadequate enforcement of Chinese commercial bribery laws, such as Article 8 of the Anti-Unfair Competition Law ("AUCL") and Article 163 of the PRC Criminal Law, Chinese legislation that specifically proscribes such malfeasance. 

From a criminological perspective, the three elements of Donald R. Cressey's fraud triangle that describe the prerequisites for fraud and corruption, i.e. pressure, opportunity and rationalization, are all present and so, in this perfect storm, bribery is the norm rather than the exception. 

Efforts by corporations to reduce fraud and corruption risks are constrained by ever increasing compliance costs and by pressure to meet sales targets in an extremely competitive market. Most local Chinese pharmaceutical firms do not need to comply with the FCPA, nor the UK Bribery Act, and the chances of getting caught by Chinese economic crime enforcement officers, whilst increasing, are still very small. 

By way of example, sales managers of Chinese healthcare industry companies usually receive a 1-3% commission on the sale of a drug, medical device or consumable, which is perfectly acceptable provided that the transaction is accurately recorded in the accounting books and records. However, the same sales manager will be expected to pay a 2-5% kickback to a doctor or hospital in order to secure a sale, which is not acceptable. It is unequivocally illegal by Chinese law. 

Many sales and leases of medical equipment in the healthcare industry in China, even by large MNCs, do not have written contracts detailing the terms and conditions, or if they do it is not uncommon for contracts to be altered or forged. These often relate to the sale of healthcare products that have not happened or are materially inaccurate. Free consumables, which may be packaged up in the sale of an expensive medical device, may not reach the customer at all, and instead will be sold in the black market. These fictitious and fraudulent sales not only allow employees to embezzle cash, but help to fund bribery schemes. 

Another common fraud is for the sales team of, say, Company A (or through a tendering agent) to prepare tender bidding documents for their own company and at the same time prepare the documents for so called "competing" Companies B and C using respective letterheads, seals and chops that are shared between the conspirators. The bids will all be more expensive than they should be, with Company A, coming in lowest, thus winning the contract as previously intended by all the conspirators. The sales teams of the various companies will take it in turns to win contracts and collectively engage in nefarious methods to place pressure on other companies outside their cartel, to either join their cartel, or be excluded from tendering fairly, either by using corrupt government connections, collusion with employees in the purchasing company or tendering agency, or by exploiting bureaucratic red tape, of which there is plenty in China. 

Foreign firms, especially from the US and UK, face greater risks in manufacturing and selling their products in China. However, as these multinational pharmaceutical companies usually employ more robust and costly corporate governance and compliance policies, and as their branded products are seen to be superior and safer than local products, such foreign firms secure higher prices for their products than Chinese firms. The pressure on sales teams is very high as their remuneration and commissions, and indeed their continued employment, are more often than not linked to sales targets. However, due to increased compliance requirements and long arm legislation like the FCPA, the sales teams of MNCs need to employ more imaginative and discreet methods to raise funds to pay bribes to customers. 

In the past, and to a lesser extent today, there was a huge underground industry producing fake invoices (commonly called "fa piaos" in China) and other supporting documents in China, but these slips of serial numbered paper, with a date of transaction, description of services or product, and value of transaction can now be checked fairly easily against a Chinese tax bureau hotline for legitimacy and so a new underground industry has emerged that issues real invoices and supporting documentation, but for fake or nonexistent goods and services. 

In the pharmaceutical industry this activity revolves around doctors' promotion events, round table discussions, seminars and small medical meetings, all of which either never happened, or perhaps did occur, but on a much smaller scale. In China there are restaurants, hotels, and supermarkets that make more money by issuing invoices and supporting documents for non-existent events than they do from their legitimate businesses. Having purchased these seemingly genuine "fa piaos" the sales teams can then claim reimbursement for these fake expenses, which can amount to vast sums of money. This is then used to bribe doctors and officials in the form of holidays, junkets, furniture, electronic goods, real estate, vehicles or just good old fashioned cash. 

Like all criminal enterprises that create "off the books" slush funds, the sales teams, usually led by an experienced and ostensibly successful district or regional sales manager, need to employ some sort of book-keeping method to manage and control their illicit income and expenditure. This is often contained and meticulously kept in a hard or softcopy file that a savvy forensic investigator might be able to locate through digital forensics of a laptop computer, or find in a concealed, but easily accessible old fashioned accounts ledger. 

The reality is that these fraud schemes can go undetected for years. These bribery cartels are internally policed by senior sales managers who train up the new recruits in how to set up fake meetings, obtain fake supporting documentation, draft fake contracts, bribe buyers of drugs, medical devices and consumables, and of course cover their tracks. Occasionally, investigators and forensic investigators detect the schemes, through anti-bribery risk reviews, receiving whistle-blower allegations by stressed or disgruntled sales employees, or increasingly through forensic analysis of structured and unstructured data. 

Often, the sales employee, particularly in the less experienced frontline sales teams, will resign as soon as they get a hint that an internal investigation is underway. Some cooperate with investigations and some don't, but very rarely will detected bribery cases be handed over to Chinese law enforcement agencies for prosecution through the criminal courts. 

More often than not, corrupt sales personnel, whether they resigned or were dismissed, will join a competitor pharmaceutical firm. As pre-employment screening and background due diligence is rarely performed on junior employees the new pharmaceutical employer will have inadvertently inherited a more street wise, but not necessarily more honest, employee who is well versed in the art and concealment of bribery. Many companies, in the pharmaceutical industry or otherwise, are very concerned about their personal reputation and brand image and would prefer a quiet dismissal over being exposed to the glare of a public prosecution and having their previously good names dragged through the mud. Finally, finding talented people in China is as challenging as anywhere in the world, so a greater premium is often placed on hiring experience and ability, rather than on integrity.
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