FCPA Compliance and Ethics Blog

December 20, 2013

What Hath GSK Wrought? More Compliance Lessons from China

In an article, entitled “GSK China probe flags up wider worries”, in the Wednesday edition of the Financial Times (FT) reporters Andrew Jack and Patti Waldmeir discussed the ongoing bribery and corruption scandal involving the UK based pharmaceutical company, GlaxoSmithKline PLC (GSK). They detailed many of the allegations which had been previously made public against GSK, the effect of these allegations on the company and some of the company’s responses to this crisis. It was an excellent summary of where this story has been and where it might be going.

The accusations against GSK have been well publicized. The company has been accused, by its own Chinese employees on national television, of being the “big boss in a criminal partnership” and paying up to $500MM in bribes to officials and doctors. While there certainly has been speculation as to the motives of the Chinese officials in bringing these allegations, the article noted that these allegations certainly raise questions about “GSK’s own conduct and the responsibility of its senior management” and whether the company’s compliance systems were inadequate or the company “turned a blind eye” to the corruption by its Chinese operations. The article did note that Chinese investigators do not yet know how high up the complicity in GSK may have gone or whether the company simply suffered from “poor compliance”.

Interestingly the article discussed not only the endemic nature of corruption in China but how, in many ways, the Chinese health care system is based on such corruption. The piece quoted George Baeder, an independent drug industry advisor, for the following, “Financial flows – both legal and illegal – tied to drug and device sales are funding perhaps 60-80 per cent of total hospital costs. Without this funding, the current system would collapse.” Further, “central and provincial Chinese governments cannot afford to pay doctors a living wage, and may patients cannot afford to pay the true cost of care.” And finally, “Up to now, Beijing has turned a blind eye as pharma companies find ways to subsidise doctor salaries and underwrite their medical education.” How about that for structural corruption?

Intertwined with this structural issue is the problem of the quantity and quality of the drug supply. Many Chinese doctors do not feel that there is an acceptable alternative to foreign pharmaceutical products. This drives up the cost of prescribed medicines as this quantity is therefore limited. But even where indigenous Chinese generic drugs are available as alternatives, many patients do not trust these medicines. This restricts the quality of drugs available. Sort of an economist’s Rubik’s Cube.

But just as market principles can drive other corporate behavior, the fact that by 2020, the drug sales in China are estimated to top $320bn; it is simply too large a market for companies to ignore. The same is true of the Chinese government, which is currently in year 5 of a 12-year healthcare reform plan, part of which is to drive down medical costs to bring “quality affordable care to 1.3 bn” Chinese citizens. So, as the article notes, GSK and “other pharmaceutical companies are bracing for price cuts ahead and the need to be ever more cautious on their practices in emerging markets as well as more industrialized ones.”

GSK has attacked part of its corruption problems by instituting a compensation program which is designed “at removing incentives to sales staff that encouraged excessive marketing, strengthened transparency and cutting funding to doctors.”  Specifically, the company announced the decision to “stop paying speakers’ fees and travel expenses for doctors attending medical conferences by 2015.” For the changes directed at its own sales staff, GSK has said that “Individual sales targets in the remuneration of marketing staff are to be replaced by broader measures of the quality of information they provide to doctors and a link to company-wide performance.”

China is not the only company in Asia or other continents which have socialized medicine. I have opined that the GSK corruption scandal in China is the biggest news in anti-corruption and anti-bribery enforcement in 2013. I believe this because I think that other countries may look at the Chinese model and draw the lesson that it is western companies, not their own structural corruption, which causes the problems. I put this question to Amy Sommers, a partner at K&L Gates Shanghai office and asked her opinion. She replied:

Prior to 2013, when I spoke to Western audiences about anticorruption enforcement risks and mentioned the importance of China’s commercial bribery enforcement as a risk factor in its own right, as well as a potential catalyst for broader enforcement, the message didn’t seem to resonate. With the booming echo of the DOJ’s and SEC’s active FCPA enforcement efforts in the past 8 years ringing in their ears, it’s perhaps understandable that that message was drowned out. As we approach the end of 2013, I think your characterization of China’s action as a game-changer is on the money.  Today companies are evaluating China-initiated enforcement as a factor to be considered in their compliance efforts.

China’s initiation of this case has been a success for China on various levels, so there’s no question that there will be others brought.  The industry that the Chinese government has said publicly that it intends to tackle next is medical devices, but we should not assume that that will be the end of the journey.  Moreover, the question that is still unanswered is whether other jurisdictions in Asia Pacific will elect to emulate China’s example. Some news sources have reported that Asia Pacific-based regulators have expressed that intention, so I suspect they will: going after alleged corruption in the interests of protecting consumers is a desirable aim.  So, while for the moment companies seem to focusing on getting their China compliance house in order, it might be advisable to broaden that effort to other locales in Asia where there is a combination of strong economic growth and relatively high perceived corruption risk.

So in addition to the admonition of Bette Davis that you had better buckle up because it is going to be a bumpy night, any western company doing business or considering doing business in China needs to understand that there are not only direct risks of corruption but also structural defects which may make it endemic. Be careful out there.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

December 18, 2013

Joan Fontaine and the Evolution of Compensation Issues in a Compliance Program

Yesterday I noted the passing of Irish actor Peter O’Toole this past weekend. But we also lost one of the great female leads from the 1940s and 50s this weekend as well, Joan Fontaine. Ms. Fontaine was the younger sister of Olivia de Havilland. She won a Best Actress Oscar in 1941 for her role in Suspicion making her the only woman to win a Best Actress Oscar for acting in an Alfred Hitchcock film. It also made her a member of the only sisters’ duo to win Best Actress Oscars. Prior to winning her Oscar, Fontaine had been nominated in 1940 in the Best Actress category for her role in another Hitchcock film, Rebecca, in which she played the haunted second wife of Laurence Olivier. For my money, her role in Rebecca was by far the greater performance than Suspicion. While born of British parents, Fontaine never actually lived in England, being born in Japan and then coming to the United States as a teenager. Fontaine also had one of the greatest sibling rivalries of all-time with her equally famous sister, stating once that, “I married first, won the Oscar before Olivia did, and if I die first, she’ll undoubtedly be livid because I beat her to it!” She did.

