Archie Bunker, Batgirl and the International Fight Against Corruption

This week saw the death of two notables from the television industry, Bud Yorkin and Yvonne Craig. According to his Obituary in the New York Times (NYT), Yorkin rose up the television industry ranks to eventually team with Norman Lear to produce one of the true “pioneering, provocative and singularly successful satirical series” in the history of television, All In The Family, introducing one of the most recognizable characters in all of TV – Archie Bunker. When I say he began at the bottom end of the business: it literally was that, as he began repairing TVs in New York City bars. All In The Family not only broke ground by discussing taboo subjects it also became “the first TV series to top the Nielsen ratings for five consecutive years.”

Yvonne Craig was known, according to her Obituary in the NYT, as the girl “who kept Gotham safe as Batgirl” whom she played in the 1960s TV series Batman. Craig was a classically trained ballerina who brought athleticism and “a scrappy girl-power element” to the series in its third and final season. However, I remember Craig as the green skinned slave girl in the “Whom The Gods Destroy” episode from the original Star Trek series. Her Obituary noted, “She performed a seductive, loose-limbed dance that seemed to nearly overwhelm William Shatner’s red-blooded Captain Kirk, while Leonard Nimoy’s Mr. Spock pronounced it “mildly interesting.””

Interestingly both of these televisions stars inform today’s compliance issue. Yorkin for the way he and his partner Lear held up a mirror, through All In The Family, to address such issues as “racism, sexism, abortion, gay rights and the war in Vietnam, among other television taboos” and Craig, “who kept Gotham safe as Batgirl.” Of course I am referring to the devastating disaster that occurred last week in the Chinese city of Tianjin. A NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, reported that the death toll now stands at 114, with 674 injured and more than 17,000 homes damaged. An unknown number of persons are still missing.

Is anyone really surprised corruption was involved in the tragedy? Enforcement of anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act or even Chinese domestic anti-bribery laws, is not a game for corruption can kill. While most corruption leads to economic damage, there have been clear instances where corruption led to the loss of life. The 2013 massacre at the Narobi Westgate shopping mall was clearly a result of corruption in Kenya that allowed guns used in the attack to be illegally smuggled into the country through bribery.

Now it has been reported that corruption led to the disaster in Tianjin. The FCPA Blog, in a post entitled “Report: Tianjin warehouse owners used guanxi to land phony safety licenses”, wrote that “The owners of the warehouse in the port of Tianjin that exploded last week and killed more than 100 people obtained fraudulent safety licenses through their connections with fire and safety officials, China state media said.” The warehouse where the fire started and spread from was illegally holding certain lethal chemicals. The post also noted, “Ruihai International Logistics owned the warehouse. The main shareholders of the company are ex-Sinochem executive Yu Xuewei and Dong Shexuan, the son of a late police chief, VAO News reported.” The FCPA Blog went on to quote the VOA report for the following, “In an interview with the official Xinhua news agency, Dong and Yu admitted to using their connections, or guanxi, with local officials to obtain various fire safety, land, environmental and safety certifications.”

In addition to the illegally stored chemicals, it turns out there should not even have been a warehouse in that location in the first place. In another NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, Dan Levin reported the warehouse itself was not far enough back from the prescribed distance for residential housing. It seemed clear from the confession of the Mayor of Tianjin that he had been involved in the corruption when he stated, “I bear the unshirkable responsibility for this accident as head of the city.”

Another indicia of Chinese corruption had come into play as well. The executives of the company, which owned the warehouse and illegally stored chemicals, Ruihai, hid their ownership interest. The article reported they “had other people list their shares to avoid the appearance of a conflict of interest.”

In yet another NYT article, entitled “Fear of Toxic Air and Distrust of Government Follow Explosions in China” also by Dan Levin, it was noted “Later on Tuesday, China’s anticorruption agency announced on its website that Yang Dongliang, a former deputy mayor of Tianjin who became the head of the State Administration of Work Safety, was under investigation for “suspected violations of party discipline and the law,” a common euphemism for corruption. The Beijing Youth Daily reported, however, that Mr. Yang has been under investigation for a half-year, raising questions about why the case was announced now. Two other officials accused of taking bribes are also under investigation.”

The fallout from this tragedy continues. However, with such widespread corruption many Chinese feel they are not being told the truth and that their government is protecting corrupt officials. Levin said, “Public reflection on man-made tragedies is politically risky for the ruling Communist Party, according to David Bandurski, an editor of the China Media Project at the University of Hong Kong. “The party leadership is very aware that questions of responsibility in a disaster like this can very quickly move to fundamental issues of power and legitimacy,” he said, explaining that in an authoritarian system, “the buck stops with you.” Mr. Bandurski noted that censors had struggled to control the Tianjin narrative because some Chinese journalists had pushed ahead with their own reporting. “This is a very messy story, and for Chinese media, messy means opportunity,” he said.”

The Petrobras scandal in Brazil is bringing into question the government of President Dilma, it could forebode the same in China. Corruption in all its forms is no laughing matter and enforcing anti-corruption laws is no game. While prosecuting companies engaging in bribery and corruption through the hiring of sons and daughters of government officials to retain or garner new business may seem quite a long way from the Westgate Mall massacre or the massive loss of life in Tianjin; they are clearly on a unidimensional continuum.

Just as Archie Bunker put a light up to many of the social ills of his time, the more light you can shine on corruption, the more you can root it out of the shadows. But do not forget to send in Batgirl and those fighting for justice against corruption as well.

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, 2015

International Anti-Corruption Enforcement Efforts

While the US Foreign Corrupt Practices Act (FCPA) is still the most widely recognized and enforcement anti-bribery and anti-corruption law across the globe, there have been a number of initiatives which will lead directly to greater anti-bribery and anti-corruption enforcement. This increased enforcement will lead to increased risks for companies that do not have anti-bribery and anti-corruption compliance programs in place. This post discusses the efforts of other countries to enact and enforce legislation to curb bribery and corrupt across the globe.

China 

Over the past 18 months, GlaxoSmithKline PLC (GSK) was embroiled in a very public, very nasty bribery and corruption investigation. It culminated in the conviction of GSK and the assessment of a $491 million fine, criminal conviction of four senior GSK China subsidiary managers and the criminal convictions of two ancillary GSK-hired investigators. The entry of the Chinese government into the international fight against corruption and bribery is truly a game-changer. While there may be many reasons for this very public move by the Chinese government, it is clear that foreign companies are now on notice. Doing business the old fashioned way will no longer be tolerated. This means that international (read: western) companies operating in China have a fresh and important risk to consider; that being that they could well be subject to prosecution under domestic Chinese law.

The international component of this investigation may well increase anti-corruption enforcement across the globe. First of all, when other countries notorious for their endemic corruptions, for example India, see that they can attack their domestic corruption by blaming it on international businesses operating in their country, what lesson do you think they will draw? Most probably that all politics are local and when the localities can blame the outsiders for their own problems they will do so. But when that blame is coupled with violations of local law, whether that is anti-bribery or anti-price fixing, there is a potent opportunity for prosecutions.

One of the audit failures of GSK was around well known compliance risks in China, including (1) event abuse planning; (2) mixture of legitimate and illegitimate travel; (3) other collusion with travel agencies; and (4) parallel itineraries. So those risks are well known and have been documented. While the cost of monitoring is high and would involve the tedious work of verifying millions of receipts by calling hotels, airlines and office supply stores and scrutinizing countless transactions for signs of fraud; if your compliance risks are known for a certain profile, then you should devote the necessary resources to making sure you are in compliance in that area.

