Chinese Probe Into GSK—Media Reports and Legal Analysis
An unknown number of employees of GlaxoSmithKline (China) Investment Co. Ltd., the local subsidiary of the British multinational corporation GlaxoSmithKline plc. (GSK), were detained on allegations of data fraud and bribery at the end of June.
On July 11, 2013, the Ministry of Public Security (MPS) stated that GSK senior managers had confessed to “serious economic crimes,” including bribery and tax-related violations. Over 30 GSK employees were placed under house arrest and constant surveillance, The Telegraph reported. Four Chinese senior executives, Zhao Hongyan, Liang Hong, Huang Hong, and Zhang Guowei, were arrested and gave full confessions. Steve Nechelput, GSK’s chief financial officer in China, remains in Shanghai under travel restrictions and is being given counsel by the British Foreign Office. Another British national, GSK’s head of emerging markets, Abbas Hussain, apologized for the crimes committed by GSK China employees, and promised to review GSK’s business model and lower drug prices in China. Nearly three weeks after the first allegations, GSK briefed criminal investigators from the Serious Fraud Office (SFO) on its activities in China.
Police reported that GSK employees were suspected of paying bribes to doctors, hospitals, medical associations, and government officials. Employees filed false invoices and used other fraudulent means for personal gain and to acquire bribe funds. Officials estimated that over 3 billion RMB had passed through around 25 different travel agencies or consulting companies since 2007. Some 700 travel agencies and other subcontractors have been investigated in connection with the probe. Gao Feng, head of the economic crimes investigation unit at the MPS, detailed that senior GSK executives were drawn into close relationships with middlemen, who gave them financial and sexual kickbacks in return for business. Gao also hinted that at least four other multinational pharmaceutical companies might also be involved in the investigation as the scope of the anti-bribery probe widens.
Since Gao’s announcement, several sales executives from AstraZeneca, a British-Swedish pharmaceutical company, have been detained by Chinese police. One of the detained is understood to be an American citizen. Company spokespeople declared that the arrests were unrelated to the GSK probe.
GSK response: company pledges to “cooperate fully” with Chinese authorities
Internal GSK investigations following a leak to the Wall Street Journal ended in June, yielding “no evidence of bribery of corruption of doctors or government officials.” After the MPS statement, GSK spokespeople declared that, “These allegations (by the Ministry of Public Security) are shameful…[GSK] will cooperate fully with the Chinese authorities in the investigation of these new allegations.” The company added that it would immediately stop using implicated travel agencies and begin an internal review of all third party agency relationships and past travel agency use.
Under Chinese law, the GSK executives will be formally charged only after the preliminary investigations are completed. A full confession by senior executives might allow them to benefit from leniency measures linked to voluntary disclosure in the resulting trial.
GSK probe marks largest anti-corruption investigation of a foreign company since 2010, bodes ill for company reputation
This case marks China’s largest bribery investigation of a foreign company since new anti-bribery laws came into effect in 2011 and 2013. It comes in the wake of a series of scandals, and bodes ill for both the company’s future business and its reputation. In 2011, GSK reached a record $3 billion fraud settlement with the U.S. government for aggressive sales and marketing practices. In 2012, GSK fired a number of Chinese employees for expenses manipulation and other abuses, and the head of GSK’s Shanghai research and development facility was let go earlier in June following revelations that he and his assistants had misreported data.
As of July 2, GSK is also facing investigation by the National Reform and Development Council (NRDC) which has begun examining 27 companies for costs and 33 for pricing, including GSK, Merck & Co., Novartis AG, and Baxter International Inc. The Chinese Food and Drug Administration and the Ministry of Commerce have begun looking into illegal pharmaceutical practices in China, with the CFDA declaring the start of a six-month investigation into bribery, fake drugs, unauthorized medicine sales, and forged receipts.
Implications for international investigations by U.S., U.K., and China
GSK is currently the subject of an ongoing 2010 joint investigation by the U.S. Securities Exchange Commission (SEC) and the Department of Justice (DOJ) into alleged violations of the Foreign Corrupt Practices Act (FCPA) in China. Although GSK is a multinational corporation based in the U.K., its extensive holdings in the United States make it subject to U.S. law as well.
This probe marks the first parallel investigation, or ‘carbon copy prosecution,’ by the Chinese government and the SEC and DOJ of an anti-corruption case. Both countries are subject to WTO anti-corruption criteria and the United Nations Convention against Corruption. Some observers have wondered whether the GSK probe marks the establishment of a more internationalist and active global anti-corruption campaign, which may draw on bribery evidence and admissions generated in DOJ and SEC enforcement actions, or vice versa.