So with the sisters, some things never changed. However in the compliance world, things do change. Compliance programs evolve just as the thinking on best practices has changed over the past few years. One of the areas that has not received as much attention in compliance programs is the amount of compensation paid to third party representatives. Clearly a great amount of attention has been paid to due diligence, knowing just who you are doing business with and the management of the relationship. However the area of the quantum of compensation is not something as explicitly considered. Another area which is now drawing greater scrutiny in the Foreign Corrupt Practices Act (FCPA), and other anti-corruption law arenas, is compensation which results in a conflict of interest.

Jeff Kaplan, editor of the Conflict of Interest Blog, wrote, in a post entitled “Conflicts of Interest and Industry Culture”, that “intersection of culture and C&E that is too often overlooked: industry culture.” He went on to say that “As a general matter industry culture is not as significant a cause of risk as organizational or geographical culture. But it can be potent, particularly in industries with a high degree of inter-company mobility, such as financial services.”

I thought about Kaplan’s insights when I read an article in today’s New York Times (NYT), entitled “Glaxo to Stop Paying Doctors To Boost Drugs”, by Katie Thomas. This is the same GlaxoSmithKline PLC (GSK) that is under investigation for bribery and corruption in China, in violation of Chinese domestic anti-corruption legislation. In her article Thomas wrote that “British drug maker GlaxoSmithKline will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write, its chief executive said Monday, effectively ending two common industry practices that critics have long assailed as troublesome conflicts of interest.” While this practice has gone on “for decades” it had been prohibited in the United States through an “industry-imposed ethics code but still occurs in other countries, specifically in China. I found this quite interesting since the FCPA only applies to non-US (foreign) government officials, such as those in socialized medicine health care system.

In addition to this ban on paying doctors to speak favorably about its products at conferences, GSK will “also no longer compensate sales representatives based on the number of prescriptions doctors write, a standard practice that some have said pushed pharmaceutical sales officials to inappropriately promote drugs to doctors.” Instead GSK would pay its sales representatives “based on their technical knowledge, the quality of service they provided to clients to improve patient care, and the company’s business performance.” (What a novel idea, compensation based on quality!) There was nothing in Thomas’ article to suggest that GSK made these changes based upon the ongoing investigations in China. Indeed, a company spokesman interviewed for the NYT article “declined to comment on the investigation because he said it was still underway.” However the timing of such changes and the fact that it seemed to apply more fully to GSK operations outside the US, would make the timing of the changes certainly appear less than coincidental.

In addition to the obvious conflict of interest, which apparently is an industry wide conflict because multiple companies have engaged in these tactics, there is also clearly the opportunity for abuse leading to allegations of illegal bribery and corruption. Indeed one of the key bribery schemes alleged to have been used by GSK in China was to pay doctors, hospital administrators and other government officials, bonuses based upon the amount of GSK pharmaceutical products which they may have prescribed to patients. But with this new program in place, perhaps GSK may have “removed the incentive to do anything inappropriate.”

This new program by GSK demonstrates that companies can make substantive changes in compensation, which promote not only better compliance but also promote better business relationship. A company spokesman interviewed for Thomas’ piece noted that the changes which GSK will make abroad had already been made in the US and because of these changes, “the experience in the United states had been positive and had improved relationships with doctors and medical institutions.”

For the compliance practitioner, one of the lessons from the GSK scandal is to look not only at the amount of compensation paid but how it was paid. If there is a way to remove or even help to remove “the incentive to do anything appropriate” it certainly can be positive for the company and positive for your overall compliance efforts.

You might also fire up the DVD player over this holiday season for a Joan Fontaine double shot of Hitchcock.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

November 7, 2013

Does Motive Matter in Anti-Bribery and Anti-Corruption Enforcement?

Do the intentions behind enforcement of domestic or international anti-corruption laws matter? Or is ‘the law the law’ and it really does not matter what a government’s motives are in enforcing laws that it has on the books. That question comes up for discussion from time-to-time. Some believe that motives and intentions do matter; others believe that enforcement of existing laws are motive and intention enough. This subject has been raised over the past several months in connection with the Chinese government and their anti-corruption enforcement efforts against western companies as exemplified by the GlaxoSmithKline PLC (GSK) enforcement action, announced last summer.

Trying to understand the motives of the Chinese Communist Party and the Chinese government have long been a subject for Americans. China watchers have pontificated and speculated for many years. I am not sure that the true motives are ever clear to us westerners. But simply because we may not always understand them does not mean that we cannot consider them, particularly now that China is so opened up to western businesses which desire to garner a part of the market share in a country with the world’s largest population.

This subject was explored in a recent Financial Times (FT) piece, entitled “China: Red restoration”. The article began with a short discussion about a recent meeting held by the President of China, Xi Jinping, with several prominent leader of western businesses; including Mike Duke, President and Chief Executive Officer (CEO) of Wal-Mart, Indra Nooyi, Chairman and CEO of PepsiCo., Muhat Kent, Chairman and CEO of Coca-Cola, David Rubenstein, co-founder of The Carlyle Group, and Maurice Greenberg, the former Chairman and CEO of American International Group (AIG). As reported by the FT, President Xi told the group, “Your suggestions are a very important source of inspiration for the Chinese government.” The FT believes that this statement and others made by President Xi “were intended to signal that the world’s second largest economy remains open for business.”

Contrast that last statement with what has happened to GSK over the past several months. Company executives have been arrested or detained; passports have been pulled so that company executives could not leave the country; company executives have been paraded in front of state television cameras to confess wrongdoings; a high company official went to China and publicly apologized for the company’s conduct. All of this from a company that was already under a Deferred Prosecution Agreement (DPA) in the United States for fraudulent conduct in marketing certain pharmaceuticals. Moving it from a compliance to a business perspective, the FT noted that GSK “recently revealed that its medicine and vaccine sales had fallen 61 per cent in the third quarter from a year earlier”. Talk about taking it ‘in the wallet’.

However GSK is not the only company to come under Chinese regulatory scrutiny for allegations of bribery and corruption. Since July approximately 15 western companies have heard their corporate names listed as being under investigation. These companies range from other pharmaceuticals, to baby-food and formula companies, as well as others in health care and medical products and supplies. Beyond these anti-corruption investigations, other companies have felt the heat from Chinese regulators. Apple CEO Tim Cook was forced to publicly apologize over poor customer service and “to promise to improve customer services policies.” The German car manufacturer Volkswagen was required to recall over 380,000 vehicles in China after media reports surfaced that they were “unsafe”. Still other companies faced media criticism which led reduced sales. For instance, stories in the media surfaced about Kentucky Fried Chicken (KFC) and food safety issues which led to a 10 per cent slump in sales.

