Sometimes you have to wonder if companies ever have figured out that they need to comply with the Foreign Corrupt Practices Act (FCPA) by putting in place a compliance program that actually works. It might seem that if your company has previously been through a FCPA enforcement action, it would want to be extra-careful about complying with the FCPA. Moreover, when the risks of corruption are well-known not only for a country but also in a specific industry in that same country, one might think that this additional level of risk might warrant a higher level of risk-management. In other words, I am shocked, just shocked, that there is corruption going on in the Chinese healthcare industry.
I had all of those thoughts and perhaps many others when I read yet another ‘above the fold’ story of bribery and corruption reported by the New York Times (NYT). While I initially thought of Wal-Mart and their NTY story about its alleged bribery and corruption in Mexico, there are some differences in this story by Alexandra Stevenson and Sui-Lee Wee, entitled “Selling CT Scanners with Bricks of Bills in China”,which detailed allegations of ongoing bribery and corruption in the Chinese healthcare industry.
First, and perhaps foremost, is the day the story was printed, the Wal-Mart piece was published on Sunday, in the paper’s signature edition. The China corruption piece was published on Saturday. The Wal-Mart piece broke the story of the alleged corruption; the Chinese corruption piece reported on many ongoing investigations and criminal prosecutions. Finally, the Chinese corruption story highlighted companies which have previously gone through FCPA investigations and/or enforcement actions; including General Electric Company (GE), Siemens Aktiengesellschaft (Siemens), Koninklijke Philips Electronics N.V. (Phillips) and Toshiba Corporation (Toshiba).
Further, all of this occurred in the face of, in spite of and with full knowledge of the events surrounding GlaxoSmithKline PLC (GSK) in China in 2013 and 2014. In the GSK matter the Chinese government brought a massive bribery and corruption criminal action against the company itself and its four top China business unit manager. The GSK corruption was significant not simply for its breadth, scope and length but also that it was the first criminal matter brought against a Western company by Chinese authorities, in China for violation of Chinese domestic laws against bribery of government officials, which were the state employees in the Chinese healthcare industry. GSK was assessed a criminal penalty of approximately $498 million and its top four business unit managers were convicted individually and sentenced to prison terms.
Another very big difference in the NYT Wal-Mart story and its Chinese corruption story are the sources. The Wal-Mart story was wrapped around a Wal-Mart whistleblower who provided a wealth of documents and interviews to the NYT. In the Chinese corruption story, the source was amazingly enough public records. The Chinese corruption article said, “Then, last year, an investigation by the German newspaper Suddeutsche Zeitung highlighted dozens of recent Chinese cases in which Siemens employees and sales representatives were accused of bribery.”
It went on to note, “A review of dozens of Chinese court cases and internal corporate documents as well as interviews with company insiders showed how foreign firms have become deeply enmeshed in the corruption pervading China’s health care industry. The New York Times reviewed more than a dozen cases in which employees of G.E., Philips and Siemens testified to bribing meagerly paid public hospital officials.”
Moreover, “In many other cases, Western companies signed off on deals involving third-party contractors who paid bribes and sought kickbacks.” But even with all this information in the public record, companies still engaged in conduct, which if true would violate the FCPA. Finally, and perhaps most amazingly, “the companies continued to sign off on deals involving contractors who admitted to bribery in court.”
The bribery schemes themselves went from the most basic to relatively sophisticated. The most basic schemes included cash literally paid out of the trunk of a car in suitcases. It ran to more sophisticated techniques using multiple layers of distributors and third-party agents. They also involved price uplifts which were used to generate the pots of money used to pay the bribes. This development follows a trend most glaringly seen in Brazil where the customer itself is in on the bribery scheme and facilitates the creation of the pot of money to pay bribes by agreeing to a pricing uplift or even discount which is then used to fund the bribe.
The companies named in the NYT article all stated forcefully that they were committed to doing business ethically and in compliance with anti-corruption laws such as the FCPA. The piece quoted Stefan Schmidt, a spokesman for Siemens Healthineers, who said, “Siemens trains and monitors its third-party sales representatives. Whenever we identify misconduct on the part of distributors, we end our relationship with them.” Steve Klink, a company spokesman for Phillips said, “Being a responsible company, everyone in Philips is expected to always act with integrity.” Finally, Hiroko Eno, a spokeswoman for Canon Medical Systems Group, who bought Toshiba’s medical device business in 2016, was quoted that the company has a “a zero-tolerance policy toward bribery and unethical business practices.”
Over the next several blog posts, I will be reviewing the matters set out in the NYT Chinese corruption story. (I am not sure how many days it will run.) The piece presents numerous lessons for the compliance professional. I hope you will follow this story with and let’s see where it goes. Tomorrow, the bribery schemes.
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© Thomas R. Fox, 2019