U.S. anti-corruption laws: the FCPA in China
The anti-bribery provision of the United States Foreign Corrupt Practices Act (FCPA), enforced by the DOJ, prohibits U.S. ’issuers,’ ‘domestic concerns,’ and their officers, directors, agents, and shareholders1 from bribing foreign officials with ‘anything of value’ to corruptly influence an official decision or to obtain a business benefit. Prosecutions are based on historically broad definitions, so that a ‘foreign official’ includes government officials as well as employees at government organizations such as state owned enterprises (SOEs) and government hospitals. The term ‘anything of value’ might range from cash or a cash equivalent to loans, travel expenses, charitable donations, commission sharing, and luxury entertainment. The FCPA covers prohibited conduct anywhere in the world by publically traded companies and their officers, directors, employees, and agents, including third party agents, consultants, distributors, and joint-venture partners.
A person or company covered by the FCPA is liable if he/she/it makes a payment to a third party or intermediary while knowing that all or part of the payment will be given to a foreign official. (“Knowing” is defined very broadly as basically being aware that such a payment will be problematic/raise red flags—and not doing anything about it.) Prohibited payments or activities carried out by third party associates may not constitute grounds for a defense of ignorance by the covered company, because it may be assumed that such company will have appropriately vetted its partners before engaging in business. The DOJ does not insist upon strict liability for the anti-bribery provision.
Penalties may include company fines of up to $2 million, or twice the pecuniary gain from improper payment, while individuals may face fines of up to $100,000, or twice the amount of gross pecuniary gain and/or imprisonment of up to five years. Companies and individuals may be subject to further injunctions, including suspension, or being barred from U.S. government contracts, being barred from receiving export licenses, and being sued in a private cause of action for triple damages under the Racketeer Influenced and Corrupt Organizations Act (RICO).
One exception to the strict anti-bribery provisions is the ‘facilitating payments,’ or ‘grease payment’ exception.2 Grease payments are exempt from FCPA liability.
The ‘Books and Records and Internal Control FCPA provisions, together known as the accounting provisions, are enforced by the SEC and apply to any company listed on a U.S. stock exchange. The Books and Records provision requires the covered entity to keep accurate and detailed records which accurately reflect the transactions and dispositions of the company assets. The internal control provision further requires a covered entity to implement internal accounting controls and to reasonably ensure that transactions i) are executed in accordance with the direction of management, ii) are accurately recorded, and that iii) access to company assets is permitted only with management’s general or specific authorization.
In reality, the accounting provisions may provide a secondary offense for prosecution charges, and violations thereof may include commercial bribes that would typically fall outside of the ‘foreign official’ caveat otherwise needed for liability. Accounting provisions violations may result in fines of up to $25 million for a company, and $5 million and/or imprisonment up to 20 years for culpable individuals. The SEC may require a company to turn over all profits on contracts secured by bribes. Strict liability applies in violations of the accounting provision, so that a company or person is held legally responsible for damages or losses caused by its/his/her acts and omissions, regardless of culpability.
Under the Resource Guide to the U.S. Foreign Corrupt Practices Act, jointly published last November by the DOJ and SEC, the exact meaning of ‘corrupt intent’ remains vague.3 Based on past non-prosecution agreements (NPA) and deferred prosecution agreements (DPA), ‘corrupt intent’ can apply even if the bribe i) does not succeed in influencing the official, ii) the bribe is not ultimately received, or is only promised, iii) the briber does not know the specific identity of the officials, and iv) the payment is passed through a third party, not directly given to an official.
That being said, if there exists a clear corporate policy that defines bribery as wrong, and that policy has been effectively communicated to all employees, any violation of such policy would constitute a knowing, wrongful act. Companies doing business abroad must have a clear anti-corruption corporate compliance policy as well as an effective training program to convey that policy to employees. If evidence of corporate compliance cannot be shown, companies can be held responsible for the illegal payments and actions of their employees or affiliates.
Following last year’s review of the ‘neither admit nor deny’ clause,4 the SEC has determined that the policy will not apply to cases involving (i) parallel criminal convictions, or (ii) NPAs or DPAs that include the admissions or acknowledgements of criminal conduct. Historically, while the DOJ does not allow the ‘neither admit nor deny’ defense, it generally charges only foreign subsidiaries. The SEC, which deals more often with U.S. parent companies, is more flexible in its interpretation of the provision.