Brazil 

While GSK was a harbinger of international anti-corruption investigations and enforcement actions based on domestic anti-bribery laws; Brazil and its state-owned energy company Petrobras may become the world’s largest corruption investigation. In a New York Times (NYT) article, entitled “Scandal Over Brazilian Oil Company Adds Turmoil to the Presidential Race”, the scandal was detailed by a former Petrobras official, Paulo Roberto Costa. Mr. Costa was the person who oversaw the company’s refining operations. He has admitted to having engaged in the receipt of bribes for at least a 10 year period “equivalent to 3 percent of the value of the deals from the Brazilian construction companies that obtained the contracts” to build refineries. This amounted to literally millions being “stashed in bank accounts in Switzerland and the Cayman Islands.” He “inflated budgets for new projects” by 3% and then had that amount kicked back to him as bribes. The allegations were verified “through an associate, Alberto Youssef, a black-market money dealer who testified that he helped launder funds in the scheme. Mr. Youssef, who has also accepted a plea deal, testified that more than a dozen of Brazil’s largest construction companies had paid hefty bribes to obtain lucrative Petrobras contracts.” Interestingly, Brazilian President Rousseff “has also effectively acknowledged the prevalence of corruption inside the executive suites of Petrobras, while denying that she had known about the kickbacks when they were taking place.”

The scandal has not only engulfed suppliers to Petrobras in Brazil. It has now moved to the international stage. From shipyards in Singapore, which have been alleged to have paid bribes to Petrobras, to Rolls Royce in Great Britain which has been alleged to have paid bribes for the sale of turbine engines; this scandal truly is international in scope and may engulf more companies going forward. In addition to violations of Brazilian law, the US government has reportedly opened an investigation, as Petrobras USA is a US stock-exchange issuing entity and subject to the FCPA. Indeed, in the US there are already multiple shareholder derivative lawsuits against the US entity for mis-representing its true value because of the corruption allegations against the company in Brazil.

The Petrobras scandal continues to make news almost daily and its repercussions continue to reverberate across the globe. The FCPA Blog, in an article entitled “Swiss AG freezes $400 million in Petrobras bribe probe”, stated that in Switzerland alone there are nine open investigations into alleged money laundering tied to Petrobras. In mid-March the Office of the Attorney General of Switzerland (OAG) announced that they had issued an order to freeze $400 million of assets allegedly tied to a Petrobras corruption scheme. The FCPA Blog further stated the OAG announced “The release of over $120 million reflects Switzerland’s clear intention to take a stand against the misuse of its financial center for criminal purposes and to return funds of criminal origin to their rightful owners.”

The domestic Brazilian Anti-Bribery Law, the Clean Company Act, enacted into law in 2014, is uniquely designed for oversight by internal audit. Compliance programs will be evaluated on three prongs: the structure of the program; specifics about the legal entity; and an evaluation of the program’s efficiency. The first prong will include consideration of the existence of mechanisms for reporting suspected or actual misconduct, training, code of conduct, policies and procedures, periodic risk assessments, and application of disciplinary measures against employees (including senior management too) involved in wrongdoing. Under the second prong, the compliance risks associated will be considered. Compliance programs should be tailored to the company’s risks; “one-size-fits-all” programs will not be accepted. The third prong will consist of a case-by-case verification, that it is not simply a paper program.

Finally, and no doubt spurred by the Petrobras corruption scandal, the FCPA Blog also reported, in another article entitled “After protests, Brazil president issues anti-graft regulations”, that Brazilian President Dilma Roussef issued a presidential decree with regulations under the Clean Company Act. The new regulations issued address some of the crucial questions concerning the administrative procedure for imposing corporate liability and assessing fines. It also set out the criteria for determining fines, evaluating compliance programs, and entering into leniency agreements. Finally, the decree also provides that books and records accuracy and completeness will be a key criterion for evaluating compliance programs, no doubt inspired by the FCPA accounting provisions. As the FCPA Blog said, “The regulations under the Clean Company Act are a critical milestone in the effort to restore credibility to Brazil’s federal government, in light of its past commitments to fighting corruption in the corporate world.”

Conclusion 

What does all of the above mean for a global company? It means that some law that prohibits bribery and corruption will cover your business. It will not and does not matter if you are a US, UK or Brazilian company doing business outside of your home country, somewhere a law prohibiting bribery and corruption will cover your actions. Even if you are not covered by the FCPA, the UK Bribery Act or the Clean Company Act, if you are doing business in a local country you can still be subject to prosecution under its domestic anti-bribery laws. This means that there will be greater enforcement going forward and greater cooperation between enforcement agencies.

For businesses the only response to this plethora of new laws is to implement and enhance a best practices anti-bribery/anti-corruption compliance program and there are several examples that companies can follow to do so. In the US, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) provided their suggestions with their Ten Hallmarks of an Effective Compliance Program; the UK Ministry of Justice (MOJ) has provided commentary on the Six Principles of an Adequate Procedures compliance program and the Organization of Economic Cooperation and Development (OECD) has put forth its Good Practice Guidance on Internal Controls, Ethics, and Compliance.

All of these anti-bribery/anti-corruption regimes set forth easily digested concepts that a company could implement. However, there must be more than simply a paper program in place. A company must actually do compliance for it to be effective. By making compliance a part of normal business practices, it will be possible to prevent, detect and then remediate any bribery or corruption issues that may arise.

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, 2015

GSK in China-the Book

The year 2013 brought the anti-corruption compliance world a new situation as the Chinese government aggressively investigated, for the first time, a western company for bribery and corruption of Chinese citizens in China, based on Chinese domestic law. The company, GlaxoSmithKline PLC (GSK), was convicted of corruption in September 2014. I wanted to put together, in one volume, the background facts, information from the trials and conviction and add some of the most significant lessons to be learned for any compliance practitioner going forward. For these reasons, I am pleased to announce the publication of my latest book, GSK in China: Anti-Bribery Enforcement Goes Global which is now available through Amazon.com.

I believe that GSK will be a watershed in the global fight against bribery and corruption. Behavior and conduct, which was illegal under Chinese law but previously tolerated and even accepted by Chinese government officials, quickly became a quagmire that the company was caught in when charges of corruption were leveled against them last year. David Pilling, writing an article in the Financial Times (FT), entitled “Why corruption is a messy business”, said “Multinationals are discovering that there is only one thing worse than operating in a country where corruption is rampant: operating in one where corruption was once rampant – but is no longer tolerated.” GSK became the first western company to pay the piper when this new tune began to play.

When it began, it was not it clear why China’s Communist Party Chief Xi Jinping began his anti-corruption push. Some speculated that it was an attack on western companies for more political reasons that economic reasons. Others took the opposite tack that the storm, which broke with the bribery and corruption investigation of GSK, was China’s attack on western companies to either hide or help fix problems endemic to the Chinese economic system. My take is that his campaign has a different purpose but incorporates both political and economic reasons. That purpose is that Xi has recognized something that the US government officials, and most particularly the DOJ, have been preaching for some time. That is, the insidiousness of corruption and its negative effects on an economic system.

Xi and China have realized that corruption is a drain on the Chinese economic system. Publications as diverse as the Brookings Institute to the Wall Street Journal (WSJ) have noted that one of the reasons for the anti-corruption campaign is to restore the Chinese public’s faith in the ruling Communist Party. Bob Ward, writing in the WSJ article, entitled “The Risks in China’s Push to Root Out Wrong”, said, “China’s anticorruption drive began in late 2012 as a way to cleanse the ruling Communist Party and convince ordinary Chinese that the system isn’t rigged against them. Investigators are targeting some of China’s most powerful officials and disciplining tens of thousands of lower-echelon officials who party investigators contend got used to padding their salaries.” Cheng Li and Ryan McElveen, writing online for Brookings in an article entitled “Debunking Misconceptions About Xi Jinping’s Anti-Corruption Campaign”, wrote, “If there were ever any doubts that Xi could restore faith in a party that had lost trust among the Chinese public, many of those doubts have been dispelled by the steady drumbeat of dismissals of high-ranking officials since he took office.”