The FT article noted that there may be several motives for these actions against western companies. One is obviously a strain of nationalism which holds that such markets should belong to Chinese enterprises. Bao Dike, managing editor of the PKU Business Review, summed up this view when he was quoted as saying “they also show how China doesn’t need these foreign enterprises any more”. Kerry Brown, Professor of Chinese Politics at Sydney University, was quoted as saying, “Politically it is also a very easy populist move to beat up on foreign companies; much easier than taking on big Chinese companies and their powerful backers.”

Another motive might be what is termed “killing the chicken to scare the monkey.” Under this motivation, Chinese regulators are investigating western companies in order to send a message to the entire market about pricing and competition. The FT stated, “they intend to clean up things in order to provide quality products at reasonable prices in industries about which the public is concerned.” The Chinese public was certainly concerned about the prices it was paying for pharmaceutical products and one response may have been for the Chinese to investigate, in a very public way, GSK. The same holds true for the makers of baby-formula and milk-powder makers. Li Huafang, an independent economist and newspaper columnist, was quoted as saying “I actually think the new administration wants to strengthen regulations for both foreign and domestic businesses.” Or as Peter Gabriel might say “Shock the Monkey”.

The final motive discussed in the FT article was that of consolidation of power by the new President, Xi Jinping. Wang Lixiong, a prominent political writer, said that “The rough treatment of some foreign businesses stems from Mr. Xi’s need to establish his authority; to impose his will; this is a very common tactic among new rulers. We need to wait until he has consolidated power to see what his real intentions are.”

All of this tells me that western companies need to factor all of the above into their risk assessments when deciding whether to engage in business in China. This is a broader risk assessment than you would normally do for anti-corruption such as under the Foreign Corrupt Practices Act (FCPA). This is a political risk assessment. But the key is that you look at your risks and measure them. The FT ends its article by noting that it appears that President Xi is still welcoming western businesses to China, and said, “As long as they can show that their investments and operations in China support or at least do not get in the way of efforts to garner support for the party and its leadership, they will probably be allowed to stay and even thrive.”

For a western company, from an anti-corruption perspective, this clearly means you need to investigate your Chinese operations now. If you detect problems, you should work expeditiously to remedy them now. The FT article makes clear that whatever the motivations of the Chinese regulators are; if you are in violation of Chinese domestic laws regarding bribery and corruption, your experiences could well be costly and the reputational damage immense.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

October 14, 2013

1066 and All That: Why The International Fight Against Corruption?

Filed under: Corruption in China,FCPA,Financial Times,GlaxoSmithKline — tfoxlaw @ 1:01 am

If there is one event in history of Western Civilization which could be said to be a true turning point, today is the anniversary of one of the very top echelon. On this date in 1066, William the Conqueror defeated Harold II, King of England, near the town of Hastings, on the English south coast. On Christmas Day, 1066, William was crowned the first Norman King of England, in Westminster Abbey, and the Anglo-Saxon phase of English history came to an end. The French language became the dialect of the King’s court and gradually mixed with the Anglo-Saxon tongue to give birth to modern English. This date was the last time that a European Continental power successfully invaded England. Why did William invade England? He claimed he was promised the crown by his cousin, Edward the Confessor.

I was reminded again this weekend that in the arena of the global fight against bribery and corruption, I believe that the GlaxoSmithKline PLC (GSK) matter in China will be a true game changer. An article in the Financial Times (FT), entitled “Net closes of former security chief as China cracks down on corruption”, focused on the tightening circle around Zhou Yongkang, a former member of China’s Politburo Standing Committee (PSC) and Secretary of the Politics and Law Committee. In this role he was “the domestic security tsar, in charge of spy and security agencies, as well as China’s paramilitary forces, police, judges, courts, and lawyers.” In other words, he was about as connected as one could be in China. Yet, he has fallen from the Chinese Communist Party’s top hierarchy.

But, equally importantly for the fight against international bribery and corruption, both close family members of Yongkang and former close associates have been arrested or have come under investigation for bribery and corruption. Yongkang rose to power through China’s petroleum industry, having been the head of the Energy Group of the Chinese National Petroleum Company (CNPC). Officials at CNPC have been arrested or are under investigation. Officials at several other state owned energy concerns, businesses in the travel, telecommunications, real estate and liquor industries have been either arrested, detained or are under investigation for bribery and corruption.

Some have questioned the motives for China’s crackdown against western companies over bribery and corruption, as exemplified by the GSK matter. I believe that the crackdown is a part of the Chinese government’s wider fight against internal corruption, as laid out in the article about the downfall of Yongkang. In another FT article, entitled “China dream sours for foreign companies”, Tom Mitchell wrote that “The “Chinese dream” articulated by China’s new president, Xi Jinping, is fast becoming a nightmare for some of the world’s most powerful corporations.” This is because “since then, government investigations and state media exposés targeting foreign investors have become a regular feature of the country’s business landscape.” Mitchell reported that some western executives “complain that foreign groups appear to be encountering particularly heavy scrutiny under the new leadership.” That complaint might certainly be considered by GSK about now as they have become the poster child for Chinese enforcement of its own internal anti-bribery legislation.

One of the things that compliance practitioners should not lose sight of in the ongoing bribery and corruption investigation of GSK is that the investigation, detentions and arrests all involve allegations of violations of Chinese law, not the US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. And while prosecution and even indictment or arrest under the FCPA or Bribery Act could not be termed a pleasant experience, I am relatively certain that it would pale in comparison to indictment or arrest under the applicable Chinese law prohibiting bribery of Chinese officials.

I think that this portends a significant shift for US, UK or other western companies doing business in China. In a recent client alert, entitled “Recent Developments in Chinese Antibribery Laws and Enforcement”, the law firm of Akin Gump Strauss Hauer & Feld LLP, wrote that “The recent, very public crackdowns against alleged bribery activities by foreign firms, however, should be seen in a broader historical context and as a manifestation of developments in the legal arena that have been taking place over some time.” This is because Chinese officials had previously focused on prosecution of bribe recipients, not the bribe payers. They noted that “Chinese laws against bribery can be found in the PRC Criminal Law, first promulgated in 1997. Importantly, in contrast to bribery laws in many other jurisdictions, the Chinese law applies only to the actual giving of a bribe, not to the offering of one; there is no law against attempted bribery in China. In contrast to the FCPA, the rules in China apply to bribing private individuals and entities, not just government officials.”

