COVID-19 has transformed medical procurement in China – and the compliance risks involved

Post By: Bliss Khaw

China is well-established as one of the world’s leading manufacturers of a wide range of healthcare products. But as the demand for medical equipment amid the COVID-19 crisis has increased dramatically in recent months, everything is not business as usual. Even for the most experienced organizations, there have been significant changes to the business and regulatory environment in China associated with COVID-19-related medical procurement that pose unique and acute challenges. The stakes are high for compliance officers, as compliance with a range of new, rapidly shifting regulatory requirements will determine whether an organization is able to secure much-needed medical equipment during the pandemic.

Governments, corporates, NGOs and non-profit organizations from around the world—many of whom have limited experience with the China healthcare market—are all competing to secure stocks of much-needed equipment, including a range of PPE, testing equipment and ventilators. This explosion in demand and competition for crucial medical supplies has been accompanied by a new growth of speculation, overpricing, and unverified claims by unqualified brokers and suppliers, seeking to take advantage of this unprecedented business opportunity.

Over the course of April, Control Risks reviewed more than 100 suppliers in China directly in relation to COVID-19-related medical procurement efforts, for business as well as compliance teams. Of the suppliers we have helped organizations to screen since the beginning of April, 35% lacked relevant qualifications or licenses, 33% were unable to meet expected production capacity and/or had limited or no relevant experience or track record, and 27% were linked to regulatory or legal issues, which have been the most common issues of concern identified. We also identified a number of instances where the suppliers in question had unclear control or ownership structures with links to government entities.

New regulatory requirements and a rise in counterfeiting 

New regulatory challenges abound as China seeks to control and regulate this rapid increase in demand and limit the potential for damage caused by unqualified products being shipped to overseas markets; this has led to a host of new compliance challenges and potential avenues for malfeasance.  Before being released for shipment, Chinese customs authorities are comprehensively inspecting any exports of medical masks (including protective masks, surgical masks and disposable medical masks) and medical protective clothing, ventilators, COVID-19 testing reagents, and infrared thermometers.

In shipping declarations in China, exporters of these goods—whether it is the manufacturer itself or a broker—must declare that they have obtained certificates to show proper licensing for medical device manufacture in China, as well as the ability for the equipment to meet quality standards in the recipient country. Once customs authorities are satisfied that the necessary China medical device registration certificates have been presented, they will release the shipment.

While customs authorities require quality certificates relevant to the importing country, these are not verified in China. Authorities are in the process of compiling a white list of companies with overseas licenses as a means of easing customs requirements, but these efforts are still in the implementation stage, and outbound COVID-19-related medical supplies are still subject to strict customs reviews.

Amid the pandemic, many Chinese manufacturers that had previously been focused on the domestic market are now facing demand from international buyers—and have little experience in export licensing requirements. At the same time, quality standards for various COVID-19-related medical equipment in recipient countries may be unclear. This environment of uncertainty, new regulatory requirements, and rapidly-moving deals has resulted in the risk of counterfeit certificates and pressure to find other “creative” solutions, with a number of new agencies entering the market, claiming to be able to assist manufacturers with required certification and processes.

The newness of some of these requirements, combined with the inexperience of some domestic manufacturers who are entering international markets for the first time, means that suppliers may be duped by fake licenses, which they present in good faith.

What does effective screening look like?

Effective screening of China-based partners in the medical industry is challenging—even in the best of times—and is highly dependent upon a combination of Chinese-language capabilities combined with an understanding of rapidly changing market conditions in China. Turnaround on screening and contracting processes is urgent and highly compressed amid the pandemic, putting added pressure on compliance teams.

Close coordination between compliance and business teams is key to effective screening, given the immediate impact that non-compliance with new, shifting regulations in China can have on the success of COVID-19-related equipment contracts. To ensure the success and efficiency of such efforts, it is imperative to have an understanding of these crucial issues:

  • Is the supplier registered to engage in this type of manufacturing?
  • Is the company the direct manufacturer, or are they subcontracting out to another company?
  • Will the equipment have the right licensing and credentials to meet export requirements?
  • What is the ownership structure of the company? Is the company associated with any government entities; is it politically exposed?
  • How recently was the company established? Does the company have a track record and relevant experience with these types of products?

Being able to assess supply partners on this basis and having answers to these key questions will help ensure that the time, effort and resources put towards obtaining vital COVID-19 medical supplies results in a successful outcome.

About the Author: Bliss Khaw is a Principal at Control Risks, the global specialist risk consulting firm. An expert in business intelligence, investigative due diligence, and anti-corruption compliance, Bliss also serves as the firm’s Americas-based representative on China issues.

Autor: Fernando Vaccotti

Consultor Privado. Experto en Seguridad Internacional. Security Consulting Services & Solutions. Consultor Experto en Seguridad WFP (Programa Mundial de Alimentos ONU). Soluciones en Seguridad Multidimensional. Pensando soluciones fuera de la caja. Out of box thinking.

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