There have already been demonstrated economic benefits to China’s anti-corruption campaign. In September, Bloomberg reported that China’s fight against bribery and corruption could boost economic growth, generating an additional $70 billion for the budget, in summarizing economists’ forecasts. An article in the online publication Position and Promotions, reported that the bribery “could trigger a 0.1-0.5 percent increase in the world’s second-biggest economy, equivalent to $70 billion dollars.” This crackdown should also be welcomed by western companies, as “it could also benefit foreign companies operating on the Chinese market, who have experienced the negative effects of the omnipresent palm-greasing, according to Joerg Wuttke, president of European Chamber of Commerce in China.”

GSK’s actions during the pendency of this entire series of events will long be studied as one NOT to follow when faced with allegations of corruption and bribery. GSK sealed its own fate when they, in the face of credible allegations of bribery and corruption by a well-informed whistleblower, performed an investigation and came up with no evidence to support such allegations. It took the Chinese government less than 30 days to not only develop credible evidence but also secure confessions from GSK employees topped off with a very public corporate apology.

As with any good scandal there is a sex angle with a sex tape surfacing involving the GSK China Country Manager. This sex tape and GSK’s attempts to investigate its provenance led to the conviction of a husband and wife investigators, who are a UK and US citizen, in a trial for violations of Chinese privacy laws.

At the close this phase of GSK’s bribery and corruption saga in China, GSK in China – The Book, provides some thoughtful reflection, which you may be able to put to good use in your compliance program going forward. For the compliance practitioner there have been many specific lessons to be learned from GSK’s missteps. I think the clearest lesson is that the only real hope that a company has in today’s world is an effective, best practices anti-corruption compliance program. Whether it is designed to help a company comply with the US Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption legislation, really does not matter. It is the only, and I mean only, chance your company will have when an issue in some far-flung part of the world splashes your company’s name across the world’s press.

But there may also be cause for celebration to those who have long preached against the evils of corruption, whether it is for economic reasons or for those who view the fight against anti-corruption as a part of the fight against terrorism. For if China is attacking domestic corruption, I believe that will lead other countries to do so as well. So while GSK may well suffer going forward, the fight against global bribery and corruption may just have moved a few feet forward.

For a copy of my new book GSK in China: Anti-Bribery Enforcement Goes Global in bound version, click here.

For a copy of my new book GSK in China: Anti-Bribery Enforcement Goes Global in Kindle version, click here.

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, 2015

Critiquing FCPA Enforcement and the GSK Domestic Corruption Conviction

Recently the FCPA Professor posted a blog, entitled “Look in the Mirror Moments”, in which he used written commentary by the US Secretary of the Treasury to the Chinese government about the Chinese governments anti-trust investigations as a mechanism to explore critiques of Foreign Corrupt Practices Act (FCPA) enforcement. In this post, he compared certain aspects of FCPA enforcement to the Chinese corruption enforcement action against GlaxoSmithKline PLC (GSK). Leaving aside the differences in anti-trust enforcement (price-fixing, monopolistic behavior and illegal collusion) and anti-corruption enforcement (bribery), I wanted to review his critiques through the prism of the known facts of the GSK enforcement action.

The FCPA Professor had the following comments about FCPA enforcement, in comparison with the Chinese corruption enforcement action against GSK. He said,

“Without in any way trying to comprehensively compare the overall U.S. legal system to the overall Chinese legal system, the following attributes of FCPA enforcement must at least be acknowledged. 

The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action. 

As to the swiftness of FCPA enforcement actions, one can only assume that the majority of general counsels and board of directors of companies under FCPA scrutiny would be jumping for joy if the scrutiny – from start to finish – would resolve itself in 15 months rather than the typical 3-5 years (and in some instances more) of FCPA scrutiny lingering.”

The difficulty I have with both of these points is that one cannot separate the Chinese enforcement action against GSK from the Chinese legal system that produced it. Let’s start with the ‘jumping for joy’ prong. The initial difference to note is that the Chinese enforcement action was a domestic prosecution based upon Chinese domestic law for bribery and corruption of Chinese. It was not a US (or UK) company violating US (or UK) laws. This means that the relevant documents and witness were in the locality where the investigation was performed. Even when a key witness, GSK China Country Manager Mark Reilly was in the UK, he voluntarily returned to China to give evidence but was prevented from leaving the country without being charged with a crime. So as far as is known, there were no government-to-government requests for information, no Letters Rogatory or use of any other international discovery mechanism to obtain evidence.

Moreover, the procedural protections in place under US (and UK) criminal procedure simply do not exist in China. There is no right to counsel, no right against self-incrimination, no right to confront witness and not even a right to know what the charges against you might be. These lack of rights were certainly borne out in the speed in which the Chinese investigative authorities were able to obtain evidence and public confessions from GSK principals involved in the bribery and corruption. The first 30-day timeline of the GSK investigation went as follows:

• June 28, 2013 – Local Police announced they have place GSK officials under investigation for economic crimes.
• July 11, 2013 – Public Security Ministry issued statement accusing GSK of bribery.
• July 15 , 2013 – Four senior company execs ‘detained’. Finance chief barred from leaving country.
• July 16, 2013 – GSK General Counsel (GC) placed under ‘house arrest’ along with 30 other employees. One of the four GSK China executives who were detained, admited to bribery allegations on Chinese state television.
• July 22, 2013 – GSK formally apologized for breaking Chinese law regarding domestic bribery and corruption.
• July 26, 2013 – Peter Humphrey, a UK citizen and his wife, a naturalized US citizen, both hired by GSK in an ancillary matter related to the GSK corruption scandal were arrested but not told of the charges against them.

A little over one year later, in July, 2014 the trial of Humphrey and his wife was announced. Orignially it was to be held in secret with both Humphrey and his wife still not told of the formal charges against them. However after diplomatic protests by both the US and UK governments, Humphrey and his wife were both convicted and sentenced in an open trial, albeit lasting only one day, on August 8, 2014. The charges against them were announced at trial. Thereafter, GSK pled guilty in a secret one-day trial GSK was fined approximately $491MM and China Country Manager Mark Reilly and four other GSK China business unit executives were found gulity. They were all sentenced to jail but given suspended sentences.

How did the Chinese government develop its evidence so quickly? One of the defendant’s, admitted, on state run televison, his involvement in the bribery scheme only 18 days after the investigation was announced by Chinese authorities. Indeed, GSK itself made a public apology only 24 days after the announcement by the Chinese authorities it was under investigation. We now know that GSK was informed by a whistleblower of allegations of bribery and corruption as early as January 2013 yet in June GSK announced it had not found anything to substantiate these allegations.

I believe the answer is found in the differences in the Chinese and US legal systems. It all starts with the following: in China you are presumed guilty while in the US (and the UK), you are presumed innocent until proven guilty. In an article in the New York Times (NYT), entitled “Presumed Guilty in China’s War on Corruption”, Andrew Jacobs and Chris Buckley wrote that the “war on corruption often operates beyond the law in a secret realm of party-run agencies”. The process “Known as Shuanggui, it is a secretive, extralegal process that leaves detainees cutoff from lawyers, associates and relatives.” Moreover, even as a case moves through the Chinese criminal justice system, defendants’ counsel “have limited access to evidence, witnesses, and their clients.” It does not get any better when a defendant actually goes to court because “Lawyers say Chinese courts rarely allow them to call defense witnesses, while prosecutors frequently withhold cruical evidence.” Finally, of the 8,110 officials charged with corruption “in the first half of this year, 99.8 percent were convicted”. To this rather amazing trial court conviction rate, I would add the the prosecution does even better on appeal, never losing to a convicted defendant.

Does that sound like a system in which you would jump for joy if you were caught up in, even knowing that the time from announcment of investigation until 99.8% chance of conviction awaited you? Even if the government investigation only took 14 months? In the US, corporations have the same rights as individuals at trial; to cross-examine witness, to be made aware of the charges against it, those charges must be brought with specficity, right to counsel, right to an open trial and right to appeal. These rights are all enshrined in the US Constitution. Those rights are not present for individuals or corporations under Chinese law or jurisprudence.

