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Home > FCPA
Is bribing a Chinese doctor bribing an FCPA governmental official?

In China bribes are often offered and accepted for the sale and procurement of medical devices, pharmaceuticals, and other healthcare products (hereinafter referred as the “Healthcare Products”).  Doctors or managers of hospitals and clinics who accept bribes to buy, use, or recommend such Healthcare Products have been known to prescribe or even over-prescribe procedures that warrant use of such products.  As a result, products supported by bribery sell more quickly and at a higher price than products for which lower or no bribes are paid, regardless of the inherent value or effectiveness of the Healthcare Products themselves.  This raises the overall price for all Healthcare Products.


Doctors filmed in taking kickbacks in clinic rooms


During Christmas Eve of 2016, the China Central Television Station (“CCTV”) broadcasted a report showing doctors in six hospitals located in Shanghai City and Hunan Province taking bribes from medicine sales representatives.  According to CCTV, the doctors were paid kickback amounting to 30 to 45 percent of the medicines’ selling price.  You may follow the link to review the video of the CCTV report.


CCTV footage showed a doctor in Shanghai receiving a 1,800 yuan (US$260) bribe from a drug sales agent for prescribing 150 boxes of a medicine in a month, while in another video, a drug representative gave envelopes to three doctors at the same hospital within an hour.


A pharmaceutical representative can get a 10 percent cut from revenue generated by the medicine prescribed, the report said.  The undercover investigation followed nearly 100 pharmaceutical representatives at four hospitals in Shanghai over eight months.


Reporters started with a mysterious group of “special patients” at a large Shanghai hospital with more than 4 million outpatients a year.  Reporters found these “patients”, who have no medical records, showed up at similar times every day.  CCTV footage showed these bogus patients — the drug representatives — merely walked into the consulting rooms of the doctors, where they began checking doctors’ prescription tallies on their computers.

One representative, who was complaining of his lost smartphone, was comforted by a doctor, who assured him that  he would soon be able to buy an iPhone 6 from his illicit gains.


The drug representatives visited the hospitals on a daily basis in the hope that doctors would prescribe more of their products, the report said.  It showed they gave “envelopes” to doctors after entering consulting rooms.  One doctor received envelopes from four representatives within three minutes, the footage revealed.


Insiders said the higher the price of the drug, the larger room there is for bigger cuts.  This, in turn, served as encouragement for some doctors to prescribe expensive drugs.


The footage showed a doctor in a hospital in Changsha, capital city of Hunan, fuming over a less than expected cut— the going rate is a minimum 20 percent of the drug’s cost.


“It should be at least 20 percent higher,” the doctor was filmed saying. “Others offer more than 30 percent, how are you competing with them? The price of the drug is so high, and you are such a big company, which is hard to understand,” he complained.


The report also compared the prices with the market rate of five drugs, with the biggest gap shown as being over 10 times.[1]


Multinational companies punished under the FCPA for bribing Chinese doctors of state-owned hospitals


Many pharmaceutical companies and medical device companies were found guilty and punished for violation of Foreign Corrupt Practices Act (“FCPA”) for giving kickbacks to Chinese doctors.  Not only is untruthful booking of bribing expenses as normal business expenditures prohibited under the FCPA, as bribing government officials is also prohibited, as Chinese doctors are regarded as governmental officials under the FCPA.  


On October 5, 2015, Security and Exchange Commission (“SEC”) charged B-company, the New York-based pharmaceutical company, with violating the FCPA when its joint venture in China made cash payments and provided other benefits to health care providers at state-owned and state-controlled hospitals in exchange for prescription sales. The B-company agreed to pay more than $14 million to settle the case.


On July 28, 2015, SEC charged Illinois-based infant formula manufacturer with violating the FCPA when its Chinese subsidiary made improper payments to health care professionals to recommend the company’s product to new and expectant mothers.  The M-company agreed to pay $12 million to settle the case.


On September 30, 2016, SEC announced that the UK-based pharma giant will pay a $20 million civil penalty to settle charges that it violated the Foreign Corrupt Practices Act when China-based subsidiaries spent millions of dollars on pay-to-prescribe schemes for several years to pump up sales.  The FCPA offenses spanned, at the very least, from 2010 to 2013.  The offences include gifts, improper travel and entertainment with no or little educational purpose, shopping excursions, family and home visits, and cash.  "The costs associated with these payments were recorded in G-company’s books and records as legitimate expenses, such as medical association sponsorships, employee expenses, conferences, speaker fees, and marketing costs," the SEC said. 


