How multinational pharmaceutical companies deal with bribery and corruption risks in China

Recent investigations by Chinese authorities into bribery and corruption allegations in multinational pharmaceutical companies in China show an increased commitment to crack down on corruption.

Since 2009, China has accelerated its reforms to make healthcare more accessible and affordable. One of the authorities’ promises was to crack down on bribery between pharmaceutical companies and hospitals. However, recent developments have shown that these attempts at enforcement are not as successful as anticipated, and public dissatisfaction with the healthcare services continues to grow.

Recent cases indicate that corruption in China remains rife and foreign companies must be cautious, regardless of their industry. Although there are signs that Chinese authorities intend to strengthen their enforcement on bribery and corruption issues in the pharmaceutical industry, this will inevitably take time.

Despite the pace of change, recent investigations into multinational pharmaceutical companies in China indicate that none is shielded from local regulations and watchdog agencies. It is imperative that foreign companies’ existing corruption compliance regimes are reviewed in order to ensure they are effective and in line with the local regulations.

Due diligence: know your environment

A well-established anti-corruption process should ensure that due diligence is carried out on third-party partners such as distributors, deal-brokers and suppliers, where there is a clearly understood potential for fraud. But in China, particularly in the pharma industry, it is also necessary to widen the scope of due diligence on third-party relationships to include advertising agencies, travel agents and event organizers, which would typically be considered low risk in most developed markets.

The pharmaceutical industry is a hot spot ripe for bribery activities due to rapid industry change, inadequate policies and poor implementation procedures. Faced with the need to react to healthcare reform in many countries, as well as the need to improve success from research and development spending, the pharmaceutical sector is seeing dramatic growth in outsourcing and partnerships in new markets such as China, as well as headcount reduction. However, the 2013/14 Kroll Global Fraud report survey shows that less than half of healthcare and pharmaceutical firms are planning to invest in due diligence and staff background checks globally. If changes to business models are not accompanied by revisions to fraud defences, the incidence of bribery in this sector is likely to rise further.

“Problems can arise if compliance becomes overly focused on a handed-down procedure and process, rather than truly understanding the local, on-the-ground corruption challenge.”

For multinational pharmaceutical companies operating in China, a common policy is to import best practice in compliance and operating procedures from their developed home markets. While this may seem intuitive, it can also be dangerous – it risks leaving compliance “blind spots”, unless policy also reflects the context of the local business environment. In particular, problems can arise if compliance becomes overly focused on a handed-down procedure and process, rather than truly understanding the local, on-the-ground corruption challenge.

A risk here is that corruption compliance can become a box-ticking exercise, without considering the behaviour of people locally, be they employees, partners or third parties. This is crucial to mitigating corruption.

Anti-corruption policy: prevention is better than cure

In reality, it is often the case that if employees are determined to be dishonest, they will find creative methods to trick the safeguard system. Therefore, ultimately, companies need to be able to trust and rely on their employees. To help to achieve this, it is essential that companies establish an anti-corruption culture from the top of the organisation. For a multinational firm, quite often the global CEO sets the tone for the whole group.

“Establishing realistic local business goals helps avoid employees using targets as the excuse for dishonest behaviour.”

Second, an important operational corruption deterrent is to make sure that realistic employee goals are set. Sales goals and other KPIs must be cognisant of the competitive landscape, including local competition and market structure. Establishing realistic local business goals helps avoid employees using targets as the excuse for dishonest behaviour.

Third, companies must ensure their anti-corruption policy is sufficiently robust to deal with the operating challenges and nuances of the developing status of China’s economy. Organizations should focus efforts on what they can do to control-their own employees, as well as their network of business partners and vendors. Companies must also have a zero tolerance policy on corruption, as this is critical for their long-term reputation in the market.

Ultimately, companies should look at prevention rather than just a cure. To avoid potentially massive financial and reputational problems they should invest in due diligence at an early stage to mitigate potential risks, rather than merely looking for a post-crisis cure.

About the author:

Violet Ho is a Senior Managing Director in Kroll’s Greater China Investigations & Disputes practice. With over 16 years of professional experience in investigations, and an in-depth understanding of China’s business environment, Violet has successfully advised on numerous highly complex investigative projects in China and beyond.

Violet has led a wide range of risk consulting projects across Greater China, ranging from fraud prevention to investigating instances of white-collar crime and distribution scams. She also manages investigative due diligence inquiries and assignments regarding business controls, intellectual property protection, employee risks, corporate security, and crisis management.

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