But the FCPA Professor also critiqued the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in FCPA enforcements with the following observation: The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.When a company enters into negotiation with the DOJ and SEC it is with legal counsel in tow. Even if we in the general public are not privy to these negotiations over the terms and conditions of enforcement actions I am confident that there is some give and take. Further, while I only have personal knowledge of one negotiation for the specific terms of a Deferred Prosecution Agreement (DPA), the lawyer representing the company made clear it was a negotiation. It was not a Diktat with sentencing simply pronounced by the DOJ. Does the office which handles the investigation also handle the settlement negotiation? Yes but that is what prosecutors do each and every day in every city, county, town, hamlet, state and federal jurisdiction in this country.

Just as it takes two to tango, it takes two to negotiate. The DOJ does not negotiate with itself. Another party is sitting across the table and that other party is the company involved in the FCPA investigation. Why is that company there in the room negotiating? Because the company has assessed its interest and determined that it would be better off settling than going to trial. This is in the face of DOJ failures in the trial court in the Gun Sting cases, the O’Shea trial and the trial court overturning the verdict in the Lindsey Manufacturing conviction. Simply because there is a negotiation between the DOJ and a private party does not make it some nefarious process, even if the prosecutors hold the upper hand.

As far as the fines and penalites, there has been nothing to suggest the basis of the $491MM fine assessed against GSK. That amount is a bit less than the amounts initially reported that GSK China paid out as bribes, somewhere over $500MM. At least in the US, there are the Sentence Guidelines which form some basis of the calculation. Of course there is always some prosecutorial discretion to lessen a fine or penalty below the suggested amount. We have seen that occur this year with the HP enforcement action and recently Asst. Attorney General Leslie Caldwell suggested that Alcoa could have been fined over $1bn for its conduct, while the actual fine was $384MM. It is appropriate for prosecutors to have such discretion.

While the DOJ is also critiqued that DPAs (and Non-Prosecution Agreement [NPAs]) are essentially the same as going to trial with a near 100% success rate, I think this belies the number of declinations that the DOJs gives out. Unfortunately (and here the FCPA Professor and I do agree); there is not enough information given out about declinations; either regarding the raw numbers or the specific reasons for a declination. Only if a company agrees or is required to make such information public does it become known. Nevertheless, there is the recent example of Layne Christensen, which received a declination. In an article in Compliance Week, entitled “How Two Companies Got Regulators to Drop FCPA Charges”, Jaclyn Jaeger reported on the reasons the company sustained this result of receiving a declination through interviews with Christensen GC, Steve Crooke, its Chief Compliance Officer (CCO), Jennafer Watson and its outside counsel Russ Berland. Jaeger detailed the specific steps the company took and we can all see the effect it had upon the DOJ, through the declination to prosecute the company.

The debate about the costs of FCPA enforcement actions, the proper role of DPAs/NPAs and length of time of investigations is a healthy one and living in the open society that we have in the US, one that we will continue to have. Since I am not a prosecutor (or ex-prosecutor), I cannot look in the mirror at FCPA enforcement but I can review the facts of the DOJ and SEC’s FCPA enforcement, contrasted with the Chinese domestic bribery and corruption proseuction of GSK and believe that there is no basis for comparing the two systems, as they are so different in too many fundamental aspects.

I can however say one thing with absolute certainly; wherever you do want to be, a Chinese jail is not high on the list.

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, 2014

GSK as a Watershed in the International Fight Against Bribery and Corruption

GlaxoSmithKline PLC (GSK) may well be a watershed in the global fight against bribery and corruption. Behavior and conduct, which was illegal under Chinese law but previously tolerated and even accepted by Chinese government officials, quickly became a quagmire that the company was caught in when charges of corruption were leveled against them last year. Many westerners were skeptical about the claims made against GSK and its head of China operations, Mark Reilly. That is one of the problems in paying bribes to government officials; it is always illegal under domestic law. David Pilling, writing an article in the Financial Times (FT) entitled “Why corruption is a messy business”, said “Multinationals are discovering that there is only one thing worse than operating in a country where corruption is rampant: operating in one where corruption was once rampant – but is no longer tolerated.”

When it began, it was not it clear why China’s Communist Party Chief Xi Jinping began his anti-corruption push. Some speculated that it was an attack on western companies for more political reasons that economic reasons. Others took the opposite tack that the storm, which broke with the bribery and corruption investigation of GSK, was China’s attack on western companies to either hide or help fix problems endemic to the Chinese economic system. My take is that his campaign has a different purpose but incorporates both political and economic reasons. That purpose is that Xi has recognized something that the US government officials and most particularly the Department of Justice (DOJ) have been preaching for some time. That is, the insidiousness of corruption and its negative effects on an economic system.

Xi and China have realized that corruption is a drain on the Chinese economic system. Publications as diverse as the Brookings Institute to the Wall Street Journal (WSJ) have noted that one of the reasons for the anti-corruption campaign is to restore the Chinese public’s faith in the ruling Communist Party. Bob Ward, writing in the WSJ article entitled “The Risks in China’s Push to Root Out Wrong”, said, “China’s anticorruption drive began in late 2012 as a way to cleanse the ruling Communist Party and convince ordinary Chinese that the system isn’t rigged against them. Investigators are targeting some of China’s most powerful officials and disciplining tens of thousands of lower-echelon officials who party investigators contend got used to padding their salaries.” Cheng Li and Ryan McElveen, writing online for Brookings, in an article entitled “Debunking Misconceptions About Xi Jinping’s Anti-Corruption Campaign”, wrote, “If there were ever any doubts that Xi could restore faith in a party that had lost trust among the Chinese public, many of those doubts have been dispelled by the steady drumbeat of dismissals of high-ranking officials since he took office.”

But the economic reasons behind the anti-corruption campaign are equally important. One of the more interesting articulations came from one disgraced former Chinese government official, who was one of the earliest senior officials to be charged with corruption. In a WSJ article by James T. Areddy, entitled “Chinese Ex-Official Admits to Corruption”, he wrote about the trial of Liu Tienan, the “former head of the National Energy Administration and senior director in the National Development Reform Commission” who had been arrested in May 2013. His trial finally came around in September 2014. At his trial he made some rather extraordinary statements. Areddy wrote that “Liu testified that reducing official power is key to curbing corruption: “The major point, which is based on my own experience, is to give the market a great deal of power to make decisions.”” But Liu did not end there, “as he explained his view that China’s state bureaucracies are too powerful and entrepreneurs are too weak. “Approvals should be developed in a system, rather by an individual’s actions. This would help prevent abuse of power for personal self-interest.””

Whether or not Liu thought those statements up on himself, a smart defense lawyer suggested he make them to reduce his sentence, or the Chinese government told him to say it as his role in the well-known show trials of the Chinese justice system; it really does not matter. That is one of the most incredible statements I have ever heard of coming out of anything close to an official Chinese statement or proceeding. Think about it; first Liu is saying that the Adam Smith’s ‘invisible hand’ of the market should be governing market decisions. Next, he speaks against the arbitrary nature in China for entrepreneurs in giving approval about how businesses can expand and grow in China. This arbitrary process should be replaced with objective criteria. It is almost if Lui is channeling his inner FCPA Professor when he speaks against artificial barriers to market entry. Finally, Liu attacks the small-mindedness of bureaucratic mentality in their use of power for self-interest.