However, under Chinese law, the doctors of Chinese state-owned hospitals are not governmental officials.


Doctors in state-owned hospitals not taken as governmental officials under Chinese law


As a matter of law, the doctors in state-owned hospitals are not Chinese governmental officials or state working personnel as said under Chinese law.


On November 20, 2008, the Supreme People’s Court and the Supreme People’s Prosecuting Court jointly issued the Opinions on Several Issues Regarding the Application of Laws over the Handling of the Criminal Cases of Commercial Bribery (hereinafter referred to as the “Opinions”).  Paragraph 3 of Article 4 of the Opinions clearly provides that it regards medical professionals as non-state working personnel.  If medical professionals are found to have taken advantage of their position to prescribe treatments, illicitly accepted money or property from a seller of medical products (such as pharmaceutical drugs, healthcare devices and healthcare materials) and promoted the seller’s interests, they shall be convicted of having taken a bribe by non-state working personnel under Article 163 of the Criminal Law (emphasis added), and if the amount involved is relatively large.  


The criminal liability on the crimes of taking bribes includes imprisonment and confiscation of illegal proceeds.  The crime of taking bribes (by state working personnel), if serious enough, could trigger death penalty; the crime of taking bribes by non-state working personnel would not trigger death penalty, but a maximum imprisonment of no more than 15 years. 


Vis-à-vis the crime of taking a bribe by non-state working personnel, the party that made bribes shall be punished for the crime of making bribes to non-state working personnel under Article 164 of the Criminal Law.  For example, the local subsidiary of the UK-based drug maker was found guilty of making bribes to Chinese doctors and received a criminal fine as much as RMB 3 billion (nearly $500 million) in September of 2014.  As above mentioned, for the same offenses of its local subsidiary, the UK-based drug maker received a civil fine of US$ 20 million from the SEC for violation of the FCPA in September of 2016.  Some local subsidiary's managers, including its former CEO, were convicted of bribery-related charges and received suspended prison sentences under China’s Criminal Law.  However, both the local subsidiary and its executive managers were convicted under Article 164 for the crime of making bribes to non-state working personnel.


It has been a long time debate in China about if a doctor (as well as some other functionaries working in state-owned enterprises) shall be treated as a functionary discharging public affairs and thus a member of state working personnel.  The dispute was not concluded until 2003 when the Supreme People’s Court convened and decided that the engagement in public affairs means the carry-out of duties in organization, leadership, supervision and management for and on behalf of state organs, state-owned companies, enterprises, institutional entities, and the people’s bodies (emphasis added).  The laboring activities or technical serves not in relation to the power assigned to the function shall not be regarded as public affairs.  Therefore, the action of prescribing drugs or medical devices by a doctor is then categorized as a technical service other than the engagement of public affair, which then explains the position of the Opinions that the prescription doctors are not state working personnel.


Prescription doctors as non-state working personnel are clearly distinguished from state working personnel in the Opinions.  Paragraph 1 of Article 4 of the Opinions provides that “if any state working personnel in medical institutions are found, in procurement of medical products (such as pharmaceutical drugs, healthcare devices and healthcare materials) to have solicited money or property from the seller, or illegally accepted money or property from the seller to promote the interest of the seller, by taking advantage of their position, to the extent that such activities constitute a crime, they shall be convicted of having taken a bribe (by State-working personnel) under Article 385 of the Criminal Law (emphasis added).  In practice, the administrators of a hospital or the department of a hospital would be regarded as state working personnel (again vis-à-vis prescription doctors as non-state working personnel). 


What is more, some hospitals even outsource some departments such as oncology to some private hospitals or enterprises.  Therefore, there is argument that the doctors in the outsourced clinical departments by no means could be governmental officials.[2]  For example, in 2014, Wei Zexi was diagnosed with synovial sarcoma, a rare form of cancer that affects tissue around major joints.  After he received radiation and chemotherapy, his family sought out other treatments.  Through a promoted result on the Chinese search engine Baidu, Wei discovered the Second Hospital of the Beijing Armed Police Corps, a state military-run hospital which provided immunotherapy treatments for those with his illness.  State radio operations claimed Wei's family trusted the treatment because it had been "promoted by one of the military hospitals which are considered credible, and the attending doctor had appeared on many mainstream media platforms".  Wei went through four treatments at the hospital, spending upwards of 200,000 yuan ($32,116 USD) with his family, but the treatments proved unsuccessful, resluting in Wei's death on April 12, 2016.  Before his death, Wei accused Baidu of promoting false medical information, and he denounced the hospital for claiming high success rates for the treatment.[3]   The hospital was also criticized for outsourcing their oncology departments to private hospitals, a business mechanism quite pervasive in Chinese medical system.[4] 


Are doctors of Chinese state-owned hospital governmental officials under FCPA?