I believe that the Chinese motivation in the GSK matter must been seen as one part of this larger fight against bribery and corruption. This is simply more than one country pointing its finger at the outside business interest and claiming it is the bad western businessmen corrupting the locals through huge bribes. From the information that is coming out of China, it appears that China is using a multi-pronged attack against bribery and corruption and that going after the bribe-payers is but one part, albeit a new part, for China. This does not lessen the message for western companies currently doing business in China to review their own operations to see if they have any problems similar to those which have beset GSK and take remedial action as appropriate. But I do not see this current effort by Chinese authorities as an anti-American, anti-British (GSK is a UK entity) or anti-western backlash. The motivation seems to be the fight against bribery and corruption of which western businesses paying bribes in China is but one component.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

October 2, 2013

SCCE Guidance on Compliance Program Incentives

SCCENext week the Society of Corporate Compliance and Ethics (SCCE) will hold its annual conference in Washington DC. It is one of the top national conferences in compliance and ethics around. Together with K&L Gates LLP partner Amy Sommers I will be speaking on the recent GlaskoSmithKline PLC (GSK) corruption enforcement action in China and its implication for the compliance practitioner. I hope that you are planning to attend and if you are going to be in attendance that you will drop by the session Amy and I are leading.

Last week I interviewed Roy Snell, SCCE Chief Executive Officer (CEO), for my FCPA Compliance and Ethics Report podcast, which can be found here or on iTunes. One of the things that we discussed was membership in the SCCE and some of the benefits that it brings. I believe one of the best items that the SCCE offer is the Complete Compliance and Ethics Manual (the Manual). This is a one volume compendium of all things that the compliance practitioner might need in his or her practice. It is updated quarterly with CD supplements mailed to you.

One of the questions that I am regularly asked is how a company can create incentives to do business in compliance with the Foreign Corrupt Practices Act (FCPA) juxtaposed with the discipline that the FCPA Guidance suggests that every effective compliance program should maintain. An article in the Manual, entitled “Ideas for Using Incentives in Compliance and Ethics Programs”, presents some of the SCCE’s best ideas related to incentives, evaluations and rewards for compliance programs, they are as follows:

  • Departments would nominate people who exemplify the integrity program; a board level committee would select the best and give the winner free, preferential parking for a year.
  • Provide as a reward a pin or other visible emblem. When the employee accumulates enough points, they can turn in the emblem for gifts or time off.
  • Rewards could include two season basketball tickets or free lunch passes.
  • Have a “dinner with the CEO” as recognition.
  • Have the annual compliance and ethics award winner flown in to the shareholders’ annual meeting with the award presented there.
  • Audit findings should include positive findings regarding compliance & ethics activities; these could be shared in a newsletter.
  • The compliance committee could select the department or work group that best exemplifies compliance & ethics. Measures could include such things as completing training on time, code of conduct attestations done on time, best personnel evaluations, etc. The reward could be a lunch for the department.
  • Managers with the best compliance & ethics records could be awarded free tuition and expenses to attend a compliance academy and/or to get certified in compliance & ethics.
  • Make compliance & ethics certification (CHC, CCEP) a condition for promotion to senior management positions.
  • Reward employees for making recommendations and suggestions to improve the company’s compliance & ethics program.
  • Provide rewards and recognition for those who conduct self-audits and share the findings and lessons learned.
  • Require a compliance comprehension test as an adjunct to regular annual evaluations. A 100% score would be an added 1% pay increase on top of the usual incentives. 80% =.8, 70% = .7, less would equal zero.
  • Provide an incentive for reports to the helpline or otherwise to the compliance and ethics office that help avoid noncompliance or identify actual problems that are system errors. This would only be for reports about systems, but not about people, to avoid a bounty-hunter environment.
  • Make attendance at compliance training a mandatory condition for being in any responsible position.
  • Award organization-wide recognition if the compliance & ethics program overall gets a high score, e.g., time off for all employees.
  • Provide an incentive for all division and unit compliance and ethics officers to get training and certification (CHC, CCEP).
  • Performance indicators could be linked to a compliance plan. This could include timely submissions of required regulatory filings, on-time completion of compliance training, etc.
  • Provide on-the-spot recognition by peers/supervisors with certificates (“compliance bucks”) for behavior promoting compliance and ethics that can be redeemed for company merchandise.
  • Give $50 for any submissions to the company newsletter relating to compliance and ethics that are published.
  • Have a compliance and ethics courage award, e.g., for turning down a choice vacation trip from a vendor.
  • Have a system for compliance & ethics points or “president’s points” in small incremental amounts awarded based on performance during the month, quarter or year. The points would be totaled for each time period, with recognition for those receiving a certain number of reward points.
  • Senior leaders ask employees compliance and ethics questions on the spot; those who answer correctly get free movie tickets.

At the end of the day, not only are incentives necessary in a program, but they also help a company put a more positive face on its compliance program. Compliance and ethics should not simply be about enforcing laws, rules and regulations. Recognition of employees in companies who do well and conduct business ethically is an important step and employees should be recognized for showing ethical leadership, this means not just rewarding those at the top but anyone in the organization. I hope that these suggestions from the SCCE Manual will help to generate some ideas of your own.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

September 13, 2013

The Convergence of Bear Bryant and Johnny Football – Lessons In Compliance

Filed under: Corruption in China,FCPA,GlaxoSmithKline — tfoxlaw @ 1:01 am

Sedona Arizona is known for its four vortexes, some of those alleged places where the universe has holes in it or overlaps (I can’t remember which). I have been to Sedona but I have never experienced such convergence (or the voids for that matter). However, in other ways the universe does seem to converge in the most oddest of circumstances. Two days ago, on 9/11, was the 100th anniversary of the birth of Paul ‘Bear’ Bryant, the legendary college football coach. Bryant is well known for his six national championships at the University of Alabama. But before he made his way to Alabama, he was the head football coach at Texas A&M University. In 1957 he took A&M to the brink of the national championship, leading the nation with an undefeated record until losing the final two games of the season by a combined score of 3 points.

How is this preternatural? The University of Alabama travels to College Station to play Texas A&M University this Saturday. Added to this oddness is the fact that yet another former Texas A&M coach, who actually played for Bryant on that 1957 team – Gene Stallings, won a national championship while the head coach at Alabama in 1992. While Alabama does have the last two national championships under its belt, what A&M has is two wins over Alabama the last two times they played. And, of course, A&M has the reigning Heisman trophy winner – Johnny Football.

