FCPA Compliance and Ethics Blog

April 10, 2015

International Anti-Corruption Enforcement Efforts

ARound the GlobeWhile 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

February 18, 2015

GSK in China-the Book

Filed under: Corruption in China,Ft,GlaxoSmithKline — tfoxlaw @ 12:01 am
Tags: , , ,

GSK in China-the bookThe 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

September 25, 2014

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

Partridge Family BusToday 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

September 23, 2014

Billy the Kid Begins and the GSK China Verdict

Billy the KidAccording 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

September 22, 2014

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

Filed under: China,Corruption in China,FCPA,Financial Times,GlaxoSmithKline — tfoxlaw @ 12:01 am
Tags: ,

GSK China“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

September 9, 2014

Management of Corruption Risks – Business Lessons from GSK

IMG_0891The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have made it abundantly clear over the past several years that companies should assess their risk and then manage their own risks. In the anti-corruption space, simply putting in a Check-the-Box paper compliance program does not help to prevent, detect or remediate under laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. In their joint FCPA Guidance, the DOJ and SEC make clear there are a variety of steps a company can take to manage anti-corruption risks.

One of the tired excuses for cutting back on FCPA enforcement is that it costs US companies business overseas because they cannot engage in bribery and corruption, while the commercial enterprises of countries which do not have robust anti-corruption laws essentially bribe at will. However, there are many business solutions available in the management of risk, which companies can profitably use to help ameliorate bribery and corruption risk.

I was interested to read recently about some of the responses that one of the world’s current poster children for bribery and corruption are considering. In an article in the Financial Times (FT), entitled “Witty comes out fighting for GSK”, Andrew Ward reviewed some of the business responses that GlaxoSmithKline PLC (GSK) has contemplated over the past year since the revelations about allegations of bribery in China. Ward reported that in addition to the uncertainty of the ongoing corruption investigation by Chinese authorities, the UK Serious Fraud Office (SFO) for violations of the UK Bribery Act and the DOJ for violations of the FCPA; the company “issued a profits warning that exposed weakness in the company’s core respiratory medicines business.” These warning turned on “the decline in the company’s best selling drug. Revenues from Advair, an asthma treatment that accounts for a fifth of sales, fell 12 per cent in the second quarter, on top of the 15 per cent drop in the three months before that.” Moreover, the company’s stock is down some 14% in the past year.

I was intrigued by the response of GSK’s chief executive, Sir Andrew Witty. Witty did not bemoan the corruption investigations that his company is going through or somehow try to claim that the company simply could not compete because of the scrutiny it is under. On the business front Ward reported, “GSK’s innovation engine is working” as Witty noted that the company had “six new drugs approved across all therapeutic areas last year and a further 40 in advanced development”.

In addition to the specific response regarding the development of new pharmaceutical products, Witty is looking at other sales products and models that will lessen the company’s corruption risk while providing a strong business base. Ward reported that Witty is “strengthening GSK’s two other businesses: vaccines and healthcare.” This move “was reinforced by a $20bn asset swap with Novartis in April under which GSK traded its subscale oncology business for the Swiss group’s vaccines division, while the pair agreed to set up a joint-venture in consumer products.” This means that when this structuring is completed, “half of GSK’s revenues will come from outside [the sale of] pharmaceuticals.”

Witty has also worked to change internal GSK compensation incentives to help manage corruption risks. Late last year, the company announced that it would “sever the link between sales and pay for drug reps and from 2016, stop payments to doctors for promoting its products.” Ward noted that others in the industry have not followed GSK’s lead in changing the way it compensates its sales team but Witty said, “in the long-run, the company will benefit from being the first-mover towards a new marketing model.”

Finally, and perhaps most interestingly, Witty has attempted to become an industry-wide “standard-bearer for [pharmaceutical] industry ethics.” Ward reported that the ongoing scandal has helped Witty “drive home to employees the need for greater transparency.” Ward even quoted Witty for the following, “It gives me the ammunition to say we are in the public eye and our behaviour counts. It’s not just about generating prescriptions, it’s how you do it.”

