For the past two years, anticorruption compliance has been the hot topic in international legal circles in Asia. Spurred in particular by a perception of stepped-up enforcement of the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, lawyers have endlessly touted the need for their clients operating in the region to make sure everyone plays by the rules.
So the sweeping allegations made by the Chinese government against British pharmaceutical giant GlaxoSmithKline (GSK) have taken some by surprise. China’s Ministry of Public Security says it is investigating whether the company paid almost $500 million in bribes, mainly to doctors who prescribed its products.
“There are a number of my clients with very sophisticated compliance programs, and given GSK's size in China and their statements so far, I would expect they have a robust compliance program as well,” says Hogan Lovells Shanghai partner Eugene Chen. “As a result, I am surprised by seeing the magnitude of the conduct being alleged. At least by public statements, it seems GSK was surprised by it too.”
The case has given lawyers in the region much to chew on. It is a reminder of how, despite the attention to compliance, the economic incentives for bribery remain strong in China and may have grown stronger with increased competition. But the fact that GSK has been targeted has also reawakened fears that the Chinese authorities may be singling out foreign companies for practices that may be even more common among domestic ones.
The Ministry of Public Security says that GSK funneled as much as $489 million in bribes through travel agencies in order to influence doctors. The company also allegedly arranged for doctors to receive sexual services from prostitutes. Such payoffs, the ministry says, helped GSK boost its domestic sales and fetch higher prices for its drugs.
GSK said in a statement Monday that it appeared that certain of its senior China executives acted outside of its “processes and controls” and broke Chinese law. The company has said it will cooperate with the investigation. The firm is being advised in China by Jun He Law Offices, which said litigation partners from both its Beijing and Shanghai office are working on the matter.
Chinese authorities have detained four GSK employees, including legal affairs director Zhao Hongyan, a former judge for China’s Railway Court who joined GSK in 2007. The others are vice president and operations manager Liang Hong, human resources director Zhang Guowei, and business development manager Huang Hong. Liang Hong has been shown on Chinese state television admitting to the bribery.
Many lawyers say they were not surprised that a major corruption scandal emerged in the pharmaceutical sector, noting that the low wages paid to doctors at state-owned hospitals make informal payments by drug companies highly attractive. China’s People’s Supreme Court and the China Food and Drug Administration have both singled out the sector for heightened scrutiny. President Xi Jinping’s well-publicized campaign against corruption across the board made a high-profile case in the sector almost inevitable, says Meg Utterback, a Shanghai partner with King & Wood Mallesons.
“Everybody who is advising at all in compliance, whether in food safety or health care, knew it was going to come this year,” she says.
Utterback says that the health care industry—and within that, pharmaceuticals—was also a likely target given its populist undertones. Chinese consumers are concerned not only about drug safety but also the cost of health care, and politicians know that.
“It’s a fairly easy thing to target because it is something people widely support,” she says.
Sheppard Mullin Richter & Hampton Beijing managing partner James Zimmerman, who is also a former chairman of the American Chamber of Commerce China, sees similar political motivations in the move against GSK and the pharmaceutical business in general.
“My take is that the PRC government is targeting the industry given that cost-effective health care is a critical policy objective as a result of China's aging population, and the government's legitimacy is at risk if it fails to deliver on its promise of affordable and accessible health care,” he says. “And the government is targeting foreign companies since they are viewed—in some instances—as part of the problem.”
Indeed, Utterback says GSK was an easy target because of the fact that it is a foreign company, and multinational corporations already have a large share of the pharmaceuticals market.
“I just think it was an easy pick. It was a big name,” she says. “You’re not going to go with some ginseng company from Shandong.”
But others think it is notable that the Chinese government chose to go after GSK in particular, given that the whole sector is rife with corruption.
“So far as I know we’re not seeing these kinds of investigations into Chinese pharmaceuticals manufacturers, and these companies have far lesser compliance standards,” says Hogan Lovells’ Chen.
It's unclear right now what the government's true motivation is for this investigation, he says, but he will be watching to see if charges are brought against the recipients of the alleged bribes and other multinationals operating in the sector, and if there will be similar investigations into domestic drug manufacturers.
“I think those three factors will give us a idea of whether it’s a genuine sustained campaign [against corruption] or they’re making an example of GSK,” he says.
Whatever the motivations for the Chinese government’s decision to bring charges against GSK, lawyers say the case shows the difficulties in remaining compliant in a high-risk market like China’s, even for companies with strong codes of conduct rules in place.
Jones Day Shanghai partner Peter Wang chalks that up to the challenge of carrying over the corporate culture seen at headquarters to the offices in these markets.“They’re not dumb enough to try to do this thing at a corporate level, you would think,” he says of GSK. “But sometimes there’s a disconnect between what you think could happen [in a particular market] and what is actually happening [on the ground].”
That trend has been seen many times in any number of investigations run by Wilmer Cutler Pickering Hale and Dorr Beijing partner Kenneth Zhou: “My experience, because we have done a lot of [Foreign Corrupt Practices Act] investigations, in most cases I have seen it’s really the China team, especially the sales team in China on the ground, they were the ones that did things improperly in order to achieve their sales target,” he says.
There is also the challenge of operating in a country where the line between what Zimmerman calls “creative marketing practices” and full-on bribery is blurry at best, and there is little clarity in Chinese law to help define an otherwise gray area, he says.
“Hence there is much wiggle room as to the appropriateness of certain activities, and especially in a society where gift-giving is common,” he says.
So while clients may not be panicked by the GSK case, Zimmerman adds, they are certainly concerned about how the Chinese government will define corruption going forward and how that may or may not conflict with the compliance policies they have in place now.
Still, lawyers aren’t expecting significant changes in foreign investor sentiment toward China as a result of this investigation.
“I don't think you're going to see major pharmaceutical or health care companies, whether Eli Lilly and GE Healthcare, pulling out because of the GSK investigation,” Utterback says. Instead, there will be a renewed focus on compliance and a strengthening of those policies to make sure companies are not exposed to similar investigations, she says.
Wilmer’s Zhou agrees. He predicts his clients will tighten up their ethical rules code of conduct in relation to corruption, as the GSK case has forced them to more clearly define what is ethical and what is not ethical in terms of doing business in China.
“It’s certainly a wakeup call, at least for multinationals in the pharmaceuticals industry,” he says.