Chinese criminal law
Chinese anti-corruption governance is comprised of two main parts: PRC Criminal Law and the Anti-Unfair Competition Law (AUCL), which states that business operators5 in China cannot give ‘money or things,’ (including giving property, promotions, expenses, sponsorships, research expenses, commission, reimbursement of expenses, or kickbacks)6 for the purpose of gaining a competitive advantage. The Communist Party of China (CPC) and the State Council have also issued internal rulings on corruption or bribery of party members and government officials, including the Interim Provisions on the Prohibition of Briberies in Commercial Transactions (Interim Provisions).
While CPC and State Council directives do not create liability for foreign companies, PRC Company Law states that corporate employees who bribe, accept bribes, or embezzle company assets may suffer the confiscation of their illegal income, or sanctions imposed by the company. When such offense encompasses offering money or property to a state functionary for the purpose of securing illegitimate benefits, PRC Criminal Law will also apply.
PRC Criminal Law defines ‘state functionaries’ as individuals of government agencies who are engaged in public service according to the law. SOE employees or individuals of other enterprises or institutions who are engaged in public service, as well as individuals appointed by government agencies, SOEs, and so on to carry out public service, are also considered state functionaries. For the purposes of the Criminal Law, offering bribes to near relatives of state functionaries, who have interests in common with such state functionary, and through third parties, is also illegal.
Company employees and individuals taking advantage of their position to request or accept a ‘relatively large amount of money or goods’ are guilty of accepting bribes as ‘non-state functionaries’ and will be charged as such.
According to the Opinions on Several Issues Concerning Law Application and the Handling of Criminal Commercial Bribery, there are a variety of distinguishing factors between gifts and bribes, including the degree of relationship with the official, value of the good/service given, purpose, timing, and matter of deliver, and whether the recipient has subsequently taken advantage of their position to promote the interests of the giver. In general, bribes are defined by the intention of the giver to get, or the recipient to give, an ‘improper gain.7 Lawful discounts, commissions, and ‘advertising-related gifts of small value’ are all allowed under the AUCL, but said discounts and commissions must be recorded in the company’s financial statements. The promise or proposal of offering a bribe does not constitute an offense under Chinese law.
Under the Interim Provisions, ‘commercial briberies,’ refer to the bribing acts or other means8 of a business offer seeking to sell or purchase commodities from an advantaged position. Acts of bribery include offering rebates which are not recorded in the official company accounts as well as the payment of travel expenses or other benefits. Violations of the Interim Provisions may result in company fines from RMB 10,000 to RMB 200,000, confiscation of illegal earnings, and further potential prosecution under the PRC Criminal Law. Because of complex theories and pre-conditions for charging an entity, Chinese anti-corruption law usually charges individuals.
Charges for giving bribes vary greatly based on the monetary threshold of such bribe or number of personnel to which such bribe is offered, and range from a fixed term imprisonment to life imprisonment and confiscation of property; charges for accepting bribes are generally lower, although state functionaries convicted of accepting ‘serious bribes’ may receive the death penalty.
U.K. Bribery Act
Accusations by the Chinese investigators and the DOJ and SEC could, if proven, put GSK at risk of prosecution by U.K. authorities under Britain’s severe bribery laws at home.
The U.K. Bribery Act makes it illegal to either pay or receive an advantage to/from another person with the intent to: i) induce a person to perform improperly a relevant function or activity, or ii) reward a person for the improper performance of a relevant function or activity. The Bribery Act applies to the bribery of both public and private persons, and covers U.K. nationals, U.K. residents, and organizations which are either established in the U.K. or conduct business in the U.K. It should be noted that a corporate compliance policy which satisfies the FCPA may not comply with the U.K. adequate procedures guidance published by the SFO. Corporate offense is based on standards of strict liability, barring a defense of adequate procedures.9 Prosecutors do not have to demonstrate prior knowledge, or ‘corrupt intent’ on the part of the company or its officials to charge them under the Bribery Act. Recent changes in the SFO have indicated that self-reporting of violations will no longer predispose the SFO to civil remedies. Facilitating payments, or grease payments, although exempt from the FCPA, are prohibited under the Bribery Act.
It is anticipated that starting in early 2014, the SFO may choose to use DPAs to reach financial settlements with companies. Under a DPA, criminal charges may be brought against a company but not proceeded with, provided that the company complies with agreed terms and conditions. Under the Bribery Act, a company might be sentenced to unlimited fines and, if found guilty of corruption, be banned from public contracts in the U.K. Guilty individuals could face up to 10 years in prison.
The Bribery Act contains some of the strictest laws against corruption, but enforcement has been minimal since the act was passed in 2010. No cases have been brought against international actors so far. Although guidance revisions have indicated a tougher stance towards enforcement, the few cases brought against corporate entities ultimately involved charges under previous laws. Still, the SFO has indicated that a number of cases are currently being investigated, and may lead to prosecutions in the future.
