Avoiding the pharma blacklist

June 24, 2014 | BY

clpstaff &clp articles &

New Provisions creating a nationwide blacklist show the seriousness of the campaign against bribery and corruption. Here is what businesses should know about the new regulation

The enhanced enforcement against corruption in the pharmaceutical and healthcare sector since June 2013 has led to intensified investigations into various multinational pharmaceutical companies in China. Against this backdrop, the newly established China National Health and Family Planning Commission (Commission) is planning to strike further by naming and shaming those companies (and individuals) who violate the Chinese bribery law or carry out other corrupt activities when they sell drugs, medical devices or medical consumables to Chinese medical institutions.

According to the Provisions for the Establishment of Blacklists of Commercial Bribery in the Medical and Pharmaceutical Distribution Sector (关于建立医药购销领域商业贿赂不良记录的规定) (New Blacklist), which was issued by the Commission on December 25 2013 and became effective on March 1 2014, companies and individuals providing financial or other benefits to medical institutions will be put on a blacklist, if the accused:

  • is found guilty by a court for bribery, even if no fine or other penalty is imposed because the offence is minor;
  • is investigated by the relevant People's Procuratorate but no criminal charge is brought against it because the offence is minor;
  • is investigated and disciplined by the Communist Party's disciplinary agencies for bribery;
  • is penalised by the Treasury Department, the Administration for Industry and Commerce (AIC), the China Food and Drug Administration (CFDA) or other administrative agency for bribery; or
  • otherwise violates the relevant laws, rules and regulations.

Once the name of a manufacturer or distributor is put on a blacklist in a given province, the blacklisted operator will be prohibited from selling drugs, medical devices or medical consumables to public medical institutions or any healthcare entity that is funded by the fiscal budget in that province for a period of two years. During the two-year period, if the manufacturer or distributor bids for any central procurement project in other provinces, it will receive a “minus score”, that is, less consideration compared with other non-blacklisted bidders. It is not clear how much the blacklist will actually impact the bidding result in other provinces due to inconsistent procurement processes across the country and lack of published precedents, but the credit-related score could represent as much as 25% for public procurement of pharmaceutical products.

|

The Blacklist relaunched


Though astounding to many multinational pharmaceutical companies, the New Blacklist is not an entirely new development. In fact, it is based on a prior version issued by the Ministry of Health (the predecessor of the Commission) in 2007 (Old Blacklist), which required the provincial healthcare authorities to establish the respective blacklist for operators in the medical product distribution sector in that province, publish the blacklist on the internet and prohibit medical institutions from purchasing any pharmaceuticals, medical devices or medical consumables from the blacklisted companies for two years after the relevant company is blacklisted.

After the Old Blacklist was promulgated, the Chinese healthcare authorities then published several other regulations to curb corruption in the distribution of pharmaceutical products, including:

  • The Guidelines for the Centralised Procurement of Pharmaceuticals by Medical Institutions (医疗机构药品集中采购工作规范) (2010);
  • The Working Guidelines for the Centralised Procurement of High-value Medical Supplies (Trial Implementation) (高值医用耗材集中采购工作规范(试行)) (2012); and
  • The Working Guidelines for the Centralised Procurement of Large Type A Medical Equipment (Trial Implementation) (甲类大型医用设备集中采购工作规范(试行)) (2012).

However, most of these subsequent regulations were very general in nature, with no specific provisions explaining how the blacklist is established and how the restrictions are implemented.

The Old Blacklist authorised the local healthcare authorities to promulgate local implementation procedures. By the time the New Blacklist was issued, most of the provinces, autonomous regions and municipalities under direct control of the central government had issued their own local implementation rules. Most of the local rules mirror the Old Blacklist but those of certain provinces include provisions that may seem unsettling to multinational pharmaceutical companies. For example, the local implementation rules of Zhejiang Province provide that if an individual briber is blacklisted, their employer will also be blacklisted automatically. This seems rather arbitrary – although convenient from the local authorities' perspective – as they do not take into account whether and how the employer is involved in the bribery at all. This is particularly worrisome for multinational pharmaceutical companies who have adopted a strict code of conduct or compliance programmes but cannot stop rogue employees from acting recklessly. After the New Blacklist came into effect, these local rules remained, though subject to amendment. Multinational pharmaceutical companies operating in different provinces in China should therefore keep this in mind.

The New Blacklist has undergone some important changes from the old version:

Higher publication authority

The Old Blacklist asked the Department of Health of each province to maintain a blacklist and to publish it on its website. However, some provinces did not faithfully follow the requirement and were slow to establish the provincial list or disclose it for public inspection. To address this problem, the New Blacklist provides that the provincial counterparts of the Commission have to publish the list on their website and then forward it to the Commission, who will publish the respective provincial list on the Commission's own website. Theoretically, if a company is blacklisted, its name will appear on the websites of both the Commission and its provincial counterpart where the violation occurred.