The compliance angle? Sometimes things just seem to line up rather eerily. Earlier this week, the FCPA Blog, in a post entitled “China to Fortune 500: Confess, you’ll feel better”, reported that representatives of over 30 western-based firms were gathered in Beijing in July “to receive a stern message from the National Development and Reform Commission (NDRC) division chief, Xu Xinyu.” His warning was that the companies would be well-advised to self-disclose economic crimes, such as bribery and corruption, “before they are found out, or face harsh penalties. He also stated that companies who mount a defence against accusations made by the NDRC would face even stiffer punishment.” His warning would seem to follow the traditional Chinese Communist party tactic of facilitating “self-criticism” and then use this information as a road map to redemption. While of course couched in language and persuasiveness that is unique to China, it would certainly appear as if such steps are akin to self-disclosure and remediation, which are cornerstones of any best practices compliance program.

This convergence is yet another reason that I believe that the GlaxoSmithKline PLC (GSK) corruption scandal in China will be a true game-changer in compliance. We basically have the Chinese government telling companies that they need to self-disclose any violations of Chinese law or face stiffer penalties in an enforcement action. The GSK scandal has demonstrated just how different western and Chinese legal systems and procedures can be. But it does appear that one thing the Chinese want is cooperation. The FCPA Blog reported a Reuters source said that some of the companies who participated in this meeting were known to be “GE, Siemens, Samsung Electronics, Microsoft, Volvo, IBM Corp, Michelin, Swedish packaging giant Tetra Pak, Intel Corp, Qualcomm, Dumex, a subsidiary of Danone, and U.S. cable equipment maker Arris Group Inc.” Further, the “the NDRC has launched nearly 20 probes in the past three years, and has hinted that more investigations into local and multinational firms are in the works.”

The message for the compliance practitioner is clear. If you have operations in China, they need to be scrutinized now. But, equally important, use this teachable moment to demonstrate to management the risks of doing business in jurisdictions with a high perception or preponderance of corruption.

So what will happen at the convergence this weekend in College Station? All I can say is something I never say GIG’EM AGGIES.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

August 19, 2013

GSK in China: A Game Changer in Compliance

I have published my first eBook-GSK in China: A Game Changer in Compliance. In this eBook, I review the information on the GlaxoSmithKline bribery and corruption allegations in China to-date, what you can do about it as a compliance practitioner and what it may all mean for international companies doing business in China.

I am sure that you will find it useful going forward to your compliance challenges. It is available through Kindle for only $4.99. You can download a copy here and start reading about it now.

August 13, 2013

GSK and Missed Red Flags in China

One of the questions that GlaxoSmithKline PLC (GSK) will have to face during the next few years of bribery and corruption investigations is how an allegedly massive bribery and corruption scheme occur in its Chinese operations? The numbers thrown around have been upwards of $USD500MM. It is not as if the Chinese medical market is not well known for its propensity towards corruption, as prosecutions of the Foreign Corrupt Practices Act (FCPA) are littered with the names of US companies which came to corruption grief in China. GSK itself seemed to be aware of the corruption risks in China. In a Reuters article, entitled “How GlaxoSmithKline missed red flags in China”, Ben Hirschler reported that the company had “more compliance officers in China than in any country bar the United States”. Further, the company conducted “up to 20 internal audits in China a year, including an extensive 4-month probe earlier in 2013.” GSK even had PricewaterhouseCoopers LLP (PwC) as its outside auditor in China. Nevertheless, he noted that “GSK bosses were blindsided by police allegations of massive corruption involving travel agencies used to funnel bribes to doctors and officials.”

Types of Bribery Schemes

The types of bribery schemes in China are also well known. In a Financial Times (FT) article, entitled “Bribery built into the fabric of Chinese healthcare system”, reporters Jamil Anderlini and Tom Mitchell wrote about the ‘nuts and bolts’ of how bribery occurs in the health care industry in China. They open their article by noting that the practice of bribing “doctors, hospital administrators and health officials is rampant.” They quoted an un-named senior health official in Beijing for the following, “All foreign and domestic pharmaceuticals operating in China are equally corrupt”. The authors also quoted Shaun Rein, a Shanghai-based consultant and author of “The End of Cheap China” for the following, “This is a systemic problem and foreign pharmaceutical companies are in a conundrum. If they want to grow in China they have to give bribes. It’s not a choice because officials in health ministry, hospital administrators and doctors demand it.”

Their article included a diagram which visually represented two methods used to pay bribes in China, which were designated the Direct incentives and Indirect incentives methods. Whichever method is used, the goal is the same – to boost sales.

In the Direct incentives method, a third party representative of a company would provide cash to the department head of a clinic or hospital. The department head would in turn pay it to the physicians to encourage them to prescribe the company’s medical products. But a third party representative could also contact a physician directly and reward them with “gifts such as storecards, vouchers and travel” expenses. Other direct methods might include the opening of bank accounts or charge accounts at luxury goods store and then the company would hand “the debit card or VIP card directly to the recipient.”

The FT noted that the Indirect incentives method tended to be “used by larger pharmaceutical groups with stricter governance procedures.” Under this bribery scheme there were two recognized manners to get benefits into the hands of prescribing physicians. The first is to have cash incentives paid to a third party representative, such as a travel agency, which would then “pass on some of these rewards to the physician directly.” Another method was for the company itself to make a “lump sum sponsorship paid to hospitals”. The hospitals would then distribute perks “to the doctors as a monthly or annual bonus.” Another indirect method noted was that companies might organize overseas conferences and site visits, which might “include free first class travel and five-star accommodation.”

Anderlini and Mitchell reported that “The 2012 annual reports of half a dozen listed Chinese pharmaceutical companies reveal the companies paid out enormous sums in “sales expenses”, including travel costs and fees for sales meetings, marketing “business development” and “other expenses”. Most of the largest expenses were “travel costs or meeting fees and the expenses of the companies’ sales teams were, in every case, several multiples of the net profits each company earned last year.” They cited the example of Guizhou Yibai Pharmaceutical Co Ltd which earned a net profit last year of Rmb333.3m. However its “sales expenses came to a total of Rmb1.25bn, including meetings expenses of more than Rmb295m and wages of just Rmb88m.” Indeed the “largest expense for the company’s sales team of 2,318 people was Rmb404m spent on travel, for an average of more than Rmb174,000 per sales representative for the year. That is roughly what it would cost every single sales representative to fly 10 times a month between Beijing and Guiyang, where the company is based.”

