China Issues Final Compliance Guidelines in Regulating the Medical Industry

At a Glance

• The draft Guidelines were issued on October 11, 2024; this release of final Guidelines in three months demonstrates the Chinese government’s determination to crack down on bribery and other perceived corruption problems in the medical industry.
• The Guidelines require pharmaceutical companies and medical device companies to immediately cease activities posing bribery risks. Companies may conduct internal investigations or hire third-party professionals to investigate, collect evidence and report risks to regulators.
• The Guidelines identify nine areas prone to commercial bribery, offering practical guidance for managing these risks.

On January 10, 2025, China’s State Administration for Market Regulation (SAMR) officially released the Compliance Guidelines on Preventing Commercial Bribery Risks for Pharmaceutical Enterprises (the Guidelines). This extraordinary industry-focused development marks a significant milestone in China’s efforts to combat bribery and corruption in the medical industry.

The medical industry is one of the five sectors prioritized by the Chinese central government in its anti-corruption campaign of 2024. In 2024, more than 52,000 individuals were subject to anti-corruption investigations in the medical industry in China, of which 2,634 individuals were arrested and prosecuted — a historical record. The SAMR issued its draft Guidelines on October 11, 2024, and released the final Guidelines in three months, which demonstrates the Chinese government’s determination to crack down on bribery and other perceived corruption problems in the medical industry.

The Guidelines provide local AMRs with comprehensive guidance on investigating and enforcing the People’s Republic of China’s (PRC) Anti-Unfair Competition Law and other relevant laws and regulations in the medical industry. Pharmaceutical companies and medical device companies (Pharmaceutical Enterprises, as defined by the Guidelines) are also recipients of guidance outlined in the Guidelines and must immediately establish and implement a compliance program that follows the Guidelines to minimize bribery and corruption risks and ensure healthy growth of the business.

Nine High-Risk Areas and Compliance Actions

The Guidelines identify nine areas prone to commercial bribery, offering practical guidance for managing these risks. Below are some of the key developments requiring close attention by Pharmaceutical Enterprises operating in China:

1. Outsourcing Activities Through Third-Party Vendors

Outsourcing via third-party vendors, such as contract sales organizations (CSOs) or distributors/resellers, is common in the medical industry but carries inherent bribery risks. Notably:

• the misuse of funds by outsourcing vendors for bribery
• using outsourcing companies as intermediaries to execute bribery schemes

Because outsourcing vendors are not affiliated with Pharmaceutical Enterprises, it is difficult for Pharmaceutical Enterprises to directly manage or monitor their operations. However, recent PRC cases show that Chinese enforcement authorities are increasingly targeting Pharmaceutical Enterprises using outsourcing vendors as an attempted shield in bribery schemes.

Under the Guidelines, Pharmaceutical Enterprises must establish transparent vendor-vetting and onboarding procedures, conduct due diligence, keep complete records of onboarding documents, and sign service agreements with anti-corruption and audit clauses to control and manage third-party vendors. Pharmaceutical Enterprises are advised to develop a “negative list” and clarify prohibited conduct in the service agreements or commitment letters signed with outsourcing vendors.

More particularly, the Guidelines require Pharmaceutical Enterprises to pay attention to contract prices or payments that significantly deviate from market rates. A Pharmaceutical Enterprise is prohibited from funding third-party vendors through fake transactions or services, or committing bribery through third-party vendors that are under its actual control, such as instructing its employee(s) to establish a company as a channel to commit bribery. The Guidelines prohibit Pharmaceutical Enterprises from directing a third party (explicitly or implicitly) to induce others to prescribe, promote, recommend, procure, or use their products to gain a competitive advantage or business opportunity by using inappropriate service fees, discounts, rebates, commissions, or other sources of funds.