In another article on the GSK corruption scandal by Ward, entitled “GSK chief floats break-up option”, Ward quoted said that Witty has “zero tolerance for any form of corruption” and that “he was pleased if wrongdoing had been brought to light so that it could be stamped out.” Witty went on to say that “Any company that doesn’t get whistleblower letters isn’t looking hard enough. If you are not getting any don’t dream. It can’t be perfect 100 per cent of the time.”

Another perspective on business solutions to the management of corruption risks came from Tom Mitchell, also writing in the FT in an article entitled “Expats in China should read GSK potboiler carefully”. Mitchell focused on a book by Joe Studwell called The China Dream, which detailed some of the business failures that had befallen western companies in China. Mitchell drew the lesson from Studwell’s book that “When foreign investors’ interests are aligned with those of their domestic partners – as they generally are today in the auto sector – those investors do very well indeed… However, when interests are not aligned – or when outside operators in sectors where they are not required to have joint ventures – foreigners are vulnerable to sudden reversals of fortune instigated by either a bitter partner or by unsympathetic officials.”

How closely does that sound like what happened to GSK? Mitchell noted that GSK “made money from selling goods in China at prices that were – Chinese police allege – were high by the standards of many markets. At the same time, GSK was not sharing revenue streams with a local partner that could help with damage limitation when local authorities appeared on its doorstep.”

The management of risk is essentially a business exercise. That is because risk is what can cause a company to lose money. Some risk is embodied in statutes such as the FCPA or UK Bribery Act. Sometimes risk is a change in the market circumstance. For that I and others have written about the negative side of GSK; the company may well come out the other side of the Chinese corruption scandal stronger because they seem to understand that there is a market based solution to corruption risks. GSK has changed the way it will compensate its sales force and will delete its compensation to doctors. This may take away incentives to cut corners or engage in bribery and corruption. But think about Witty’s steps to diversify the GSK product base. If you are in an industry that is corrupt and you cannot find a way to do business profitably, your company may have other business lines it can move forward to a more prominent role in your business. Lastly, as with most responses to legal issues by lawyers, business executives are only limited by their imaginations in their response to business issues.

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

August 8, 2014

Nixon Announces Resignation; GSK Just Resigns

Nixon Resignation SpeechOn this day, 40 years ago, President Richard Nixon announced that he would resign the Office of the President, effective the next day on August 9 at noon. I can still remember my father instructing us to watch the resignation speech on television because, as he put it, it was history in the making. Before a nationally televised address to the country, Nixon said, “By taking this action,” he said in a solemn address from the Oval Office, “I hope that I will have hastened the start of the process of healing which is so desperately needed in America.” His action was hastened along by the Articles of Impeachment voted by the House of Representatives relating to his involvement with the Watergate Affair. With his resignation, Nixon was finally bowing to pressure from the public and Congress to leave the White House.

Yet, even before this truly historic speech and spectacle the next day of Nixon helicoptering off the South Lawn of the White House, Nixon had transformed the America we all lived in. One area that resonates up to this day is his opening with China. If it had not been for Nixon and his Secretary of State Henry Kissinger’s efforts, we might have waited a long time for an opening with China. But Nixon went there and opened China up to do business with the US and indeed the rest of the western world.

Unfortunately one of the much later fallouts from this visit and opening of China has been the corruption investigation by Chinese authorizes against western companies but most publicly the British pharmaceutical giant, GlaxoSmithKline PLC (GSK). And, more unfortunately, the bad news for GSK continues to trickle out into the press.

Next week, Shanghai’s No. 1 Intermediate People’s Court is scheduled to open a trial against Peter William Humphrey, a 58-year-old British national, and his wife, Yu Yingzeng, a 61-year-old American, on charges of illegally purchasing personal information about Chinese nationals. While the trial had originally been planned to be closed to the public, last month Chinese officials announced that the trial would be ‘open’ although the degree of openness is not completely clear.