Auditing Responses – Missed Red Flags?

But what should GSK have done if such expenses were kept ‘off the books’? Hirschler, in his Reuters article, quoted one un-named source for the following, ““You’d look at invoices and expenses, and it would all look legitimate,” said a senior executive at one top accountancy firm. The problem with fraud – if it is good fraud – is it is well hidden, and when there is collusion high up then it is very difficult to detect.” However, Jeremy Gordon, director of China Business Services was quoted as saying “There is a disconnect between the global decision makers and the guys running things on the ground. It’s about initially identifying red flags and then searching for specifics.”

There are legitimate reasons to hold Continuing Medical Conferences (CME), such as to make physicians aware of the latest products and advances in medicine. However, this legitimate purpose can easily be corrupted. Hirschler quoted Paul Gillis, author of the China Accounting Blog, for the following “Travel agencies are used like ATMs in China to distribute out illegal payments. Any company that does not have their internal audit department all over travel agency spending is negligent.” Based on this, GSK should have looked more closely on marketing expenses and more particularly, the monies spent on travel agencies. Hirschler wrote, “They [un-named auditing experts] say that one red flag was the number of checks being written to travel agencies for sending doctors to medical conferences, although this may have been blurred by the fact that CME accounts for a huge part of drug industry marketing.”

One other issue might be materiality. If GSK’s internal auditors had not been trained that there is no materiality standard under the FCPA, they may have simply skipped past a large number of payments made that were under a company’s governance procedure for elevated review of expenses. Further, if more than one auditor was involved with more than one travel agency, they may not have been able to connect the dots regarding the totality of payments made to one travel agency.

What about the external auditors, PwC? Francine McKenna, who writes and speaks extensively on all things related to Big 4 auditing, wrote last year, in blog entitled “What The SEC And PCAOB Fail To Acknowledge About Chinese Fraud”, that Pam Chepiga, of Allen & Overy LLP, in 2012, “told the audience that FCPA investigations in China are difficult because, “you can’t take the documents out of the country.”” After her panel, Chepiga, told McKenna “that not only does China restrict the dissemination of documents outside of China, but internal investigations by multinationals must be done by Chinese lawyers with support from the Chinese accounting firms. Given the experience that the SEC is having with Deloitte, it seems, “previous cooperation agreements are not in force”. The SEC would have a hard time going over and investigating a fraud or FCPA violation by the Chinese arm of a US based company”. So things may not have been any easier for PwC. However, the recent agreement between the Securities and Exchange Commission (SEC) and the Chinese Securities Regulatory Commission will allow the SEC some access to audit the work papers of Chinese companies listed in the US may influence this issue.

Ongoing Monitoring

Another response that GSK could have implemented was to engage in greater ongoing monitoring. In the Texas Law, Out of Order column, entitled “5Tips for Avoiding Email Compliance Traps”, Alexandra Wrage, President of TRACE International, reported that “Internal Glaxo documents and emails reviewed by The Wall Street Journal show Glaxo’s China sales staff was apparently instructed by local managers to use their personal email addresses to discuss marketing strategies related to Botox. In the personal emails, sales staff discuss rewarding doctors for prescribing Botox with cash payments, credits that could be used to meet medical education requirements and other rewards.”

Wrage uses the GSK matter as a jumping off point “For companies wanting to get a handle on the compliance risks they face through email (mis)uses and other forms of technology”. She gives five tips to avoid email compliance traps: (1) Encourage communication between compliance and IT departments. (2) Map out your universe of data. (3) Know your obligations, then develop an established set of policies and procedures around them. (4) Train employees to speak up about the new uses in technology. (5) Stress-test your program.

Remember with the technology available to companies today it is possible that companies have the ability to determine if employees are accessing personal email accounts business computers. Also to Wrage’s list, I would add one other point and that is call Eddie Cogan at Catelas Software. Relationship monitoring is what they do and they can help you out immediately.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

August 12, 2013

The Films of Satyajit Ray and the GSK China Investigation: Both Game-Changers

Filed under: compliance programs,Corruption in China,FCPA,GlaxoSmithKline — tfoxlaw @ 1:01 am

If you are in London this week, I might suggest that you drop by the British Film Institute (BFI), which is celebrating the work of the Indian film maker, Satyajit Ray. If you have never seen a Satyajit Ray film, all I can say is that you have missed one of the world’s greatest directors. In an article in the Financial Times (FT), entitled “A genius for looking”, Amit Chaudhuri says that “all Bengali and Indian cinema was changed” after the release of Ray’s first film, Pather Panchali. Ray followed up this first film with two more entitled, Aparajito and Apur Sansar, and all three form The Apu Trilogy. They truly were game changers for cinema across the globe.

In many ways, the ongoing bribery and corruption investigation of GlaxoSmithKline PLC (GSK) may also portend a game-changer in China. In another FT article entitled “China dream sours for foreign companies”, Tom Mitchell wrote that “The “Chinese dream” articulated by China’s new president, Xi Jinping, is fast becoming a nightmare for some of the world’s most powerful corporations.” This is because “since then, government investigations and state media exposés targeting foreign investors have become a regular feature of the country’s business landscape.” Mitchell reported that some western executives “complain that foreign groups appear to be encountering particularly heavy scrutiny under the new leadership.” That complaint might certainly be considered by GSK about now as they have become the poster child for Chinese enforcement of its own internal anti-bribery legislation.

One of the things that compliance practitioners should not lose sight of in the ongoing bribery and corruption investigation of GSK is that the investigation, detentions and arrests all involve allegations of violations of Chinese law, not the US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. And while prosecution and even indictment or arrest under the FCPA or Bribery Act could not be termed a pleasant experience, I am relatively certain that it would pale in comparison to indictment or arrest under the applicable Chinese law prohibiting bribery of Chinese officials.