Clearer procedure

The New Blacklist and its implementation notice, which was issued by the Commission at about the same time, set out clearer procedures for the local authorities to follow. For example, the municipal level authorities must report the names of the non-compliant company within five business days after they are aware of the decision on the commercial bribery. One it receives the list, the provincial authority has up to 15 days to verify and notify the company that will be blacklisted. After the facts are verified, the provincial authorities must publish the blacklist on its website for one month before they forward the list to the Commission. The Commission will then have up to five business days to publish the blacklist on its website.

Integrity sales agreement

Another feature worth mentioning is the introduction of the integrity sales agreement (廉洁销售合同). As part of the implementation notice of the New Blacklist, the Commission provided a specimen integrity sales agreement and asked each manufacturer/distributor to enter into it when selling drugs, medical devices and medical consumables to medical institutions. This agreement form contains the name of the sales representative of the manufacturer/distributor, as well as some specific guidelines for the manufacturer/distributor and their sales people. For example, sales representatives are prohibited from offering kickbacks, entertainment, dining, travel service and “above-standard” accommodation to the staff of medical institutions, nor can they visit the hospital or doctors to promote their medical products. The integrity sales agreement has to be signed together with the sale and purchase agreement for the medical products.

Public medical institutions targeted

Different from the Old Blacklist, which blindly prohibits all medical institutions from dealing with blacklisted companies, the New Blacklist targets only the public medical institutions and healthcare entities funded by fiscal budget. Private medical institutions certainly welcome this as a sign of the government's efforts to refrain from meddling with the private business. However, given that government-owned or public-funded medical institutions are incumbent buyers of medical products and represent the vast majority of healthcare providers in China, a blacklisted company's business will be severely affected if it is blacklisted in any province, let alone nationwide. This is in addition to reputational damage. It is also worth noting that the Commission recently asked the local healthcare authorities at or above the county level to go through the public healthcare authorities they approved and prepare a list. Those not included in the list will be treated as private healthcare institutions. The list will be available by the end of June 2014.

Harsher punishments

If, within five consecutive years, a manufacturer or distributor is blacklisted twice or more, all public medical institutions and all healthcare entities funded by fiscal budget throughout the country cannot buy any medical products from the manufacturer or distributor.

|

Not to be underestimated


When the New Blacklist was issued, the Commission asked its local counterparts to go through the local blacklists and forward them to the Commission for publication by the end of April 2014, though a centrally-archived blacklist has not yet appeared on the Commission's website.

The New Blacklist is a big deterrent to pharmaceutical companies, particularly multinational companies operating in China. However, given how the Old Blacklist has been implemented (based on publicly available information), one may wonder how effective the New Blacklist will be.

The Old Blacklist was not strictly enforced. Even though the publication requirement was embedded in the Old Blacklist, most provincial healthcare authorities chose not to publish the blacklist on their website, or to hide it somewhere on the website, effectively rendering the search very difficult, if not impossible. Some provinces even limit the search to registered members, making it inaccessible to the public. Interestingly, various healthcare authorities did publish the names of some companies that have been blacklisted in certain provinces from time to time. For example, in 2007, the Beijing Department of Healthcare published the names of 21 companies added to the Beijing blacklist even though it was never clear how many other blacklisted companies there already were.

This boils down to a basic question, which remains unanswered under the New Blacklist – should the blacklist be freely and publicly available to the public or should the government restrict access? A reasonable person would imagine that the list should be accessible to the public so that people know which companies have committed violations. This should be self-evident for a blacklist mechanism. Unfortunately, past enforcement practices suggest that there might be a lack of consensus among the central and provincial healthcare authorities. How the New Blacklist will be enforced remains to be seen, but how this question will be answered remains the key to its effectiveness.

Despite previous enforcement practices, multinational pharmaceutical companies should not underestimate the Commission's resolution and commitment to implement the New Blacklist. They should improve their internal control policies, update their compliance programmes, provide more tailored internal training and carry out frequent audits in order to stamp out any corrupt activities that may send the company onto the blacklist. More importantly, having a contingency plan involving different stakeholders within the organisation is advisable so as to avoid blacklisting, or if evitable, to control at a level acceptable to the company.

Jing Wang, Norton Rose Fulbright, Beijing

This premium content is reserved for
China Law & Practice Subscribers.

  • A database of over 3,000 essential documents including key PRC legislation translated into English
  • A choice of newsletters to alert you to changes affecting your business including sector specific updates
  • Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
For enterprise-wide or corporate enquiries, please contact our experienced Sales Professionals at +44 (0)203 868 7546 or [email protected]