After a review of the anti-corruption laws in China, the U.S., and the U.K., it is clear that the allegations against GSK, if true, may result in serious penalties for the multinational company. GSK’s holdings and business are under the jurisdiction of the FCPA, the Bribery Act, and China’s anti-corruption laws. The FCPA only prosecutes against the bribery of foreign officials, although the definition of ‘foreign official’ is more vague than one might imagine, but under Chinese and British laws, GSK senior executives could also be charged for accepting bribes from travel agency middlemen. China and the U.K. also prosecute commercial bribes, while the FCPA only charges for bribes to government officials or other relevant state personnel (see above).
The MPS has declared that the detained GSK executives have made a full confession of their crimes, which may lead to more lenient charges in court. GSK leaders back in the U.K. have also briefed the SFO on their activities in China following the announcement of the Chinese investigation. At the same time, strict revisions to the guidance of both the Bribery Act and the FCPA seem to indicate that cooperation may no longer ensure a more relaxed prosecution in the U.S. or U.K. Companies who find themselves subject to investigations in either of the two countries may need to consider that they can no longer rely on the defense of ‘neither admit nor deny’ for reduced penalties. In the increasingly complicated environment of multinational corporations and foreign subsidiaries, companies must strengthen efforts in due diligence and transparency to ensure that ethics at the corporate level are translated to ground floor business practices, as it is becoming obvious that parent companies will be held responsible for the actions of local employees and partners.
All three legal codes include criminal and civil penalties for the large-scale bribery, records manipulation, and fraud that GSK executives have confessed to, and as the U.S. and China move forward in their first parallel prosecution case, it is certain that the GSK case will set a precedent for the future interplay of multinational anti-corruption law. Because the U.K. Bribery Act and the Chinese laws and provision against bribery are still relatively untested, the GSK case will also prove instrumental in demonstrating how the new legal codes apply to real world cases.
Observers have repeatedly expressed surprise over the extent and severity of the bribes, with some foreign multinational business advisors worrying that the case against GSK represents the targeting of foreign companies in competition with domestic industry, rather than an overarching crackdown on corrupt practices. In either case, companies planning to invest in China in the future must renew their focus on strengthening international compliance policies to ensure that they are not exposed to similar vulnerabilities. Many observers have noted that the crimes that GSK sales personnel and senior executives are accused of are common practice in China’s hyper-competitive pharmaceutical market. However, this case will go some way to defining what practices, common or not, are actually legal in the increasingly stringent anti-corruption laws today.
1 Here, 'issuers’ refer to a company listed on a national securities exchange in the U.S. (either stock or American Depository Receipts), or the company’s stock trades in the over-the-counter market in the U.S. wherein the company is required to file SEC reports; ‘domestic concerns’ are broadly defined as a U.S. person or company. Comparison of U.K., U.S., and China anti-corruption laws Chinese anti-corruption laws U.K. Bribery Act U.S. FCPA Jurisdiction: Chinese companies and citizens, agents, third parties, and anyone involved in the bribing situation, including foreign citizens and companies ‘Individuals who have a close connection to the U.K.,’ i.e. U.K. nationals, U.K. residents, and organizations which are either established in the U.K. or conduct business in the U.K. U.S. companies, their personnel, U.S. citizens, foreign companies listed on a U.S. stock exchange, or otherwise required to file reports with the SEC, foreign companies doing business in the U.S. Covers: Public bribery of ‘state functionaries,’ commercial bribery of ‘non-state functionaries’ Public and commercial bribery Public bribery of ‘foreign officials’ Comprised of: PRC Company Law PRC Anti-Unfair Competition Law PRC Invitation/Bids Submission Law PRC Criminal Law Interim Provisions on the Prohibition of Briberies in Commercial Transactions Anti-bribery provision Books and Records Provision, Internal Control Provision (Accounting Provisions) Offense: Bribing another and/or being bribed Bribing another and/or being bribed Bribing another Enforcement: Commission for Discipline Inspection of the Communist Party The People’s Procuratorate of the PRC Ministry of Public Security State Administration of Industry and Commerce Serious Fraud Office (SFO) Department of Justice (DOJ) Securities and Exchange Commission (SEC) Self-reporting: May result in lenient charges Still subject to prosecution, could gain reduced charges b/c ‘public interest,’ DPA after 2014 May result in NPA or DPA Corporate Strict Liability: Yes, for failure to prevent bribery (defense: adequate procedures) No, under anti-bribery provisions; Yes, under accounting provisions Facilitating payments: Illegal; but ‘advertising-related gifts of small value’ may be exempt. Illegal OK Compliance: Adequate Procedures Corporate compliance and training Intent vs. Bribe: Only bribery act is illegal Both are illegal Both are illegal (see ‘corporate intent’) Maximum Criminal Penalty: 6 months to life imprisonment 10 yrs imprisonment and/or an unlimited fine 20 yrs imprisonment Maximum Civil Penalty: Confiscation of personal assets Civil recovery order or civil claims by competitors, etc. Fines up to $5 million USD (individual) or $25 million USD (company)
2 ‘Grease payments’ refer to payments used to expedite a routine government action by a foreign official. Examples of routine government action include: ‘obtaining permits, licenses, or other official documents to qualify a person to do business,’ and scheduling ‘inspections related to transit of goods across country.’ The grease payment exception is intended to apply to ‘largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.’ Relying on the FCPA exemption for grease payments may be problematic because such payments may be illegal in the jurisdiction in which they are made. Failing to properly account for grease payments may also count as a violation of the books and records provision.