There have already been demonstrated economic benefits to China’s anti-corruption campaign. In September, Bloomberg reported that China’s fight against bribery and corruption could boost economic growth, generating an additional $70 billion for the budget, in summarizing economists’ forecasts. An article in the online publication Position and Promotions, reported that the bribery “could trigger a 0.1-0.5 percent increase in the world’s second-biggest economy, equivalent to $70 billion dollars.” This crackdown should also be welcomed by western companies, as “it could also benefit foreign companies operating on the Chinese market, who have experienced the negative effects of the omnipresent palm-greasing, according to Joerg Wuttke, president of European Chamber of Commerce in China.” He was further quoted as saying, “It takes the stress away. You’re not afraid that somebody gets an order because he found a better champagne or something like that. It’s not Singapore yet, but it’s a very positive development”.

As we close this phase of GSK’s saga, I think some time for reflection is appropriate. For the compliance practitioner there have been many specific lessons to be learned from GSK’s missteps. However I think the clearest lesson is that the only real hope that a company has into today’s world is an effective, best practices anti-corruption compliance program. Whether it is designed to help a company comply with the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption legislation, it really does not matter. It is the only, and I mean only, chance your company will have when an issue in some far-flung part of the world splashes your company’s name across the world’s press.

But there may also be cause for celebration to those who have long preached against the evils of corruption, whether it is for economic reasons or for those who view the fight against anti-corruption as a part of the fight against terrorism. For if China is attacking domestic corruption, I believe that will lead other countries to do so as well. We are already seeing stirrings in India under new President Modi. So while GSK may well suffer going forward, the fight against global bribery and corruption may just have moved a few feet forward.

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, 2014

West Side Story and GSK In China – Board Oversight and Tone in the Middle

Yesterday, I celebrated the anniversary of one of America’s cultural lows. But today, I am extremely pleased to open with exactly the opposite, that being one of America’s greatest gifts to the performing arts. For on this day in 1957, the musical West Side Story premiered on Broadway. There are so many facets to one of the great, even greatest, works of musical theater. Leonard Bernstein penned the score, Stephen Sondheim wrote the lyrics, Jerome Robbins choreographed the dance and the story was by Arthur Laurents, inspired by Romeo and Juliet.

There are many great songs, dances and moments in the play. Most of us (at least of my age) outside New York were introduced to the play via television where it ran for one showing in 1971. The show never toured until the 2000s. When I finally got to see the stage production I was absolutely blown away. I had never seen anything like and it and I will never forget the 5-counter point singing by Tony, Maria, Anita, Bernardo and the Sharks, and Riff and the Jets, as they all anticipate the events to come that night in the song Tonight’s Quintet. The show truly is one of America’s gems.

I thought about the continuing appeal of West Side Story as a musical and why the story continues to resonate with the American people when I continued to consider some of the lessons learned from the GlaxoSmithKline PLC (GSK) matter in China. Today’s areas for reflection should be the role of a company’s Board of Directors and the second is the ‘tone in the middle’. While we have not heard from the GSK Board on this case, it has become clear that the GSK Board was aware of both the anonymous whistleblower allegations and the release of the tape of the GSK China Country Manager and his girlfriend. One of the lessons learned from the GSK scandal is that a Board must absolutely take a more active oversight role not only when specific allegations of bribery and corruption are brought forward but also when companies are operating in high risk environments. Further how can a company move its message of doing business ethically and in compliance down the employee chain.

In a NACD Directorship article, entitled “Corruption in China and Elsewhere Demands Board Oversight”, authors Eric Zwisler and Dean Yoost noted that as “Boards are ultimately responsible for risk oversight” any Board of a company with operations in China “needs to have a clear understanding of its duties and responsibilities under the FCPA and other international laws, such as the U.K. Bribery Act”. Why should China be on the radar of Boards? The authors reported, “20 percent of FCPA enforcement actions in the past five years have involved business conduct in China. The reputational and economic ramifications of misinterpreting these duties and responsibilities can have a long-lasting impact on the economic and reputation of the company.”

The authors understand that corruption can be endemic in China. They wrote, “Local organizations in China are exceedingly adept at appearing compliant while hiding unacceptable business practices. The board should be aware that a well-crafted compliance program must be complemented with a thorough understanding of frontline business practices and constant auditing of actual practices, not just documentation.” Further, “the management cadence of monitoring and auditing should be visible to the board.” All of the foregoing would certainly apply to GSK and its China operations.

Moreover, the FCPA Guidance makes clear that resources and their allocation are an important part of any best practices compliance program. So if that risk is perceived to be high in a country such as China, the Board should follow the prescription in the Guidance, which states “the amount of resources devoted to compliance will depend on the company’s size, complexity, industry, geographical reach, and risks associated with the business. In assessing whether a company has reasonable internal controls, DOJ and SEC typically consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.”

To help achieve these goals, the authors suggested a list of questions that they believe every director should ask about a company’s business in China.

• How is “tone at the top” established and communicated?
• How are business practice risks assessed?
• Are effective standards, policies and procedures in place to address these risks?
• What procedures are in place to identify and mitigate fraud, theft, and corruption?
• What local training is conducted on business practices and is it effective?
• Are incentives provided to promote the correct behaviors?
• How is the detection of improper behavior monitored and audited?
• How is the effectiveness of the compliance program reviewed and initiated?
• If a problem is identified, how is an independent and thorough investigation assured?

Third parties generally present the most risk under a Foreign Corrupt Practices Act (FCPA) compliance program and are believed (at least anecdotally) to comprise over 90 percent of reported FCPA cases, which subsequently involve the use of third-party intermediaries such as agents or consultants. But this is broader than simply third party agents because any business opportunity in China will require some type of business relationship.

One of the major failings of the GSK Board was that it apparently did not understand the actual business practices that the company was engaging in through its China business unit. While $500MM may not have been a material monetary figure for the Board to consider; the payment of such an amount to any third party or group of third parties, such as Chinese travel agencies, should have been raised to the Board. All of this leads me to believe that the GSK Board was not sufficiently engaged. While one might think a company which had received a $3bn fine and was under a Corporate Integrity Agreement (CIA) for its marketing sins might have sufficient Board attention; perhaps legal marketing had greater Board scrutiny than doing business in compliance with the FCPA or UK Bribery Act. The Board certainly did not seem to understand the potential financial and reputational impact of a bribery and corruption matter arising in China. Perhaps they do now but, for the rest of us, I think the clear lesson to be learned is that a Board must increase oversight of its China operations from the anti-corruption perspective.

GSK Chief Executive Officer (CEO) Sir Andrew Witty has certainly tried to say all of the right things during the GSK imbroglio on China. But did that message really get down into to the troops at GSK China? Moreover, did that message even get to middle management, such as the GSK leadership in China? Apparently not so, one of the lessons learned is moving the Olympian Pronouncements of Sir Andrew down to lower levels on his company. Just how important is “Tone at the Top”? Conversely, what does it say to middle management when upper management practices the age-old parental line of “Don’t do as I do; Do as I say”? In his article entitled, “Ethics and the Middle Manager: Creating “Tone in The Middle” Kirk O. Hanson, listed eight specific actions that top executives could engage in which demonstrate a company’s and their personnel’s commitment to ethics and compliance. The actions he listed were:

1. Top executives must themselves exhibit all the “tone at the top” behaviors, including acting ethically, talking frequently about the organization’s values and ethics, and supporting the organization’s and individual employee’s adherence to the values.
2. Top executives must explicitly ask middle managers what dilemmas arise in implementing the ethical commitments of the organization in the work of that group.
3. Top executives must give general guidance about how values apply to those specific dilemmas.
4. Top executives must explicitly delegate resolution of those dilemmas to the middle managers.
5. Top executives must make it clear to middle managers that their ethical performance is being watched as closely as their financial performance.
6. Top executives must make ethical competence and commitment of middle managers a part of their performance evaluation.
7. The organization must provide opportunities for middle managers to work with peers on resolving the hard cases.
8. Top executives must be available to the middle managers to discuss/coach/resolve the hardest cases.