Not only will the trial be open but the couple’s son, Harvey Humphrey, was allowed visited his parents in their detention center in Pudong, Shanghai, for the first time since their arrest. The visit came after some fierce lobbying by the US and UK consulates. As reported in the online publication FiercePharma, in an article entitled “GSK private eyes’ son allowed first visit to parents in China jail as trial nears”, their son said, “They didn’t quite believe I was coming. They were quite overwhelmed. My mum was shocked. My dad held himself together,” the younger Humphrey told the paper. “It’s a bit unusual for the Chinese to do this. I feel something has changed in the Chinese approach to my parents.” Son Harvey had written to the GSK’s Chief Executive Officer (CEO) Sir Andrew Witte last December to “take a few minutes to raise my father’s case” during a visit to the country, he told the Financial Times (FT), “I understand everything is complicated in China but it seems my parents are paying a big price”. But at this point there is no word on what if any involvement GSK might have in his parent’s defense.

It may be that GSK is way too busy right now worrying about all the other issues surrounding bribery and corruption. In an article in the Wall Street Journal (WSJ), entitled “FBI, SEC Start Glaxo Inquiries Over China”, Christopher M. Matthews and Hester Plumridge reported that in late July “Glaxo received an anonymous email claiming its employees in Syria bribed doctors and pharmacists over the past five years to promote products including painkiller Panadol and toothpaste Sensodyne. The bribes took the form of cash payments, speaking fees, trips, free dinners and free samples, said the email, which was reviewed by The Wall Street Journal. The email cited names and dates. Syrian health officials allegedly received bribes from Glaxo employees to fast-track registration of its Sensodyne dental products, including cash payments and a trip to a 2011 conference in Rome, the email maintains. Glaxo employees also were involved in smuggling a narcotic product from Syria into Iran, the email alleges. The product in question, pseudoephedrine, is a raw ingredient of Glaxo’s congestion medicine Actifed.”

GSK once again reiterated its previously announced position that it was firmly against the payments of bribes by its employees. In response to the allegations of bribes paid in Syria the WSJ article said, “Glaxo said it would thoroughly investigate all claims made in the Syria email, and said it has asked the sender for more information. The company said it has zero tolerance for unethical behavior, adding, “We welcome people speaking up if they have concerns about alleged misconduct.”” Too bad GSK didn’t seek more information about its Chinese operations when the company’s internal investigation came up with no evidence of bribery and corruption.

Much more problematic for GSK is the fact that both the SEC and DOJ have opened formal investigations into allegations of bribery and corruption by the company. The WSJ piece notes, “Federal Bureau of Investigation agents have been interviewing current and former GlaxoSmithKline employees in connection with bribery allegations in China, according to a person familiar with the matter, as fresh claims of corruption surfaced against Glaxo’s operations in Syria. The interviews have taken place in Washington, D.C., in the past few months and are part of a Justice Department investigation into Glaxo’s activities in China, the person added. The U.S. Securities and Exchange Commission also is investigating the company’s business in China, according to people familiar with the matter.”

As readers of this blog will recall from previous posts, in 2012 GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety. The press release noted that the resolution was the largest health care fraud settlement in US history and the largest payment ever by a drug company for legal violations. The criminal plea agreement also included certain non-monetary compliance commitments and certifications by GSK’s US president and Board of Directors, which specifically included an executed five-year Corporate Integrity Agreement (CIA) with the Department of Health and Human Services, Office of Inspector General. The plea agreement and CIA included provisions which required that GSK implement and/or maintain major changes to the way it does business, including changing the way its sales force is compensated to remove compensation based on sales goals for territories, one of the driving forces behind much of the conduct at issue in the prior enforcement action. Under the CIA, GSK is required to change its executive compensation program to permit the company to recoup annual bonuses and long-term incentives from covered executives if they or their subordinates, engaged in significant misconduct. GSK may recoup monies from executives who are current employees and those who have left the company. Additionally, the CIA also required GSK to implement and maintain transparency in its research practices and publication policies and to follow specified policies in its contracts with various health care payors.

The importance of the CIA for this anti-corruption investigation is that it not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the Foreign Corrupt Practices Act (FCPA). In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, to include the Compliance Officer and other members of senior management necessary to meet the requirements of the CIA; the Compliance Committee’s job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required a Deputy Compliance Officer for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified as a key component. Further, the CIA specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”.

GSK is now under investigation, either internally or by anti-corruption regulators across the globe in at least four countries. Unlike other companies that have found systemic issues of bribery and corruption or systemic failures in internal controls, the allegations of bribery and corruption are not 10-15 years old. So today we commemorate Nixon’s resignation; and for GSK it may simply mean just resignation.

