China: the changing landscape

Anti-corruption has in recent years consistently topped the list of hot topics in Asia, with the implementation of the UK’s Bribery Act and the perception of increasingly aggressive enforcement of the Foreign Corrupt Practices Act by the US. The focus to date, however, has largely been on the extraterritorial reach of the UK and US legislation, and the primary concern of multinationals operating in China has been to balance the embedded and pervasive culture of gift-giving in China with foreign anti-corruption legislation.

Since the beginning of this year there has been a change in the enforcement landscape. In January 2013, one of the very public initiatives launched by Xi Jinping shortly before becoming the country's new leader was to restore the party's credibility by attacking "flies and tigers" – corrupt public officials at all levels of the party. However, as a by-product of this new drive companies operating in China now have further cause to review their risk assessment and anti-bribery policies for compliance with domestic anti-corruption legislation. The investigation into the British pharmaceutical company GlaxoSmithKline by the Chinese Ministry of Public Security has heralded the high-profile entry of the latest player in anti-bribery enforcement. A series of investigations into hospitals and pharmaceutical companies in China earlier in the year also uncovered extensive use of kickbacks and generated heated discourse over how to reform China’s healthcare system. Shortly preceding the public fallout from the GSK investigation, on 17 July 2013 China’s State Food and Drug Administration had announced that it would be embarking on a nationwide six-month campaign to clean up the healthcare system and tighten industry regulations as well as rein in illegal online drug sales.

Following the announcement by the Chinese authorities that GSK was under investigation for allegedly funneling bribes to doctors and public officials to persuade them to prescribe GSK drugs, various media outlets have reported that other pharmaceutical companies operating in China have also received visits from the Chinese authorities. Whilst, historically, China has been notoriously inconsistent in the enforcement of its anti-bribery legislation, it would seem that the Chinese authorities have become serious about tackling bribery domestically, with multinational pharmaceutical companies a likely target.

In light of the above, it may be helpful to set out a brief overview of anti-bribery laws in China.

Anti-bribery legislative framework in China

The principal pieces of anti-corruption legislation in China are the PRC Criminal Law, for the more serious cases of bribery (under which the threshold for bribery to constitute an offence is RMB10,000[1] where committed by an individual, and RMB200,000[2] for companies), and the PRC Anti-Unfair Competition Law, which prohibits commercial bribery between business parties in connection with the sale and purchase of goods and services. The Criminal Law prohibits, amongst other things, the offering or payment of bribes to, and the soliciting of bribes by, state functionaries. With effect from 1 May 2011, the Criminal Law was amended to prohibit bribery of foreign government officials and international public organisations where the object of the briber is to secure an illegitimate commercial advantage.

In order to address perceived lacks of specificity and guidance in the Criminal Law as to elements of the law and implementation, which allowed considerable discretion on the part of Chinese authorities in enforcement, on 26 December 2012 the Supreme People's Court (China’s highest court) and the Supreme People's Procuratorate (China’s highest prosecutorial body) jointly promulgated an Interpretation of the Supreme People's Court and the Supreme People's Procuratorate of Several Issues Concerning the Specific Application of the Law in the Handling of Criminal Cases of Bribery (the "Interpretation") in relation to the Criminal Law, which came into force on 1 January 2013. 

The Interpretation provides welcome guidance and fills in gaps in the criminal bribery laws, with precise financial thresholds and specified aggravating circumstances to assist the courts in determining fair and predictable punishments. It also expands upon existing sentencing guidelines, and creates new incentives for voluntary disclosures and confessions, and whistleblowing.

Interestingly, the Interpretation places the spotlight on bribe givers and shifts the focus from recipients of bribery, as Chinese authorities have historically tended to prosecute the bribe recipient rather than the bribe giver. Taken in conjunction with recent enforcement activity against the giving of bribes, then, it would seem that the Interpretation is part of a movement by the Chinese government to place the bribe giver at the centre of the enforcement of its criminal anti-bribery laws.

It is also worth noting that the Interpretation specifies that official corruption relating to drugs, food items, product safety and environmental protection represents a significant enforcement priority. This is perhaps unsurprising given the concern by Chinese consumers over drug safety and the cost of healthcare, and the fact that multinational pharmaceutical companies are continuing to invest in China as one of the fastest growing markets internationally for healthcare.

Pursuant to the Interpretation, the threshold for a bribe to a state functionary that will trigger a criminal investigation is RMB10,000. The Interpretation also sets out the factors and financial thresholds that will determine the level of ‘seriousness’ of the bribery offence, with associated penalties for each categorisation from ‘serious’, to ‘very serious’ and bribery that causes ‘major loss to the national interest’ (please see below for a table setting out details of the various levels of ‘seriousness’ and their categorisation).

Click here to view table.

Implications for multinational companies in China

Whatever the motivation for China’s newfound zeal in enforcing its anti-bribery laws, in conjunction with close attention already being paid to operations in China by the Serious Fraud Office in the UK and the Department of Justice and the Securities and Exchange Commission in the US, this serves as a timely reminder for companies operating in China to carefully consider their business operations in China as well as revisit their internal controls, audit, compliance and training policies.

In light of the focus placed on drugs and healthcare by both the Interpretation and the recent enforcement activity by the Chinese authorities, coupled with the notoriety of the healthcare industry in China, it will be prudent for pharmaceutical companies with operations in China to take particular care.

The GSK investigation in China has also highlighted the risks faced by foreign executives stationed in China, including travel bans, arrest and detention, and the implications of an investigation by a governmental authority.  As well as a review by companies of their internal controls, compliance and audit procedures, risk assessment and management, gift-giving policies and training programmes, companies may also put in place internal policies and procedures guiding executives on how to act once an investigation has started, and on how to best protect their executives within the framework of the local systems. In particular, once a company has become aware that an investigation has been commenced by a governmental authority, it should be in a position to follow clear policies as to how to handle such situations, with such policies formulated to balance the need for an internal inquiry as against the danger of alerting others to the confidential investigation, and the risk of alienating or being seen to obstruct overseas governmental authorities.

Such reviews and implementation of policies and procedures at this juncture could prove valuable, and allow the company to identify and resolve any existing issues before governmental enforcement authorities become involved.