What about at the bottom, as in remember those China unit employees who claimed they were owed bonuses because their bosses had instructed them to pay bribes? Well if your management instructs you to pay bribes that is a very different problem. But if your company’s issue is how to move the message of compliance down to the bottom, Dawn Lomer, Managing Editor at i-Sight Software, provided some concrete suggestions in an article in the SCCE magazine, entitled “An ethical corporate culture goes beyond the code”, where she wrote that that the unofficial message which a company sends to its employees “is just as powerful – if not more powerful – than any messages carried in the code of conduct.” Lomer suggested that a company use “unofficial channels” by which your company can convey and communicate its message regarding doing business in an ethical manner and “influence employee behavior across the board.” Her suggestions were:

1. Reward for Integrity – Lomer writes that the key is to reward employees for doing business in an ethical manner and that such an action “sends a powerful message without saying a word.”
2. The three-second ethics rule – It is important that senior management not only consistently drives home the message of doing business ethically but they should communicate that message in a short, clear values statement.
3. Environmental cues – Simply the idea that a company is providing oversight on doing business ethically can be enough to modify employee behavior.
4. Control the images – It is not all about winning but conducting business, as it should be done.
5. Align Messages – you should think about the totality of the messages that your company is sending out to its employees regarding doing business and make sure that all these messages are aligned in a way that makes clear your ethical corporate culture clear. 

The GSK case will be in the public eye for many months to come. Both the UK Serious Fraud Office (SFO) and US authorities have open investigations into the company. Just as the five counter-point singing or the rooftop symphonic dance scene to the song America demonstrates the best of that art form; you can draw lessons from GSK’s miss-steps in China now for implementing or enhancing your anti-corruption compliance program going forward now.

And while you are ending your week of considering GSK and its lessons learned for your compliance program, crank up your speakers to 11 and listen to some five counter-point singing the movie version of the Tonight Quintet, by clicking here.

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, 2014

Come On Get Happy – The Partridge Family and GSK’s Internal Investigation

Today we celebrate an anniversary of one of the all-time lows in the American cultural milieu; for on this date in 1970, the television show The Partridge Family appeared on the ABC Television network. Symbiotically created from the ashes of the television show The Monkees and the real-life family pop group The Cowsills; The Partridge Family starred, as its TV-mom, Oscar winning actress Shirley Jones and as her eldest TV son, and teenaged girl heartthrob, her real-life stepson David Cassidy. Proving once again that 1960s and 1970s television really was largely a cultural wasteland, the family romped and sang their way across a never-ending sunny southern California in multi-colored converted school bus. While the episodes themselves were as close to putrid as one can get, they did have better success with their lip-synced music from each episode. One song, I Think I Love You, reached No. 1 on the Billboard Pop Charts that year.

I thought about this strange convergence of history and culture (or perhaps the lack of culture) when considering more lessons learned from the GlaxoSmithKline PLC (GSK) corruption scandal. I was particularly focused on GSK’s response to at least two separate reports from an anonymous whistleblower (brilliantly self-monikered as GSK Whistleblower) of allegations of bribery and corruption going on in the company’s China business unit. One of the clear lessons from the GSK matter is that serious allegations of bribery and corruption require a serious corporate response. Not, as GSK appears to have done, in their best Inspector Clouseau imitation, not being able to find the nose on their face.

Further, and more nefariously, was GSK’s documented treatment of and history with internal whistleblowers. One can certainly remember GSK whistleblower Cheryl Eckard. A 2010 article in The Guardian by Graeme Wearden, entitled “GlaxoSmithKline whistleblower awarded $96m payout”, where he reported that Eckard was fired by the company “after repeatedly complaining to GSK’s management that some drugs made at Cidra were being produced in a non-sterile environment, that the factory’s water system was contaminated with micro-organisms, and that other medicines were being made in the wrong doses.” She later was awarded $96MM as her share of the settlement of a Federal Claims Act whistleblower lawsuit. Eckard was quoted as saying, “It’s difficult to survive this financially, emotionally, you lose all your friends, because all your friends are people you have at work. You really do have to understand that it’s a very difficult process but very well worth it.” So to think that GSK may simply have been SHOCKED, SHOCKED, that allegations of corruption were brought by an internal whistleblower may well be within the realm of accurate.

There would have seemed to have been plenty of evidence to let the company know that something askance was going on in its Chinese operations. The international press was certainly able to make that connection early on in the scandal. An article in the Financial Times (FT), entitled “China accuses GSK of bribery” by Kathrin Hille and John Aglionby, reported “GSK said it had conducted an internal four-month investigation after a tip-off that staff had bribed doctors to issue prescriptions for its drugs. The internal inquiry found no evidence of wrongdoing, it said.” Indeed after the release of information from the Chinese government, GSK said it was the first it had heard of the investigation. In a prepared statement, quoted in the FT, GSK said ““We continuously monitor our businesses to ensure they meet our strict compliance procedures – we have done this in China and found no evidence of bribery or corruption of doctors or government officials.” However, if evidence of such activity is provided we will act swiftly on it.”

Laurie Burkitt, reporting in the Wall Street Journal (WSJ) in an article entitled “China Accuses Glaxo 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. The strategy was called “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.”” 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.

I have often written about the need for a company to have an investigative protocol in place so that it is not making up its process in the face of a crisis. However the GSK matter does not appear to be that situation. It would not have mattered what investigation protocol that GSK followed, it would seem they were determined not to find any evidence of bribery and corruption in their China business unit. So the situation is more likely that GSK should have brought in a competent investigation expert law firm to head up their investigation in the face of this anonymous whistleblower’s allegations.

In an ACC Docket article, entitled “Risks and Rewards of an Independent Investigation”, authors James McGrath and David Hildebrandt discuss the use of specialized outside counsel to lead an independent internal investigation as compliance and ethics best practices. This is based upon the US Sentencing Guidelines, under which a scoring system is utilized to determine what a final sentence should be for a criminal act. Factors taken into account include the type of offense involved and the severity of the said offense, as well as the harm produced. Additional points are either added or subtracted for mitigating factors. One of the mitigating factors can be whether an organization had an effective compliance and ethics program. McGrath and Hildebrandt argue that a company must have a robust internal investigation.

McGrath and Hildebrandt take this analysis a step further in urging that a company, when faced with an issue such as an alleged Foreign Corrupt Practices Act (FCPA) violation, should engage specialized counsel to perform the investigation. There were three reasons for this suggestion. The first is that the Department of Justice (DOJ) would look towards the independence and impartiality of such investigations as one of its factors in favor of declining or deferring enforcement. If in-house counsel were heading up the investigation, the DOJ might well deem the investigative results “less than trustworthy”.

Matthew Goldstein and Barry Meier discussed the need for independence from the company being investigated in an article the New York Times (NYT) about the General Motors (GM) internal investigation entitled “G.M Calls the Lawyers”. They quoted William McLucas, a partner at WilmerHale, who said, “If you are a firm that is generating substantial fees from a prospective corporate client, you may be able to come in and do a bang-up inquiry. But the perception is always going to be there; maybe you pulled your punches because there is a business relationship.” This is because if “companies want credibility with prosecutors and investors, it is generally not wise to use their regular law firms for internal inquiries.” Another expert, Charles Elson, a professor of finance at the University of Delaware who specializes in corporate governance, agreed adding, “I would not have done it because of the optics. Public perception can be affected by using regular outside counsel.””

Adam G. Safwat, a former deputy chief of the fraud section in the Justice Department, said that the key is “Prosecutors expect an internal investigation to be an honest assessment of a company’s misdeeds or faults, “What you want to avoid is doing something that will make the prosecutor question the quality of integrity of the internal investigation.”” Also quoted was Internal Investigations Blog editor, Jim McGrath who said, “A shrewd law firm that gets out in front of scandal can use that to its advantage in negotiating with authorities to lower penalties and sanctions. There is a great incentive to ferret out information so they can spin it.”