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

July 18, 2014

Looking Back on Johnny Winter and GSK’s 2001 China Bribery Scandal

Johnny WinterJohnny Winter died yesterday. He was one of the greatest rock and roll guitarists of all-time. As posted in Rolling Stone’s online article “Johnny Winter, Texas Blues Guitar Icon, Dead at 70” by Kory Grow, Winter “was born in Beaumont, Texas in 1944 and rose to prominence in his early 20s after a Rolling Stone cover story on Texas music in December 1968. “If you can imagine a 130-pound, cross-eyed albino with long fleecy hair playing some of the gutsiest, fluid blues guitar you ever heard, then enter Johnny Winter,” wrote Larry Sepulvado and John Burks in the issue. “At 16, [Mike] Bloomfield called him the best white blues guitarist he ever heard…. No doubt about it, the first name that comes to mind when you ask emigrant Texans about the good musicians that stayed back home is Winter’s.””

I was introduced to him by two long forgotten friends in the spring of 1976 through the album Johnny Winter Captured Live and most particularly the song ‘It’s All Over Now’. I spent most of yesterday afternoon listening through my ear buds to that song blasting at the highest volume possible and went immediately back to those nights in 1976 listening to Winter’s axe hammer guitar and vocals. I also considered how great Winter was as he is Number 63 on Rolling Stone’s list of the Top 100 Guitarist’s of all-time.

Interestingly yesterday, there was an article in the Financial Times (FT) by Demetri Sevastopulo and Andrew Ward, entitled “GSK admits to 2001 Chinese bribery scandal”, which reported that the UK pharmaceutical company GlaxoSmithKline PLC (GSK) had been involved in a prior bribery scandal in China back in 2001. They reported, “The Financial Times has learnt that GSK also found problems with its China vaccine business in 2001 that led to the firing of about 30 employees.” The article went on to say, “Two people familiar with the 2001 scandal said GSK found that staff were bribing Chinese officials and taking kickbacks. The company acknowledged the matter for the first time to the Financial Times, but said it had dealt with the issue rigorously.”

Obviously having a prior bribery scandal in the very same country as another current scandal portends poorly for GSK, as the FT noted. “The US Department of Justice, which is investigating the current allegations, will take a close look at the earlier scandal, said a former senior DoJ official who asked to remain anonymous. If it found a pattern of such behaviour, the justice department was likely to take a tougher stance towards the company, legal experts said.” The FT article quoted Timothy Blakely, a partner at the US law firm of Morrison & Foerster, who said, “US prosecutors would have to examine the 2001 case under justice department guidelines to see whether there was a pattern of behaviour. “It is something that a prosecutor would have to take into account,” said Mr Blakely.”

Unfortunately for GSK the 2001 scandal has some other rather inconvenient facts, which may well impact how the company fares in the current imbroglio in which it finds itself. The first fact is that unlike the current scandal, which unfolded beginning in 2013 when an anonymous whistleblower presented evidence of bribery and corruption in the company’s China operations, in the 2001 scandal the company took swift actions to investigate the allegations. In 2001, GSK hired PricewaterhouseCoopers (PwC) to investigate the allegations “at the time the corruption suspicions emerged.” The 2001 investigation, as noted above, led to the termination of “about 30 (GSK) employees”.

One of the difficulties for GSK is that it appears this robust response in 2001 contrasts dramatically with its response in 2013. It is now known that GSK was notified by the anonymous whistleblower of allegations of bribery and corruption as early as January 2013. Yet the company gave itself a clean bill of health, finding no evidence of any wrongdoing. However, it did not take Chinese authorities long at all to investigate and conclude that there was “evidence of “massive and systemic bribery”” in GSK’s China business operations.

Interestingly, one of the PwC investigators back in 2001 has played prominently in this current bribery problem. It is Peter Humphrey who is currently under indictment for his actions around some of GSK’s current problems. But, as reported by the FT, back in 2001 “One member of the PwC team in 2001 was Peter Humphrey. Now an independent investigator, he is being held in China on charges of illegally buying private information in connection with GSK’s current scandal.”

