With the government’s stricter crackdown on illegal rebates, Korean pharmaceuticals are searching for smarter ways to raise cash to bribe doctors, sources said.
In particular, drugmakers are buying up gift certificates to break them into cash and dole them out to physicians, industry officials said. Such activity is more rampant among small- and medium-sized pharmaceuticals than large firms, they said.
“My company told me to use my personal credit card, not the corporate card, for credit card kiting. To erase evidence, I’m buying up paper gift certificates, not the ones on mobile,” said a salesperson at a drugmaker, which posted about 90 billion won ($79.6 million) sales last year.
“In case of a crackdown, I purchase gift certificates from shops that can offer me receipts without any item written on the receipt or receipts as if I had a meal there. My coworkers usually buy gift cards for buffet meals at hotels or seafood restaurants,” he said.
After purchasing gift cards, salespersons re-sell them on the internet to obtain cash. Considering that 10 percent of the gift card’s value is paid for value-added tax, they offer up to 15 percent discount per gift card and get the 85 percent of the gift card value as cash, the salesman said.
After the salesperson submits the payment with his personal card to the company, the company records it as an expense and returns him the amount, he added.
“It looks like an entertainment fee, but the company knows that I did card kiting. If I made a large amount of card kiting, I simply report it to the company,” he said.
Some other salespersons said they voluntarily used their cards to make cash, without companies’ pressure or knowledge.
“Some salespersons purchased buffet certificates to make cash without reporting to the company,” said a salesperson at a large-size domestic pharmaceutical firm. “I can’t say large-companies are out of this practice, but it is usually pharmaceuticals with small revenues that engage in cash making through gift cards.”
Large-amount gift card kiting done in secret
Pharmaceutical salespersons contact illegal distributors of gift certificates if they have to use corporate cards for a large-amount purchase.
Such distributors are registered as official sellers of gift certificates but actually engage in illegal exchanges of certificates for cash in millions of won every month, sources said.
During the process, they do not exchange real gift cards, but pharmaceutical officials take cash after making payment via corporate credit cards.
“A gift certificate seller gets only single-digit commission but makes relatively hefty profits because the purchase is huge, usually in hundreds of millions of won. For a purchaser, he may pay more commission, but he can obtain large cash without leaving a trace,” an illegal distributor of gift certificates said. “In real trading, there is no gift certificate exchanged. The payment is made for gift cards, and the salesperson gets cash. To leave no evidence, I don’t take an account transfer.”
The distributor also noted that he traded gift certificates with not only pharmaceuticals but companies in the other sectors.
“One company’s head managed 600-700 million won through gift certificate trading. He called himself chairman and engaged in the practice with many companies,” he said.
More widespread is pharmaceutical employees’ “collecting receipts” to record the payments as expenses in the balance sheet.
For instance, a drug company with annual sales of 100 billion won collects receipts over 30,000 won personal payment from employees to record them as expenses.
“When I didn’t have any receipt left, I used to ask other salespersons working at a multinational drugmaker to give me their receipts. Almost all receipts were okay, except for those from supermarkets or stationery stores. Those from home shopping sites were also accepted,” the company’s salesperson said.
The government’s efforts to clean up the industry could go back to square one if drugmakers continue to engage in illegal practices for rebates, observers said.
Korea has been enhancing regulations on illegal rebates for years. In 2010, the government started to punish both the recipient and the giver of bribes. In 2016, the anti-corruption law called “Kim Young Ran Act” took effect to prohibit improper solicitation and graft.
Recently, the government forced drugmakers to submit reports of expenses on physicians and pharmacists to the health authorities.
Besides, the pharmaceutical sector introduced an international anti-bribery management system, called “ISO 37001,” to enhance ethics management.
“The more the authorities enhance investigations on illegal rebates, the more illegal cases will come on the surface. If they confiscate and check years-old accounting books, some companies will find it hard to get away with wrongdoings even if they recently got ISO 37001 certification,” an official at a pharmaceutical firm said.
He emphasized that pharmaceutical companies should voluntarily clean up illegal rebates, regardless of various regulations.
Lee Won-ki, director of the Korea Compliance Certification Assurance, also stressed that pharmaceutical firms’ commitment was most important.
He said preventing corruption through an anti-corruption prevention system has limitations because a company might try to cover up unlawful practices.
Lee warned that if the KCCA finds an illegal practice at an ISO 37001-certified firm except for an individual’s deviation, it could cancel the certification.
For a company to obtain ISO 37001 certification, it should have a financial control tool within the company to prevent card kiting, Lee said.
“We also examine whether the company’s use of corporate cards or gift cards is transparent and whether the company documented on expenses for physicians and pharmacists,” he added.
The KCCA reviews whether drugmakers have set up clear standards to prevent such practice and whether they comply with them, according to Lee. “If we find a company was involved in bribery and that the company did not follow the compliance rules, we can suspend or cancel the certification,” he said.
The KCCA also reviews how many checks a company goes through when approving expenses.
“We check if officials in charge of planning, expenses, and review/approval have functioned properly. We cannot control the incidents before the certification,” Lee explained. “If a certain case occurs after the certification, however, we will proceed with a special assessment. If the company rejects it, we will cancel the certification.”