The GSK experience in China will inform compliance practitioners for years to come with the company’s plethora of miss-steps. Perhaps one day the company will become as successful as The Partridge Family and they can open their annual meeting with The Partridge Family Theme – Come On Get Happy!

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, 2014

Lessons from GSK in China – Internal Controls, Auditing and Monitoring

One of the great things about writing your own blog is that sometimes you can get going on a subject and just explore it. While I think I might sometimes get carried away when I delve into a topic, I certainly learn much while doing so. This week appears to be such a situation where in studying and researching the GlaxoSmithKline PLC (GSK); I find that the case has much more to inform the compliance practitioner. So I am going to try and tie together some of the major lessons learned from the GSK Chinese enforcement action for the remainder of the week and present to you how such lessons might assist you in designing, implementing or upgrading a best practices compliance program. Today I want to look at internal controls, auditing and monitoring.

One of the questions that GSK will have to face during the next few years of bribery and corruption investigations is how an allegedly massive bribery and corruption scheme occurred in its Chinese operations? The numbers went upwards of $500MM, which coincidentally was the amount of the fine levied by the Chinese court on GSK. 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 (PwC) as its outside auditor in China. Nevertheless, he noted, “GSK bosses were blindsided by police allegations of massive corruption involving travel agencies used to funnel bribes to doctors and officials.”

Internal Controls

Where were the appropriate internal controls? You might think that a company as large as GSK and one that had gone through the ringer of a prior Department of Justice (DOJ) investigation resulting in charges for off-label marketing and an attendant Corporate Integrity Agreement (CIA) might have such controls in place. It was not as if the types of bribery schemes in China were not well known. In an article in the Financial Times (FT), 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. The authors 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 discussed the two primary methods of paying bribes in China: the direct incentives and indirect incentives method. Anderlini and Mitchell reported, “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.””

It would be reasonable to expect that internal controls over gifts would be designed to ensure that all gifts satisfy the required criteria, as defined and interpreted in Company policies. It should fall to a Compliance Officer to finalize and approve a definition of permissible and non-permissible gifts, travel and entertainment and internal controls will follow from such definition or criteria set by the company. These criteria would include the amount of the spend, localized down into increased risk such the higher risk recognized in China. Within this context, noted internal controls expert Henry Mixon has suggested the following specific controls. (1) Is the correct level of person approving the payment / reimbursement? (2) Are there specific controls (and signoffs) that the gift had proper business purpose? (3) Are the controls regarding gifts sufficiently preventative, rather than relying on detect controls? (4) If controls are not followed, is that failure detected?

Auditing Lessons Learned

Following Mixon’s point 4 above, what can or should be a company’s response if one country’s gifts, travel and entertainment expenses were kept ‘off the books’? This is where internal audit or outside auditors are critical. Hirschler quoted an 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.”” 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 medical conferences, such as to make physicians aware of products and the latest 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’s auditors 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.”

Another issue for auditing is 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.

Ongoing Monitoring

A final lesson learned for today is monitoring. As Stephen Martin often says, many compliance practitioners confuse auditing with monitoring. Monitoring is a commitment to reviewing and detecting compliance programs in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis. Auditing is a more limited review that targets a specific business component, region, or market sector during a particular timeframe in order to uncover and/or evaluate certain risks.

Here I want to focus on two types of ongoing monitoring. The first is relationship monitoring, performed by companies such Boston-based Catelas, through software products. It was reported in a Wall Street Journal (WSJ) article, entitled “Glaxo Probes Tactics Used to Market Botox in China”, that internal GSK emails showed the company’s China sales staff were instructed by local managers to use their personal email addresses to discuss marketing strategies related to Botox. The Catelas software imports and analyzes communications data, like email, IM, telephony and SMTP log files from systems such as Microsoft Exchange Servers and Lotus Notes. The software then leverages social network analysis and behavioral science algorithms to analyze this communications data. These interactions are used to uncover and display the networks that exist within companies and between the employees of companies. Additionally, relationships between employees and external parties such as private webmail users, competitors and other parties can be uncovered.

The second type of monitoring is transaction monitoring. Generally speaking, transaction monitoring involves review of large amounts of data. The analysis can be compared against an established norm which is derived either against a businesses’ own standard or an accepted industry standard. If a payment, distribution or other financial payment made is outside an established norm, thus creating a red flag that can be tagged for further investigation.

GSK’s failure in these three areas now seems self-evident. However, the company’s foibles can be useful for the compliance practitioner in assessing where their company might be in these same areas. Moreover, as within any anti-corruption enforcement action, you can bet your bottom dollar that the regulators will be assessing best practices going forward based upon some or all of GSK’s miss-steps going forward.

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, 2014

Billy the Kid Begins and the GSK China Verdict

According to This Day in History, 139 years ago today, Billy the Kid was arrested for the first time, for theft. Billy the Kid was believed to have been born in New York City and was later taken out west by his mother. He was arrested on September 23, 1875 when he was found in possession of clothing and firearms that had been stolen from a Chinese laundry owner. Two days after he was placed in jail, the teenager escaped up the jailhouse chimney. From that point on Billy the Kid was a fugitive. He later broke out of jail and roamed the American West, eventually earning a reputation as an outlaw and murderer, allegedly committing 21 murders.

I thought about the start of Billy the Kid’s outlaw career and more particularly how it ended as I was thinking through some of the issues surrounding the GlaxoSmithKline PLC (GSK) bribery conviction in China last week. For instance, did GSK obtain a negotiated settlement with the Chinese government when it was announced that the company pled guilty to bribery and corruption and was fined almost $500MM by a Chinese court? Further, what lessons can be drawn from the GSK matter for companies operating in China and the compliance practitioner going forward? Today, I want to explore the lessons that a company might be able to draw from the GSK matter.

I think the first lesson to draw is that the Chinese government will focus more on companies than on individuals. Andrew Ward, Patti Waldmeir and Caroline Binham, writing in a Financial Times (FT) article, entitled “Pain from graft scandal likely to linger”, quoted Mak Yuen Teen, a corporate governance expert at the National University of Singapore for the following, “By handing suspended sentences rather than jail terms to Mark Reilly, GSK’s former head of China, and four of his top lieutenants, the court in Hunan province was holding the company more accountable than the individuals.”

However other commentators said, “GSK got off more lightly than expected for bribing doctors to prescribe its drugs.” The article went on to note, “People close to the situation denied that the outcome amounted to a negotiated settlement. But Bing Shaowen, a Chinese pharmaceuticals analyst, said it was likely that GSK made commitments on research and development investment and drug pricing to avoid more draconian treatment. A further FT article by Andrew Ward, Patti Waldmeir and Caroline Binham, entitled “GSK closes a chapter with £300m fine but story likely to run on”, cited Dan Roules, an anti-corruption expert at the Shanghai firm Squire Sanders, who said that he had expected the penalty to be harsher. Roules was quoted as saying “The fact that GSK co-operated with the authorities would have made a difference.” The article went on to say that Roules “pointed to GSK’s statement on Friday pledging to become “a model for reform in China’s healthcare industry” by “supporting China’s scientific development” and increasing access to its products “through pricing flexibility”.”

What about reputational damage leading to a drop in the value of stock? The market had an interesting take on the GSK conviction, it yawned. Moreover, as noted in the FT Lex Column “The stock market was never bothered. The shares moved little when the investigation, and then the fine, were disclosed.” Why did the market have such a reaction? The Lex Column said that one of the reasons might be that the “China may be too small to matter much for now” to the company.

Another lesson is one that Matt Kelly, editor of Compliance Week, wrote about in the context of the ongoing National Football League (NFL) scandal, in an article entitled “The NFL’s True Problem: Misplaced Priorities Trumping Ethics & Compliance”, when he said that a company must align its “core values with its core priorities.” GSK moved towards doing that throughout the last year, during the investigation into the bribery and corruption scandal in China. Although the Chief Executive Officer (CEO) of GSK, Sir Andrew Witty, has been a champion for ethical reform in both the company and greater pharmaceutical industry, the FT reporters noted that the China corruption scandal, coupled with “smaller-scale corruption allegations in the Middle East and Poland, has raised fresh questions about ethical standards and compliance.” If Witty wants to move GSK forward, he must strive to align the company’s business priorities with his (and the company’s) stated ethical values.

