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Harry Cassin
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Andy Spalding
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Jessica Tillipman
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Richard L. Cassin
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Cody Worthington
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Julie DiMauro
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Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
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Richard Bistrong
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Eric Carlson
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A framework for enhanced due diligence of Chinese medical suppliers during Covid-19 emergency

Millions of units of medical supplies and personal protective equipment (PPE) are flooding into the United States from China. Recently, a commercial aircraft delivered 80 tons of PPE and other medical supplies from Shanghai to New York, and there are now more than 20 flights scheduled to do the same.

The Chinese government and many state-owned enterprises, universities, corporations, generous families, and foundations have been coordinating, donating, and supplying the critical medical supplies and PPE that the United States needs.

These efforts are not without risk. It is important that healthcare facilities, universities, corporations − and the individuals who are receiving or purchasing these supplies − mitigate China-supplier risks.

Below are some of the key risks and potential solutions to reduce cross-border operational risks.

Legal and regulatory risks

Quality and safety: defective, contaminated, secondhand or reused products; products that do not adhere to applicable FDA regulations and standards for temporary enforcement policies for PPE during COVID-19; unauthorized factory productions or knock-off products; products that are not appropriately audited or inspected for quality, safety, and labeling compliance.

Price gouging: global surge in need for medical supplies and PPE has created a spike in middlemen and agents seeking to charge exorbitant prices.

Corruption and bribery: potential kickbacks, rebate arrangements, inappropriate commissions; under-the-table payments to government officials and family members; payments to third-parties and individuals unrelated to the manufacturer or supplier.

Fraud prevention, tax evasion and money laundering: potential involvement in questionable payments to offshore third-party entities; unconventional invoicing techniques to evade paying taxes; inaccurate or incomplete documentation of goods and services rendered, including documents filed with U.S. Customs and other agencies.

Framework for mitigating risks

To mitigate these risks, companies are encouraged to consider a process of scrutinizing suppliers and analyzing proposed business transactions thoroughly, including (but not limited to) the following:

  1. Collect supplier information and documentation: Verify that the company is qualified, in good standing, and that the individuals representing the company are authorized representatives. Request that the company provide a copy of its business license, proper identification, and other relevant registrations and certifications. Beware of email solicitations.
  2. Ask difficult questions up front: Request that suppliers respond to a series of third-party intake questions. This is typically done by having the supplier fill out a Supplier Questionnaire that covers key categorical issues including: 1) background information; 2) qualifications and required licenses; 3) legal and regulatory compliance; and 4) contractual terms and considerations.
  3. Background and reputational search: Conduct desktop research on suppliers as well as related individuals and entities. This includes conducting research on significant owners, shareholders and management as well as any affiliated entities, agents, and consultants, and verifying that the information provided is truthful and accurate and check for credit history, financial health, adverse inspectional findings, FDA import alerts, and any prior issues.
  4. Identify and escalate red flags: Utilize due diligence to measure the level of risk for engaging in the proposed transaction and identify any potential red flags that would prohibit the transaction. If legal, regulatory, or compliance concerns arise, identify whether there is a solution to the issue identified or whether it is a deal breaker.

These examples of key issues comprise a significant effort which likely needs to be accomplished in very short order. By carefully reviewing the supplier agreement and terms and conducting one or more of the due diligence processes such as those as outlined above, many of the above issues could be mitigated.

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