But what is the Chinese law regarding bribery and corruption of Chinese officials inside of China and what might that portend for US, UK or other western companies doing business in China? In a recent client alert, entitled “Recent Developments in Chinese Antibribery Laws and Enforcement”, the law firm of Akin Gump Strauss Hauer & Feld LLP, wrote that “The recent, very public crackdowns against alleged bribery activities by foreign firms, however, should be seen in a broader historical context and as a manifestation of developments in the legal arena that have been taking place over some time.” This is because Chinese officials had previously focused on prosecution of bribe recipients, not the bribe payers. They noted that “Chinese laws against bribery can be found in the PRC Criminal Law, first promulgated in 1997. Importantly, in contrast to bribery laws in many other jurisdictions, the Chinese law applies only to the actual giving of a bribe, not to the offering of one; there is no law against attempted bribery in China. In contrast to the FCPA, the rules in China apply to bribing private individuals and entities, not just government officials.”

The client alert also reports that that the Interpretations on Several Issues Concerning the Application of the Law in the Handling of Criminal Bribe-Giving Cases, adopted jointly by the Supreme People’s Court and the Supreme People’s Procuratorate in December 2012, which became effective in January 2013, defined more clearly the various levels of bribery, issues regarding the amount of money involved, the identity of the recipient and penalties. Additionally, it notes that “Various Chinese court rulings provide some guidance on the issue; per these rulings, the following factors are key: (i) the nature and history of the relationship between the parties; (ii) the value of the gift; (iii) the purpose and timing of the gift relative to what is obtained; and (iv) to what extent the recipient has used his or her position to promote the interests of the gift giver.” However, and perhaps more ominously, the client alert also says that “given the general nature of these guidelines, prosecutors and judges have considerable discretion in determining whether a particular act amounts to an illegal bribe.”

Penalties Under Chinese Law

I am indebted to my colleague Helen Zhang, Partner in the Shanghai office of the Zhong Lun Law Firm, who provided me a copy of her presentation on Management of Corruption Exposure Legal Framework & Company Approaches, for a detailed discussion of the legal framework on Chinese anti-corruption laws. She begins with a definition of what might constitute a bribe under Chinese law. The criminal proceedings section states that bribes can include “money, property, material object or interest on property that can be counted by money, such as providing house renovation, membership card containing money, token card (coupon), traveling expenses, etc., or anything of a property nature.” In the administrative proceedings Zhang states there can be prosecutions for “any incorrectly recorded sales discounts or rebates.” Zhang gives several tests on what might constitute a legitimate gift, contrasting it with indicia of bribery. They include the following:

  • the transaction background, such as whether the transaction parties are relatives or friends and the circumstances and degree of communications between the transaction parties in history;
  • value of the money or property transacted;
  • cause, time and manner of the transaction, and whether the person offering money or property has brought forward any request towards the recipient in connection with the recipient’s duties; and finally
  • whether the recipient secures benefits for the provider by taking advantage of his duties.

In her presentation she set out the penalties for offering bribes under Chinese law. My summary takes the form of a Penalty Box Score.

Art. of PRC Criminal Law

Bribe

Maker

Bribe

Taker

Monetary Threshold (RMB)

Sentencing

Term

Art. 389 Individual State employee 10,000 Up to Life Sentence
Art. 393 Work Unit State Employee 200,000 Fines on ‘work units’ and ind. Up to 5 years
Art. 164 Individual or Unit Non-state employee Inv.-10,000Unit-200,000 Fines on ‘work units’ and ind. Up to 10 years
Art. 391 Individual or Unit Unit 100,000 Fines on ‘work units’ and ind. Up to 3 years
Art. 163 Individual or Unit Non-state employee 5,000 Minimum 5 yrs if bribe amt over100,000 RMB
Art. 385 Individual or Unit State Employee 5,000 Minimum 10 yrs if bribe amt over100,000 RMB
Art. 387 Individual or Unit State Organ 100,000 Fines on ‘work units’ and ind. Up to 5 years

 Defenses Available

Zhang also points to the Pursuant to the PRC Supreme Court’s interpretation, for the proposition that from January 1, 2013 forward “if the company adopts a collective decision or the in-charge manager of the company makes a decision to voluntarily confess the bribery activities before being pursued, the penalties on the company and its relevant responsible persons can be reduced or even exempted.” She notes that there are some defenses available. Under general Chinese law, these are voluntary confessions and contributions to other cases, other defenses applicable to bribery cases include “blackmailed bribery and no improper interest involved”.

She specifically sets out that facilitation payments are not excepted out from the Chinese bribery statutes; stating “Facilitation payments may be deemed bribery if the facilitation of the relevant government procedures constitutes an “improper interest” acquired by the briber. Pursuant to the judicial interpretations of the PRC Supreme People’s Court, any attempt to obtain advantage of competition inconsistent with the principle of fair and just may also be deemed a kind of “improper interest”.” Most relevant to the GSK matter, she writes that “Indirect payment of bribes through an intermediary is not a defense and both the intermediary and the briber may be criminally prosecuted: (a) if the intermediary introduces the briber to a public official, he may be prosecuted for the “crime of introduction of bribery”; or (b) if the intermediary assists in the payment of bribes for the briber, he may be prosecuted for the “crime of bribery” as an accomplice of the briber.”

————————————————————————————————————————————————————————————————————–

I am not certain as to the author of the Akin Gump client alert cited in this article. However, there are two law firm contacts listed at the end of the article. If you need more information about their article, you can reach them as follows: William Rosoff, email: wrosoff@akingump.com and Yuanming Wang, email: ymwang@akingump.com.

Helen Zhang can be reached via email at helenzhang@zhonglun.com.

————————————————————————————————————————————————————————————————————–

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

August 1, 2013

The Grim Reaper, GlaxoSmithKline and the Death Knell for the Compliance Defense

The addition of a compliance defense has raised its head again in the Foreign Corrupt Practices Act (FCPA) commentariat. In a post on the FCPA Blog by Philip Fitzgerald, entitled “From Europe, the case for an FCPA good-faith defense”, Fitzgerald posits that enforcement of foreign bribery in the US is effective under the FCPA because such enforcement is aided by the doctrine of respondeat superior. Fitzgerald then argues that a good-faith compliance defense has been considered for some time as a potential counterweight to respondeat superior. The reason being that if companies had incentives for effective compliance programs and were “accused of violating the FCPA could mount a defense based on their efforts to prevent the bribery are evident. Corporations accused of violating the FCPA would have access to courts and jury trials to contest and challenge FCPA allegations, would probably be encouraged to discover and self-report overseas bribery, and may not feel compelled to enter into settlements with enforcement agencies that can prejudice the rights of both the organizations and their employees.”