To answer the question, we have to revisit the definition of the FCPA on “governmental official”.


The FCPA defines a foreign official as an employee of a government or instrumentality thereof[5] and as any person acting in an official capacity on behalf of a government.[6]  DOJ has adopted the position that state-owned enterprises (SOEs) and state-controlled enterprises are instrumentalities of a government and that any employee of an SOE qualifies as a foreign official under the FCPA.[7]  To date, courts that have considered the issue have concluded that some state-owned companies may qualify as instrumentalities of the state and that whether an enterprise qualifies as an instrumentality of the state is a question of fact that must be determined on a case-by-case basis according to a list of factors specific to each entity.  For example, in a case, the court set forth the following factors in determining whether a company is a state owned enterprise for the purposes of the FCPA:

--The foreign state’s characterization of the entity and its employees;

--The foreign state’s degree of control over the entity;

--The purpose of the entity’s activities;

--The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

--The circumstances surrounding the entity’s creation; and

--The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).[8]


Courts that have considered the issue conclude that some state-owned companies may qualify as instrumentalities of the state and employees of such companies may qualify as foreign officials.[9]


Some factors are seemingly in favor of the position of Chinese law.  Among many factors to consider, Chinese government does not “fund” state-owned hospital as it used to do or the funding is too minimal to neglect.[10]  The hospitals are basically competitors in a free market, where they need to compete with each other for better profit, and evern survival.  To do so, some hospitals adopt a critical strategy, where they buy cheap Healthcare Products, then sell them at a higher price.  This strategy commonly adopted by hospitals explain why so many medical representatives go after doctors to promote their products.[11]


However, there are some fundamental issues that are decisive in the governmental nature of state-owned hospitals in China:

--It is the state that established and owns state-owned hospitals. 

--It is the state that funds state-owned hospitals.  In face of the reform of medical system, it is the state that leads and funds the reform.[12]

--The fundamental purpose of hospitals, state-owned or not, is to secure the healthcare and welfare for the people.[13]  The medical reform is to have a better medical system to meet this healthcare and welfare purpose (while motivate the positive attitudes of doctors to engage in the cause of healthcare and welfare) other than deviate from it.[14]

--The leaders of state-owned hospitals are cadres of Communist Party of China (“CPC”) and/or state cadres that are appointed by the CPC committees and the People’s Governments of different levels.[15]


In short, the holographic picture of state-owned hospital is governmental.  The doctors of a state-owned hospital are nothing but part of governmental instrumentality even though the doctors are from the outsourced departments of a state-owned hospital.  Speaking of which, outsourcing a clinical department of a state-owned hospital seems like a non-compliance event.  After the news of Wei Zexi, it seems that many hospitals are taking back their outsourced departments.


As above-mentioned, in 2003, the Supreme People’s Court concluded that a functionary in state-owned enterprise, if not engaging in public affairs such as the carry-out of duties in organization, leadership, supervision and management shall not be regarded as state working personnel, which is then reflected in the Opinions of 2008.  However, the conclusion and Opinions did not deny the fact that state-owned hospitals (as well as enterprises) are owned and run by the state as is like the governmental instrumentality under the FCPA.


Certainly, a doctor provides nothing but “technical service”.  However, if a doctor provides “technical service” for a governmental instrumentality, the doctor is then part of the governmental instrumentality.  If the U.S. case law considered employees of governmental instrumentalities qualified as foreign governmental officials, we would then come to a logical conclusion where a doctor working for a Chinese state-owned hospital, which is considered a governmental instrumentality,  would qualify as governmental official.  Therefore, bribing a Chinese doctor is bribing a governmental official, as identified in the FCPA.


* Licensed to practice law in China and the New York State of the U.S.  Henry Chen is also the author of Commercian Bribery Risk Management in China.  Henry Chen is available at chenlitong@hotmail.com



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