Legal practice · Issue No. 2, 2023

D. Kozyreva. Criminal Risks for a Medical Device Manufacturer: A Review of Court Practice

Like any business in Russia, the medical business is not immune to criminal risks.

Increasingly, people turn to criminal defense lawyers not with the by now "classic" charges of fraud (Art. 159 of the Criminal Code of the Russian Federation) or restriction of competition (Art. 178 of the Criminal Code), but with the illegal circulation of medical devices that are

• unregistered
• falsified
• substandard

which is prohibited by Art. 238.1 of the Criminal Code.

A professional market participant reading this article,

• who carries out business activity in the healthcare sphere
• and who, at first glance, holds all the necessary permits,

may think that this does not apply to him or her.

But it is exactly the opposite.

Of course, there are cases of criminal prosecution under Art. 238.1 of the Criminal Code

• for supplying foreign (as a rule, Chinese) contraceptives not permitted for circulation in the territory of the Russian Federation
• for an amount only slightly above 100,000 rubles.

For example, a defendant was sentenced to 2 years and 2 months of suspended imprisonment for selling:

• falsified condoms on Avito
• in the amount of 105,600 rubles.

Verdict of the Kievsky District Court of Simferopol of 20.03.2018 in case No. 1-136/2018

The large, high-profile cases are, after all, about the top management of medical device manufacturing companies

• that hold registration certificates for their products
• and have many years of experience on the Russian market.

You may ask: how do such companies, with all the necessary documents, end up in the criminal orbit?

In practice, the following are recognized as unregistered:

• not only devices that have never been registered in the territory of the Russian Federation
• but also devices that do hold a registration certificate but do not fully correspond to the documents in the registration dossier (RD), namely the operating manual and the technical specifications.

Who are they, those who may need the help of a criminal defense lawyer?

Those at risk:

• the general director
• the technical director
• the owner
• the head of production
• the person responsible for interaction with Roszdravnadzor and for the timely introduction of amendments to the RD

Witness testimony will also have to be given by:

• the chief accountant
• the head of the procurement department (responsible for purchasing components)
• the engineer who installed complex equipment (for example, a mammography unit)
• other key persons involved in the process from the purchase of components to the signing of acceptance certificates with the customer.

How professional medical device manufacturers come to the attention of law enforcement

In practice, 4 of the most common cases can be identified:

If the delivery went through successfully and the medical devices were accepted by the customer:

1. As part of an inspection by a territorial body of Roszdravnadzor, if necessary, an expert evaluation is carried out by an organization subordinate to Roszdravnadzor,

• based on the results of which, on the basis of a negative conclusion, an information letter is published stating that a medical device that does not meet the requirements has been identified in the territory of the Russian Federation.
• Roszdravnadzor then passes the materials to the Investigative Committee of the Russian Federation for the purpose of opening a criminal case.

2. During a prosecutor's inspection at the medical organization to which the medical devices were supplied, violations are identified,

• and the materials are then passed to the Investigative Committee of the Russian Federation for the purpose of opening a criminal case.

3. A large number of medical devices are supplied under government contracts.

• First, a criminal case under Art. 159 of the Criminal Code (fraud) is opened against the supplier of the medical devices, in connection with the contract price being inflated compared with the market price, or with the parameters of the device not matching the terms of reference.
• Then, within the fraud case, an expert evaluation is carried out (as a rule, by VNIIIMT), a mismatch with the RD is found, and grounds appear for opening a criminal case under Art. 238.1 of the Criminal Code.

If the delivery has not yet been completed:

4. On acceptance, the customer has doubts about the proper quality of the medical devices

• and refuses to sign the closing documents
• a report of a crime is filed in order to resolve the conflict as quickly as possible.

For which actions is criminal liability established?

Art. 238.1 of the Criminal Code prohibits:

• the production, sale (read: "supply") and import of falsified and unregistered medical devices
• the sale and import of substandard medical devices.

Criminal liability may be imposed only on condition that the amount of damage exceeds 100,000 rubles; as a rule, professional market participants cross this threshold with ease.

In addition, the latest trend in practice is to charge a combination of offenses:

• illegal circulation (Art. 238.1 of the Criminal Code)
• fraud (Art. 159 of the Criminal Code).

What is the logic of law enforcement?

• Medical devices that do not meet the requirements were supplied, for example unregistered ones (not corresponding to the RD),
• If such products also do not meet the terms of reference of the government contract (established by VNIIIMT in the course of a forensic technical examination, along with the mismatches with the RD)
• and/or the contract price was inflated, there are signs of theft of funds by deception (Art. 159 of the Criminal Code).

