FCPA Compliance and Ethics Blog

September 26, 2013

The Cost of Stupid is Less Than the Cost of Bribery and Corruption

After the butt-slide play, you might think that the sad sack Houston Astros could not sink even lower but I guess setting the Major League Baseball (MLB) record for the worst record for three straight years is not enough. Yesterday, as reported by Sam Gardner in Fox Sports Online, in a post entitled “Buzz: Astros botch Ladies Night”, the Astros managed to insult over 50% of the population with the following promotion sent out by Twitter,

9/27 is Ladies Night by @StateFarm! Ladies can learn about baseball, enjoy music, food, drinks & more! For info & tix http://www.astros.com/ladies

The Astros, teaching anyone about baseball? Really? Here are some of the tweets back in response:

Yvette Betancourt  @Yvetteab

@astros implying women don’t know about baseball?

Christie @ATXChristina

@astros @StateFarm eff both of you. Baseball was the first game I learned about as a kid. Used to keep score at games. #Misogyny

Patrick Monaghan @pkmonaghan

#Astros tweets from 1950? I learned baseball scorekeeping FROM MY MOTHER. My wife has seen more games than you. Jesus. @astros @StateFarm

And my personal favorite:

Hunter Felt @HunterFelt

@scATX What’s worse? The assumption that women would need to be taught about baseball or the idea that the @astros could do so?

Unfortunately, the Astros can only increase the cost of being so idiotic. But it did make me wonder what might be some of the costs of allegations of bribery and corruption? For the British company, GlaxoSmithKline PLC (GSK) apparently it means a big hit on sales in its Chinese operations since the story broke about its alleged corruption of Chinese medical services professionals, this past summer. In an article in the Financial Times (FT), entitled “GlaxoSmithKline China sales face growing pressure”, reporters Andrew Jack, Patrick Jenkins and David Oakley, noted that sales of the company’s products in China had dropped over 30% since the publication of the original allegations. They also reported that “As the Chinese authorities have expanded corruption and pricing probes into western and domestic drug companies since July, analysts have forecast slowed growth for the industry after a long period of expansion driven by extended medical cover and marketing to a rising middle class.” They quoted Andrew Baum, a pharmaceutical analyst with Citi, who said that “indications from his latest research suggested an absolute drop in revenues as a result of manufacturers “suspending activities” and “hospitals that are wary” of talking to drug companies following the clampdown.” While Baum “expected GSK to suffer the greatest impact, but predicted other multinational pharmaceutical companies would also report absolute sales declines in China of 10-20 per cent.”

In another FT article, entitled “Bribery fears infect drug dealings in China”, by Andrew Jack and Patti Waldmeir, they highlighted some of the current allegations against western pharmaceutical companies as explained in the bribery box score below:

Company Amount of Alleged Bribe Source of Allegation Bribery Scheme
GSK $500MM Chinese police investigation Use of intermediaries, travel agencies to bribe doctors
Eli Lilly $4.9MM Former employee Kickbacks to doctors to prescribe the company’s products
Sanofi $277K Whistleblower Bribes paid to doctors described as research grants
Novartis $8200 Company sales rep Payments to 200 hospitals for non-existent post-trial surveys

However, there are more, and perhaps even greater, costs associated with bribery and corruption; those of which can be effected upon the population of a country where the bribery occurs. As the Foreign Corrupt Practices Act (FCPA) is a supply side-focused law, we here in the US compliance community usually try to point out the costs to businesses which engage in bribery and corruption, such as the drop in sales experienced by GSK. Jack and Waldmeir pointed to the costs for those in China where bribery in the health care industry is alleged to have occurred. The article discussed three different allegations of corruption and how they all have potentially devastating effects.

Fake Clinical Trials

The article pointed to one set of allegations which involved “multi-nationals conducting “phase IV” clinical trials”. These trials are performed after a drug is approved and “which critics claim are often for marketing purposes.” The corruption involved a third party to the companies involved who “filled out fake “clinical research forms” on trials which never took place.” Under this scenario, doctors were on record for participating in the trials but never actually participated because there were no such trials. Subsequently, any results which were claimed had no basis in fact.

Commissions for Prescriptions

Another scheme highlighted was commission payments to doctors for one company’s pharmaceutical products prescribed to patients. While the medical student attempted to backtrack by saying the doctors would only prescribe one drug over another similar drug if they received ‘commissions’; such waffling misses the entire point. The recommendation was made based upon the self-interest of the doctor in receiving the commission and not based upon the needs of the patients.

Infant Formula

In one of the worst examples of the effects of corruption, in 2008, thousands of Chinese infants became sick after drinking tainted baby milk which had been sold as safe for consumption. In response to this horrific event, “middle-class parents will go to any length to buy imported formula which they think is safe.” Moreover, “doctors and nurse often urge parents to start their newborns on formula, right from the maternity ward.” Unfortunately the Chinese media have alleged that “medical staff has been bribed to favor one brand over another”.

Entering into this imbroglio, is the French company Groupe Danone, which professed that it was “shocked” at such allegations aimed towards them, when the Chinese state television aired allegations that the “company bribed doctors and nurses to recommend its brand.” The national television company quoted a company manager who said that “the company pays hundreds of Yuan each year to bribe staff in Tianjin hospitals to feed newborns” the company’s brand. This bribery scheme extended past doctors to include nurses as well; both of whom received monthly incentive payments to use and recommend the company’s product.

Yet these allegations of wide-spread bribery and corruption are having other effects as well. Jack and Waldmeir cited to Marc de Garidel, chief executive of Ipsen SA, who said that some western companies have stopped doing promotions in China altogether. Obviously there is more and greater scrutiny by Chinese officials on not only western companies but Chinese health care providers as well; to the point that de Garidel said that in some areas, doctors did not even want to meet with pharmaceutical company representatives. Furthermore, and always omnipresent is the possibility of joint prosecutions by other national jurisdictions such as the US under the FCPA or UK government under the Bribery Act.

Another interesting effect has been on recruiting and hiring for western company’s Chinese operations. Jack and Waldmeir cited to Gregory Lovas, a corporate recruiter in the life science industry with CTPartners, who said that in the past “companies had seen China postings as a way of exposing their future leaders to an expanding market as now seeking greater existing “language, cultural understanding and market knowledge.” Lovas also said that for middle-managers his clients want “background checks and references stretching back as far as 10 years.”

As Forest Gump might say, “Stupid is as stupid does.” I wonder just how many more stupid mistakes the Astros can make this year. After all, there were only four days left in their 2013 season. As for bribery and corruption in China, the outlook is more long term. Deutsche Bank predicted that corruption investigations could well be “longer and larger” than originally thought. Or as Bette Davis intoned, if you are doing business in China, you had better fasten your seatbelt. It is going to be a bumpy ride.

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

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