Here is the problem with that argument. It apparently makes no difference what the incentives will be for a company to put a compliance program in place. For even if you have a compliance program it still has to be effective. Last year this was driven home by Wal-Mart and its allegations of wide spread bribery and corruption in its Mexico subsidiary. This year we have GlaxoSmithKline PLC (GSK) running amok with allegations that it engaged in bribery and corruption in its Chinese operations.

GSK Prior Enforcement Action

All of the above is pretty eye popping in and of itself. But consider the following about GSK, a little over one year ago, in July of 2012; GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data in what the US Department of Justice (DOJ) called the “largest health care fraud settlement in U.S. history” according to its press release. The DOJ press release went on to state that “GSK agreed to plead guilty and to pay $3 billion to resolve its criminal and civil liability arising from the company’s unlawful promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices.” The press release noted that the resolution was the largest health care fraud settlement in US history and the largest payment ever by a drug company for legal violations.

You would think that any company which has paid $3 billion in fines and penalties for fraudulent actions would take all steps possible not to engage in bribery and corruption. Indeed as part of the settlement GSK agreed to a Corporate Integrity Agreement (CIA). This CIA not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the FCPA.

In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, inclusive of the Compliance Officer and other members of senior management necessary to meet the requirements of this CIA, whose job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required Deputy Compliance Officers for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified. Further, there was detail down to specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”.

GSK’s Code of Conduct (entitled “One Company One Approach”) states quite clearly, “The GSK attitude towards corruption in all its forms is simple: it is one of zero tolerance, whether committed by GSK employees, officers, complementary workforce or third parties acting for or on behalf of the company. Accordingly, we must never make, offer to make, or authorise any improper payments or provide anything of value to any individual, or at the request of any individual, for the purpose of influencing, inducing or rewarding any act, omission or decision to secure an improper advantage, or obtain and retain business.”

In its Code of Practice for Promotions and Customer Interactions, there is a detailed procedure laid out for any sponsorship of a corporate event, conference or travel. This procedure requires that “The Scientific Engagement Operating Practice “Congress Sponsorships” must be followed for sponsorships of scientific and medical congresses (conferences) at international and local (country) levels”. Further, if there is a grant a specific procedure must be followed.

The company has a Third Party Code of Conduct, which states:

Third Parties shall conduct their business in an ethical manner and act with integrity. The ethics elements include the following statement:

  1. Business Integrity, Reputation and Fair Competition

Corruption, extortion and embezzlement are prohibited. Third Parties shall not pay or accept bribes or participate in other illegal inducements in business or government relationships.

Third Parties should never communicate externally about GSK’s prospects, performance or policies nor disclose inside Information which would affect the price of GSK securities without proper authority. Third Parties are forbidden from making any public posting of confidential or proprietary information related to any aspect of GSK’s business.

Third Parties shall conduct their business consistent with fair and vigorous competition and in compliance with all applicable anti-trust laws. Third Parties must strictly adhere to the letter and spirit of the Competition laws in all jurisdictions. Third Parties shall employ fair business practices including accurate and truthful advertising.

According to the GSK Code of Conduct, all of this is to be backed up by “a Global Ethics & Compliance team which is responsible for providing oversight and guidance to ensure compliance with applicable laws, regulations, and company policies, as well as fostering a positive, ethical work environment for all employees.” The Code of Conduct also states that “GSK has an active system of internal management controls to identify company risks, issues and incidents with appropriate corrective actions taken. Our Risk Management and Compliance Policy provides the framework for these internal controls, to ensure significant risks are escalated to the proper levels of senior management.”

Frankly I do not know how much clearer a company can state that we will not engage in bribery and corruption. But the problem for GSK seems to be that none of the above was effective because the company did not follow its own stated protocols.

The Uselessness of a Compliance Defense

So how does all of this portend the end of efforts to add a compliance defense to the FCPA? As stated in its Code of Conduct, “The GSK attitude towards corruption in all its forms is simple: it is one of zero tolerance.” What do you think a compliance defense would do for GSK about now? GSK prided itself on its world-wide FCPA anti-corruption compliance program. It even said it would do so in settlement documents with the DOJ. The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about GSK. Do these facts seem like a rogue employee or even junta of rogue China subsidiary employees going off on their own? Whatever your thoughts on that question may be, it certainly appears that having a best practices compliance program did not lead to GSK doing business more ethically. And what if GSK’s corporate headquarters in London was not involved in any illegal conduct or were even kept in the dark by GSK China? What does that say about having a robust compliance program?

Amending the FCPA to protect corporate headquarters in the US from liability under the doctrine of Respondeat Superior? At this point, I do not think that anyone can argue with anything close to a straight face that this problem was exclusive to China. The corporate parent received the benefits from any profits made due to the bribery so it is difficult to image why a corporation should not be a part of any enforcement action. I suspect that both the DOJ and the UK Serious Fraud Office (SFO) will be asking the dreaded “Where Else” question about now.

GSK actually had knowledge of the allegations against it, through an internal company whistleblower. The whistleblower sent the allegations to the corporate headquarters back in January. However, just few days before the Chinese government detained the GSK employees, the company announced that it had found no evidence of any bribery or corruption. However, WSJ reporter Laurie Burkitt reviewed some internal GSK documents and, in an article entitled “China Accuses Glaxco of Bribes”, wrote that “Emails and documents reviewed by the Journal discuss a marketing strategy for Botox that targeted 48 doctors and planned to reward them with either a percentage of the cash value of the prescription or educational credits, based on the number of prescriptions the doctors made. This strategy even had a code name, which was ‘Vasily’ borrowing its name from Vasily Zaytsev, a noted Russian sniper during World War II, according to a 2013 PowerPoint presentation reviewed by the Journal.”

Burkitt reported in her article that “A Glaxo spokesman has said the company probed the ‘Vasily’ program and “[the] investigation has found that while the proposal didn’t contain anything untoward, the program was never implemented.”” But from my experience, if you have a bribery scheme that has its own code name, even if you never implemented that scheme, it probably means that the propensity for such is pervasive throughout the system.

The GSK tale drives home the point that having a compliance program is useless unless it is effective. Further, it is clear that by putting such an affirmative defense in place, companies may well go the paper compliance defense route and not dedicated the time and resources to make it effective. So whether you were pro or anti-compliance defense, I think that GSK is a stand-in for the Grim Reaper and what the matter will portend in this brave new world of anti-bribery and anti-corruption enforcement.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

Next Page »

Customized Rubric Theme. Blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

Join 4,222 other followers