Why is this dangerous?

• A fraud charge increases the risk of pretrial detention being chosen as a preventive measure
• and of a real prison sentence being imposed
• and it prevents release from criminal liability with the imposition of a court fine (more on this when we discuss defense strategies).

The beneficiary of a group of companies built the following business model:

• LLC "M*" was created to manufacture reagents and equipment for histological studies
• LLC "L" and LLC "P" were created to sell these products
• In addition, LLC "M" was a distributor of the Italian manufacturer "D" and supplied foreign reagents to the Russian market under government contracts through LLC "P*".

Law enforcement's claims arose in connection with LLC "P*"'s performance of a contract for a customer, a medical institution in St. Petersburg. Because the Italian manufacturer missed the delivery deadlines, the beneficiary decided not to withdraw from the contract,

• and to supply the healthcare facility with products of, in his opinion, similar quality, made at the site of LLC "M", with labels bearing the name of the company "D" stuck on them.

Labels in English had been ordered and made at a print shop before.

• They were needed for marketing purposes
• or for repackaging Italian products, in cases where they arrived in containers damaged in transit, or there was an order for a larger or smaller pack size than the original, or for different containers.

On acceptance, the healthcare facility's staff discovered the falsification of the reagents and dyes. While checking the goods received, a laboratory technician noticed:

• the unusual shape of the test tubes
• and that the explanatory notes on the test tubes were poorly glued on and were falling off.

Visually, the packaging of the delivered goods (formalin, solutions, dyes, paraffin, medium
with fixative for histological samples, etc.) did not match the original packaging
of the products of "D*".

• For example, "D." granulated paraffin is blue, while the paraffin delivered was white
• It was packed in wire-tied bags that indicated a different melting point (52-54°C instead of the 56-58°C required by the terms of the contract).
• On the bottom of the canister of formalin allegedly made in Italy, there was a Rosstandart mark, which, as is known, is not applied to products imported from other countries.

Representatives of the Italian company invited by the healthcare facility, having examined in detail the products supplied by LLC "P", concluded that these products had not been made by the company "D".

At the healthcare facility's request, the St. Petersburg Chamber of Commerce and Industry carried out a commodity expert examination.

• The experts concluded that the products supplied by LLC "P*" did not meet the requirements of the government contract and had signs of falsification.
• In the course of the preliminary investigation, the Federal State Budgetary Institution VNIIIMT, which carried out the forensic examination, reached similar conclusions.

As a result, the court qualified the beneficiary's actions under Part 1 of Art. 238.1 of the Criminal Code,
as the production and sale of falsified medical devices on a large scale.

• The defense insisted that the products supplied, being accessories, were not medical devices. However, the court did not accept this argument.
• The beneficiary was sentenced to three years of suspended imprisonment. It is noteworthy that during the preliminary investigation the businessman was held in pretrial detention.

Verdict of the Golovinsky District Court of Moscow of 20.07.2020 in case No. 1-29\20

The defendant was the general director of a factory specializing in the manufacture of paper for medical examinations.

Under a government contract, the company undertook to supply ultrasound paper to a medical institution.

Acceptance went through successfully, and the customer made no claims.

Later, during a Roszdravnadzor inspection, a mismatch was found between the products supplied and the accompanying registration certificate, and a corresponding information letter was published.

• The RD contained no information on roll tapes of the 110 mm x 20 m size, and in addition incorrect labeling had been applied to the products supplied.
• In his defense, the entrepreneur pointed out that the paper supplied met the quality requirements and was an analogue of the imported paper used in ultrasound machines to print images, which, in his view, was confirmed by the registration certificate
• There had never been any complaints from consumers of this paper, including from the customer under the contract.
• In addition, the products belonged to the lowest hazard class, and their use could not cause real harm to people's health
• A photograph printed on paper by a thermal printer is not used to make a diagnosis, since the diagnosis is made directly during the examination and scanning of the organs.

The court did not agree with the defendant's arguments, stating that the very fact of using unregistered devices for medical purposes poses an increased danger to people's lives and health, because until the relevant registration is completed, the properties of such a medical device are unknown.

As a result, the court of first instance qualified the entrepreneur's actions under Part 1 of Art. 238.1 of the Criminal Code, as the production and sale of unregistered medical devices on a large scale.

He was sentenced to suspended imprisonment.

It was only on the third round of consideration of the criminal case (after lengthy appeals) that the court of appeal sided with the businessman and dismissed the criminal case on the grounds of:

• insignificance, since, given the low hazard class, the use of the paper posed no threat to the life and health of the population or of medical workers

It must be admitted, however, that this is the only precedent in which the court ultimately took into account the hazard class of the medical device, and such a decision was largely a result of the defendant's perseverance: more than 3.5 years passed from the first verdict to the dismissal of the case on appeal in the third round of consideration.