3 See definition of bribery under ‘anti-bribery provision’.
4 The ‘neither admit nor deny’ clause, often used in corporate law as a quick means of resolving regulatory enforcement penalties through the payment of a fine and a settlement agreement, ensures that a defendant is not required to admit to a regulatory authority’s allegations of wrongdoing, but is not permitted to deny the factual allegations set forth in a legal complaint.
5 In the Chinese legal code, business operators are defined as entities and individuals engaged in commercial activities in China, as well as other parties or persons who may impact commercial activities, including commercial entities and for-profit or non-profit entities such as healthcare institutions, schools, etc.
6 The term ‘money or things’ refers to cash; ‘properties or things;’ ‘proprietary interests’ including club membership; cash-equivalent cards; stock options, dividends, or profits without a corresponding investment in the company; reimbursements; and travel expenses; as well as the option to purchase commodities at a price ‘obviously’ lower than market value or selling commodities above market value; payment for non-existent services such as security investments, financial management, or gambling proceeds, etcetera.
7 If the ‘money or things’ given to a state functionary has a value of over RMB 10,000 (a ‘relatively large amount’), it is classified as a ‘kickback’ and automatically connotes illegal or malicious bribing intent.
8 The broadness of the term, ‘other means,’ grants Chinese authorities considerable flexibility in pursing possible commercial bribery actions.
9 If a company has adequate procedures in place designed to prevent persons associated with it from committing bribery, which include competent procedures and targeted risk assessment, it may use the ‘adequate procedures’ defense if a person associated with the company commits an offense.
Comparison of U.K., U.S., and China anti-corruption laws
Chinese anti-corruption laws
U.K. Bribery Act
Chinese companies and citizens, agents, third parties, and anyone involved in the bribing situation, including foreign citizens and companies
‘Individuals who have a close connection to the U.K.,’ i.e. U.K. nationals, U.K. residents, and organizations which are either established in the U.K. or conduct business in the U.K.
U.S. companies, their personnel, U.S. citizens, foreign companies listed on a U.S. stock exchange, or otherwise required to file reports with the SEC, foreign companies doing business in the U.S.
Public bribery of ‘state functionaries,’ commercial bribery of ‘non-state functionaries’
Public and commercial bribery
Public bribery of ‘foreign officials’
PRC Company Law
PRC Anti-Unfair Competition Law
PRC Invitation/Bids Submission Law
PRC Criminal Law
Interim Provisions on the Prohibition of Briberies in Commercial Transactions
Books and Records Provision, Internal Control Provision (Accounting Provisions)
Bribing another and/or being bribed
Bribing another and/or being bribed
Commission for Discipline Inspection of the Communist Party
The People’s Procuratorate of the PRC
Ministry of Public Security
State Administration of Industry and Commerce
Serious Fraud Office (SFO)
Department of Justice (DOJ)
Securities and Exchange Commission (SEC)
May result in lenient charges
Still subject to prosecution, could gain reduced charges b/c ‘public interest,’ DPA after 2014
May result in NPA or DPA
Corporate Strict Liability:
Yes, for failure to prevent bribery (defense: adequate procedures)
No, under anti-bribery provisions;
Yes, under accounting provisions
Illegal; but ‘advertising-related gifts of small value’ may be exempt.
Corporate compliance and training
Intent vs. Bribe:
Only bribery act is illegal
Both are illegal
Both are illegal (see ‘corporate intent’)
Maximum Criminal Penalty:
6 months to life imprisonment
10 yrs imprisonment and/or an unlimited fine
20 yrs imprisonment
Maximum Civil Penalty:
Confiscation of personal assets
Civil recovery order or civil claims by competitors, etc.
Fines up to $5 million USD (individual) or $25 million USD (company)