2. Discounts, Rebates and Commissions

Under the Anti-Unfair Competition Law of China, an enterprise may explicitly provide discounts to transaction counterparties or pay commissions to intermediaries as part of lawful business practices if such discounts or commissions are fully disclosed in contracts and accurately recorded in financial books. The Guidelines provide further clarity on how to apply these “safe harbor” provisions appropriately to avoid bribery risks:

• Policy and Approval Systems: Pharmaceutical Enterprises must establish internal policies and approval mechanisms for discounts, rebates and commissions.
• Contractual Clarity: Contracts with counterparties or intermediaries must specify the discount rates, commission percentages and payment methods.
• Recordkeeping Requirements: Payments related to discounts, rebates, and commissions, including promotional items or bonuses, must be accurately, promptly, and completely recorded in financial books.

3. Academic Visits and Exchanges

Under the Guidelines, academic visits and exchanges refer to academic promotional activities conducted by medical science liaisons (MSLs) for health care professionals in connection with pharmaceuticals and medical device products. Consistent with the trend of prohibiting MSLs from engaging in sales activities, as further detailed in the draft Administrative Measures for Medical Science Liaisons published by the State Drug Administration of PRC on November 27, 2024, the Guidelines impose the following restrictions on MSLs:

• Pharmaceutical Enterprises are prohibited from assigning sales tasks to MSLs, such as collecting payments or handling invoices.
• MSLs are prohibited from interfering with or affecting health care professionals’ reasonable use of pharmaceuticals or medical device products.
• MSLs are prohibited from requesting or collecting the prescription or usage data of pharmaceuticals or medical device products prescribed by a health care provider, the departments under the health care provider, or its professionals.
• MSLs are prohibited from directly or indirectly offering any health care professionals anything of value or illegitimate benefits to induce them to prescribe, recommend, use, or purchase relevant pharmaceuticals or medical device products.
• One area of emphasis is that sales representatives of a Pharmaceutical Enterprise are not allowed to join academic visits and exchanges with MSLs.

Regulators in China have increasingly required Pharmaceutical Enterprises to substantiate the legitimacy of academic events with detailed evidence. Failure to provide adequate documentation may put the Pharmaceutical Enterprise in an unfavored position in justifying the academic events, which may further result in penalties, highlighting the importance of a complete and traceable document file.

4. Consulting Services

Consulting services involve hiring health care professionals for their expertise and paying reasonable compensation for their services. The Guidelines require that such engagement be based on genuine, reasonable and lawful business needs, and that the service fees be reasonable and consistent with the relevant standards or market rates.

Pharmaceutical Enterprises are prohibited from inducing health care professionals to prescribe, promote, recommend, procure or use their products, or deliver improper benefits to health care professionals, under the guise of consulting services. Pharmaceutical Enterprises must truthfully record and retain service records, results and details of services to prove the authenticity, reasonableness and fairness of the consulting service activities. Engagement of health care professionals needs to comply with the national and local regulations governing the conduct of health care professionals, as well as the internal policies of the health care institutions to which the health care professionals affiliate, such as seeking the approval from the health care institution for the engagement of its health care professionals for consulting services. Pharmaceutical Enterprises must also avoid paying health care professionals in cash or cash equivalents for the consulting services.

Five More High-Risk Areas

In addition to above key developments, the Guidelines also address compliance issues in the following areas:

• Entertainment and Hospitality
• Donations, Sponsorships and Funding
• Provision of Free Medical Equipment
• Clinical Research
• Retail Sales Channels

Self-Investigation and Reporting

The Guidelines require Pharmaceutical Enterprises to immediately cease activities posing bribery risks. Companies may conduct internal investigations or hire third-party professionals to investigate, collect evidence and report risks to regulators. Proactive and voluntary reporting of noncompliance activities that the regulators have not started investigating or are unaware of, and taking immediate remediate actions, may serve as a mitigating factor in potential penalties.

Ensuring Compliance in a Changing Legal Landscape

The Guidelines highlight China’s commitment to strengthening anti-corruption measures in the medical industry and health care sector. Foreign Pharmaceutical Enterprises are likely aligned already with these standards, focusing on third-party relationships and internal compliance mechanisms. But the new focus of compliance by Chinese regulators makes this more important than ever.