Verdict of the Chernovsky District Court of Chita of 11.03.2022 in case No. 1-51-21

As part of the fight against coronavirus infection, a medical institution decided that it needed to purchase disposable medical gowns.

The contract was signed with a sole proprietor.

According to the prosecution, the sole proprietor took advantage of the situation.

• He bought from LLC "A*" personal protective equipment that was not medical devices and was not to be used by medical institutions for medical purposes.
• He then found on the Internet a registration certificate for medical gowns, the holder of which was LLC "G", and produced labels containing false information that the gowns purchased had been made by LLC "G".
• The labels produced were sent to the director of LLC "A*" to be put into the packages of disposable gowns.
• The finished products were delivered to the hospital but were not accepted by the customer.

On acceptance it turned out that instead of 31,000 gowns, only 24,095 had arrived at the medical institution.

The entrepreneur promised to correct the shortcomings, but took no action.

As a result, the customer turned to law enforcement.

As a result, the court qualified the businessman's actions under Part 1 of Art. 238.1 of the Criminal Code, as the production and sale of falsified medical devices on a large scale, and also under Part 3 of Art. 30 and Part 4 of Art. 159 of the Criminal Code, as an attempt to steal funds by deception on an especially large scale.

Because the defendant's actions were aimed specifically at taking possession of budget funds, and the deception was directly confirmed by the falsified nature of the medical devices.

The entrepreneur was sentenced to 4 years of suspended imprisonment.

Verdict of the Vasileostrovsky District Court of St. Petersburg of 14.02.2019 in case No. 1-6/2019

The general director of LLC "N" decided to sell endoscope storage cabinets

after clinical and technical testing but before receiving the registration certificate, when the documents were still being processed at Roszdravnadzor.

The medical devices were supplied to LLC "A", LLC "S*" and other companies.

A year later, Roszdravnadzor initiated an unscheduled documentary inspection of LLC "N".

• It established the fact of the sale of 6 unregistered medical cabinets
• as well as the absence of a license
• The inspection materials were passed to law enforcement.

In the entrepreneur's opinion,

• a registration certificate is needed only to put a medical device into operation
• and for its supply it was enough to have successfully passed clinical and technical testing.

He was going to send copies of the registration certificate to the buyers immediately after receiving it.

The defendant also considered:

• that a license was not required, since the cabinet has no direct contact with the patient and has no effect on the endoscopes.

As the court pointed out, the general director could not have been unaware that sale is prohibited before the registration certificate is received, because the company assisting with the registration sent copies of the documents and reported on how the process of obtaining the registration certificate was going.

In addition, the defendant knew that the cabinets were medical equipment subject to licensing, since the transactions with the buyers were carried out without VAT.

As a result, the court qualified the businessman's actions under Part 1 of Art. 238.1 of the Criminal Code, as the production and sale of unregistered medical devices on a large scale, and also under Part 2 of Art. 235.1 of the Criminal Code, as the production of medical devices without a license on a large scale.

The entrepreneur was sentenced to more than 5 years of suspended imprisonment.

Despite the abolition of licensing of medical device production in 2022, the risk of claims from law enforcement officers remains today if the company produced devices without a license before the procedure changed.

What defense strategies are possible?

The best strategy is preventive measures,
namely timely updating of the registration dossier through amendments.

However, if:

• no preventive measures were taken
• and a charge is brought under Part 1 of Art. 238.1 of the Criminal Code (that is, if fraud is not involved and there are no accomplices),

it is possible to be released from criminal liability with the imposition of a court fine. To do this, the damage caused by the crime must be compensated.

The most obvious option is to return the money received to the customer.

But there may be other options when multi-million contracts are involved. For example, replacing the equipment and other special measures aimed at bringing the medical devices into line with the registration certificate.

If release from criminal liability is not possible, it is necessary to focus on building a defense position. It always depends on the specific case.

When should you turn to a criminal defense lawyer?

At the stage when the criminal case is opened (companies usually learn of it when they are visited
with a search), it can be difficult to influence the situation fundamentally.

The most sensible option is to seek help:

• on receiving information that a prosecutor's inspection is being carried out at a medical institution
• on a request from a law enforcement body for information and documents.
• when a Roszdravnadzor letter on the identification of a medical device that does not meet the requirements is published

Author of the article: Darya Kozyreva

Other articles · Issue No. 2, 2023