[The Editors' Verdict] Pharmaceutical Companies Giving Rebates Should Be Treated as 'Serious Accidents'

The secret ledger Excel file name in the K Pharmaceutical rebate case, in which 260 doctors were sent to the prosecution, is ‘BM’. According to the Seoul Metropolitan Police Agency conducting the investigation, BM is a code for ‘Black Money’.

Whenever any pharmaceutical company provides rebates, they use their own codes such as ‘Treasure Map (list of targets)’, ‘Market Share (payment ratio)’, and ‘Ssak-kol (advance payment)’, as revealed by investigations. The word ‘rebate’ is never mentioned orally or recorded in documents. However, just because taboo words are not used internally does not mean anyone is unaware of the distribution of rebates. Especially, the CEO cannot be unaware. Rebates span the entire company management, including sales, slush fund creation (finance), ledger manipulation (accounting), product shipment (sales), and sales staff performance evaluation (HR). If the CEO truly did not know, they deserve to be dismissed for negligence at the shareholders’ meeting.

When the dual punishment system, which punishes both the pharmaceutical company giving the rebate and the doctor receiving it, was implemented 14 years ago, the pharmaceutical industry became tense. A few years later, the chairman of Company A was arrested for rebates and served his full sentence, which astonished senior figures in the pharmaceutical industry. From then on, protecting the CEO became the desperate mission of the legal teams at pharmaceutical companies involved in rebate scandals. A major reason for using codes for rebates is to draw a line by claiming “it was done secretly by the staff and the higher-ups did not know.”

A new method to protect the upper management is indirect rebates through sales agency companies (CSOs). The National Tax Service caught a pharmaceutical company last September that established a disguised CSO, signed false drug supply contracts to create slush funds, and used them for rebates. The pharmaceutical company denies responsibility, claiming “the CSO acted alone.”

Many rebate investigations end at the level of the responsible executive, even if they reach higher levels. In the K Pharmaceutical case, the police have so far arrested one doctor who received money and one hospital employee involved. The two CEOs of the company must be held legally responsible if they knew about the rebates, and if they did not, they must be accountable to the shareholders.

Rebate scandals often break late due to insider whistleblowing fueled by long-standing grudges over incentive distribution. Therefore, it is not uncommon for the management at the time of the crackdown to be different from the management during the period when rebates were provided.

The Fair Trade Commission detected rebates by Company B from 2014 to 2018 last year, imposing a record-high fine of 30.5 billion KRW and prosecuting the corporation and the current CEO, while excluding the two CEOs who started the rebates in 2014 from prosecution. The two who handed over the CEO position to their successors are exempt from liability for the rebates conducted during their tenure. Company C, which provided rebates for seven years starting in 2011, was fined only last year, five years later.

Rebates will not disappear with half-hearted punishment of low-level staff. The CEO must be held strictly accountable. The Serious Accidents Punishment Act can be applied by analogy. Under this law, the CEO of a company where a serious accident occurs is punished. The Pharmaceutical Affairs Act should be amended to punish all CEOs who served during the rebate provision period. If CEOs are made to bear responsibility for illegal acts committed during their tenure, even if discovered later, they will take the lead in rejecting any tempting rebates, no matter how sweet.