Which brings us to some of the successes that GSK has created in the wake of the bribery and corruption scandal. These successes are instructive for the compliance practitioner because they present concrete steps that the compliance practitioner can do to help facilitate such change. As reported by Katie Thomas, in a New York Times (NYT) article entitled “Glaxo to Stop Paying Doctors To Boost Drugs”, one change that GSK has instituted is that it will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write, which were two common pharmaceutical sales practices that have been criticized as troublesome conflicts of interest. While this practice has gone on for many, many years it had been prohibited in the United States through a pharmaceutical industry-imposed ethics code but is still used in other countries outside the US.

In addition to this ban on paying doctors to speak favorably about its products at conferences, GSK will also change its compensation structure so that it will no longer compensate sales representatives based on the number of prescriptions that physicians write, a standard practice that some have said pushed pharmaceutical sales officials to inappropriately promote drugs to doctors. Now GSK pays 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.

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 compensation and marketing program by GSK demonstrates that companies can make substantive changes in compensation, which promote not only better compliance but also promote better business relationships. A company spokesman interviewed the NYT piece noted that the changes 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.”

In addition to these changes in compensation and marketing, Ward/Waldmeir/Binham, reported that GSK announced it would strive to be “a model for reform in China’s healthcare industry” by “supporting China’s scientific development” and increasing access to its products “through pricing flexibility”. They further stated “Rival companies will now be watching nervously to see whether more enforcement action takes place in a sector where inducements for prescribing drugs have long been an important source of income for poorly paid Chinese medics,” which is probably not going to be a return the wild west of bribery and corruption that occurred over the past few years in China. Bing Shaowen was quoted as saying that the GSK matter “is a very historic case for the Chinese pharmaceutical industry. It means that strict compliance will become the routine and the previous drug marketing and sales methods must be abolished.”

Whatever you might think of the GSK result, the company certainly ended its legal journey better in China than Billy the Kid did in New Mexico. But the company still faces real work to rebuild its reputation in China. Moreover, it still faces legal scrutiny for its conduct in the UK under the Bribery Act and the US under the Foreign Corrupt Practices Acct (FCPA). So stay tuned…

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, 2014

GSK Convicted – We are really, really sorry we paid bribes (and got caught)

“GSK plc sincerely apologies to the Chinese patients, doctors and hospitals, and the Chinese Government and the Chinese people.”

 

With those words, the British pharmaceutical giant GlaxoSmithKline (GSK) PLC was convicted in a secret trial in a court in the Hunan province of China for bribery and corruption related to its Chinese business unit. The amount of the fine was approximately $491MM. This fine was the largest levied on a western company for bribery and corruption in China. Moreover, if it had been in the United States for a violation of the Foreign Corrupt Practices Act (FCPA), it would have come in as the third highest fine of all-time, behind those of Siemens and Halliburton. In a Financial Times (FT) article, entitled “GSK hit with record $490m China fine for bribing doctors”, reporters Andrew Ward and Patti Waldmeir noted that the fine is “equal to the Rmb 3bn in bribers that Chinese investigators said had been paid by GSK.”

Many of us had wondered when the GSK investigation in China would end and we all found about the trial when it was announced in the newspapers last week. It certainly showed that the quality of justice in China is quite different than in the west. While it is not entirely clear how long the trial lasted, it appeared that it was in the same range as the one-day trial given to Peter Humphrey and his wife last month, when they were both found guilty for violating China’s privacy laws. In an article in the New York Times (NYT), entitled “Glaxo Fined $500 Million By China”, Keith Bradsher and Chris Buckley reported, “Chinese authorities accused Glaxo of bribing hospitals and doctors, channeling illicit kickbacks through travel agencies and pharmaceutical industry associations — a scheme that brought the company higher drug prices and illegal revenue of more than $150 million. In a rare move, authorities also prosecuted the foreign-born executive who ran Glaxo’s Chinese unit.” Moreover, GSK China’s country manager, Mark Reilly and four other in-country executives were each convicted with potential sentences of up to four years in prison. The NYT noted, “the sentences were suspended, allowing the defendants to avoid incarceration if they stay out of trouble, according to Xinhua. The verdict indicated that Mr. Reilly could be promptly deported. The report said they had pleaded guilty and would not appeal.”

A Wall Street Journal (WSJ) article, entitled “Meet the Glaxo Executives Convicted in China”, detailed the five GSK executives’ crimes and sentences, the summary is as follows:

• Mark Reilly: GSK’s former China chief. He was sentenced to prison for three years with a four-year suspension. He was also the victim of an illicit recording of he and his girlfriend with the sex tape delivered to GSK management in London.
• Zhang Guowei: GSK China’s former HR Director, who was sentenced to three years in prison with a three-year suspension. Chinese state media said he admitted that the company has used many bribery schemes to ensure the sales of high price drugs to Chinese consumers.
• Liang Hong: Former GSK China’s vice president and operations manager. He was sentenced to two years in prison with a three-year suspension. On Chinese state-controlled television he said he gave bribes to government officials, hospital administrators and doctors via travel agencies to pave the way for drug sales.
• Zhao Hongyan: GSK China’s former legal-affairs director. Ms. Zhao was sentenced to two years in prison with a two-year suspension. On state-controlled television Ms. Zhao said she destroyed evidence relating to bribery to avoid punishment.
• Huang Hong: Huang was a GSK China’s business-development manager. She was sentenced three years in prison with a four-year suspension. The WSJ article reported that she was accused of giving and taking bribes; and informed Chinese officials that GSK China used funds labeled for public relations uses to maintain relationships with “major clients,” who she said were hospital administrators.

The suspension of the sentences was highly significant. The FT article quoted from the trial court that the sentences had resulted directly because “they confessed the facts truthfully and were considered to have given themselves up.” The WSJ article reported that the court also took into account that GSK China country manager Mark Reilly had “voluntarily returned to China, assisted in the investigation and confessed…and had “truthfully recounted the crimes of his employer.”” Also they were in stark contrast to the three-year and two-year sentences handed down to Humphreys and his wife respectively last month. There was no word from GSK, however, on whether it would terminate some or all of the convicted executives.

GSK itself made several interesting statements about the bribery allegations and conclusions of the trial court. The FT article quoted Sir Andrew Witt, GSK Chief Executive for the following, “Reaching a conclusion in the investigation of our Chinese Business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years, and we remain fully committed to the country and its people.” The company went further in statements. In addition to the quote above, GSK was quoted in the NYT article as saying, “that it “fully accepts the facts and evidence of the investigation, and the verdict of the Chinese judicial authorities.”” The FT article further said that GSK also said “it had “co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSK China.””

These statements of contrition are quite a distance from the place where GSK started last summer when the bribery allegations broke when the company tried to use the ‘rogue employee(s)’ defense, when it said that the bribery and corruption involved only a “few rogue Chinese-born employees” that were “outside our systems of controls” Oops.

The NYT went on to say report that GSK also said, “that the court, the Changsha Intermediate People’s Court, had found the company guilty only of bribing nongovernmental personnel.” This is significant because the bribery of a government official (defined as such in China and not under the FCPA) is a much more serious crime in China. The British Embassy in China also weighed in, at least slightly, with the following statement, “We note the verdict in this case. We have continually called for a just conclusion in the case in accordance with Chinese law. It would be wrong to comment while the case remains open to appeal.”

So the GSK corruption scandal in China ended with no more explosive revelations. Or did it? I will explore where the company may stand and what it all means for the compliance practitioner going forward over the next few blog posts.

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, 2014