COVID-19: Sourcing from China
COVID-19: Sourcing from China - who can you trust?
After much uncertainty, governments are reaching the conclusion their citizens should wear masks and other Personal Protective Equipment (PPE) when in public. To source this essential equipment, employers are naturally turning to mainland China, which has already established the economies of scale to manufacture PPE and COVID-19 related medical equipment on a large scale. Competing global demand for these products means the industry in mainland China is now rife with speculation, overpricing and dishonest brokers who are unable to meet promised demand.
Recent scandals where countries have received faulty PPE clearly demonstrate that good due diligence is essential. Delving into the integrity of potential counterparties in mainland China can be a complex activity – often revealing undisclosed beneficiaries, a track record of corruption or nepotism, or indicators of fraud. This does not have to be a fully-fledged investigation but can be a swift assessment of the public record to answer several key questions:
- Does the company exist? Is it registered to do what it says it does? Are you actually dealing with the company which will produce your order?
- Does the company have the capability to meet your orders? Are there online indications it is already overwhelmed by client demand? Or are there allegations of a failure to deliver or delivery of faulty products?
- Is the company appropriately licenced to get the goods out of China?
Our assessments have helped clients uncover many concerns linked with exporters of PPE and medical equipment. We have also identified many success stories (see Case study below).
Medical export regulations: a changing game
Regulators in mainland China are responding quickly to address the reputational impact of companies shipping faulty PPE overseas. Before procuring COVID-19 related products from the country, and paying a supplier, companies need to establish whether the targeted product is subject to tightened export restrictions, and whether the mainland China-based counterparty has the proper documentation to export goods and clear customs.
Since 31 March 2020, three government bodies (the Ministry of Commerce, General Administration of Customs and the National Medical Products Administration) have placed extra restrictions on the export of five key items related to COVID-19, resulting in more stringent quality and accreditation checks. The five key items are: testing reagents for COVID-19, medical masks (including protective masks, surgical masks and disposable medical masks), medical protective clothing, ventilators and infrared thermometers. Regulators are checking the following:
- The product and its manufacturer have proper licences from the relevant Chinese industry regulator(s). The National Medical Products Administration has published a list of products from specific manufacturers which have obtained medical device registration certificates (医疗器械注册证).
- China categorises medical devices into three classes according to the sophistication and risk of the medical device. (Class I products include protective eyeglasses and protective face shields. Medical face masks, protective clothing and infrared thermometers are typically Class II devices. Ventilators can be either Class II or Class III, depending on functionality. Testing reagents for COVID-19 are Class III and subject to special regulations.) Medical manufacturers must register and be licenced separately to produce and sell each kind of medical device.
- Exporters must be able to produce certification showing they meet standards set by the importing country. Since 26 April 2020, the China Chamber of Commerce for Import and Export of Medicines and Health Products (中国医药保健品进出口商会) has also been maintaining lists of PPE manufacturers, which have received overseas certification, and customs will reportedly be checking these to ensure companies are in compliance.
- When declaring a shipment of the key items, the company exporting the goods is required to provide a written or electronic declaration stating they have obtained certificates of medical device registration for mainland China and certificates of quality standards relevant to the importing country.
Since 10 April 2020, customs authorities in mainland China have been inspecting shipments – without exception – of 11 kinds of medical devices (face masks, protective clothing, infrared thermometers, ventilators, surgical caps, goggles, gloves, shoe covers, disinfectant, disinfecting wipes and patient monitors). When they are satisfied with the onsite inspection and that the requisite medical device registration certificates for mainland China have been presented, they will release the shipment. Customs authorities in mainland China require the manufacturer to provide quality certificates relevant to the importing country but usually do not verify them.
Export licences may be fake
Manufacturers that previously only supplied the mainland China market have started receiving orders from overseas companies. Many of these manufacturers have limited experience in international licensing for export. New agencies have appeared in the market claiming to be able to assist manufacturers with CE certification (indicating goods meet European Economic Area standards) for fees ranging from RMB 8,000 (USD 1,100) to RMB 28,000 (USD 3,900). As a result, there is a rising risk of counterfeit CE certification that manufacturers may mistakenly have obtained in good faith.
On 5 April, China’s Administration for Market Regulation (国家市场监督管理总局) issued guidance naming eight agencies that are authorised to award CE certifications and 44 agencies authorised to support ISO13485 certification in mainland China. CE accreditation for medical devices can take weeks or years to complete under normal circumstances and varies by product. Legitimate distributors report having been offered illegitimate materials for sale to present to prospective PPE buyers, including counterfeit certificates, fake purchasing orders and even videos of ventilators in a warehouse to be used as false evidence the stock exists.
In response to this trend, Control Risks has been conducting on-site visits to verify the existence of stock as a final step in the due diligence process.
Don’t waste time – do your due diligence
Despite overwhelming pressure to acquire PPE quickly, taking the time to be confident in the capabilities and integrity of your supplier will ensure your employees receive good quality protective equipment. The due diligence checks often take 1-2 days. The risks of dealing with mainland China-based companies can be tricky to navigate, but the risk of not doing due diligence outweighs the time spent better understanding your counterparty.
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Case Study: Rapid medical third-party supplier screening
Our client had been contacted by three apparently US-based brokerage firms, claiming to be able to source medical devices from 25 Chinese companies. We conducted public-record research to verify their licences and export qualification, track record of supplying medical devices, capacity to fulfil large orders and identifying potential red flag issues. Eight of the Chinese companies appeared credible. Of the other parties:
- One of the brokers had been incorporated only a few weeks earlier in Puerto Rico. Another had undisclosed links to a politician of a Caribbean country.
- Eight companies had no track record at all in the medical equipment sector. Several had been recently founded and did not appear to be operational. Those that had established operations were from unrelated industries such as construction materials, luggage and adult toys.
- Nine companies had some track record in the medical sector but had only switched to producing PPE from unrelated products in response to COVID-19. Some were able to provide copies of relevant certificates and licences, while others were still applying for them.