Humphrey, his naturalized American wife Yu Yingzeng and their companyChinaWhys Co., were hired by the GSK after GSK received a copy of a sex tape made of the company’s head of its China operations, Mark Reilly and his girlfriend having sex. Their assignment was to investigate the matter, the genesis of the tape and try to determine who filmed the couple. Humphrey has claimed that he was kept in the dark about the bribery and corruption allegations made at the same time as the notice about the sex tape was made to GSK officials. But if he was part of the investigation team back in 2001, do you think he might have inquired about any current allegations of bribery or corruption or any ongoing company investigations? What are the implications for GSK if he did make such inquiries but was not given correct information?

Another very interesting issue for GSK is that its current Chief Executive Officer (CEO), Sir Andrew Witty, “was the company’s head of Asia-Pacific, but his responsibilities excluded China. GSK said Sir Andrew “was not involved in and was not aware of” the case at the time. Sir Andrew has tried to cast GSK as a leader in ethical reforms since it was hit with a record $3bn DoJ fine for marketing abuses in 2012. But his clean-up effort, including measures to cut the link between sales volume and pay for marketing personnel, has been overshadowed by the latest scandal in China.”

All of these ‘coincidences’ may lead the US Department of Justice (DOJ) or the UK Serious Fraud Office (SFO) to conclude that GSK has a culture of non-compliance or worse yet – a culture of corruption. The FT article cited to un-named legal experts for the following, “If prosecutors find a pattern of such behavior, they are likely to take a tougher stance towards the company.” Do not forget that GSK had paid a $3bn fine for false marketing and is currently under a Deferred Prosecution Agreement (DPA) for those illegal actions.

While it is not clear how all of this will end up for GSK, I do fear it will end poorly. So if you are in GSK now, I might suggest that you put on your best headphones and crank up the volume on your receiver (or iPhone as I doubt many people have receivers anymore) and listen to my fellow Texan Johnny Winter blast out “It’s All Over Now”. Because you know, it is….

For a blast from the past, check out this version of Johnny Winter playing “It’s All Over Now” on YouTube.

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

July 7, 2014

No Sex Please, We’re British: More from GSK in China

No Sex PleaseThe above is the title of a British television show/play/movie which is a farcical romp about a newlywed couple who mistakenly receive an initial shipment of pornographic pictures, then movies and women, all sent from Sweden to England. The plot turns on their attempts to dispose of the ‘offending materials’ while under the noses of their parents/in-laws, employers and friends. In his review of the show, Christopher Heath said, “No Sex Please, We’re British shows how we stuffy Brits tie ourselves in knots when it comes to this subject. The funny thing is how the cast, led by Ronnie Corbett, handle their predicament and it has to be said, they cope with aplomb. As you might expect, the plot is all about mix-ups, keeping a stiff upper lip, maintaining a veneer of social respectability, not getting found out about something someone hasn’t done and failing miserably.”

I thought about that ubiquitous work of British visual and audio entertainment when the revelations from late June that the GlaxoSmithKline (GSK) PLC corruption scandal all started with a sex tape. In an article in the MailOnline, entitled “How a secret sex tape plunged British drugs giant Glaxo in a £90million bribery probe”, Rebecca Evans reported “A covert sex tape involving a senior executive and his Chinese lover was the trigger for a major investigation into corruption at British drugs giant GlaxoSmith-Kline, it was revealed yesterday. The video of married Mark Reilly and his girlfriend was filmed by secret camera and emailed anonymously to board members of the pharmaceutical firm. It led to an investigation that has rocked the £76billion company – which stands accused of bribing doctors and other health officials in China with £320million of gifts, including sexual favours from prostitutes, to persuade them to prescribe its drugs.”

This sex tape, along with allegations of bribery and corruption, were sent to GSK Board members, including Chief Executive Officer (CEO), Andrew Witty in March 2013 by someone with the email address “GSK Whistleblower”. Evans reported that two additional emails “making serious fraud allegations” were sent as well, one in January and one in May. In an article in the Wall Street Journal (WSJ), entitled “Sex Video Sheds Light in Glaxo China Case”, Laurie Burkitt reported that “The British drug maker regarded the video—apparently shot without the executive’s knowledge—as a breach of security, the person said.” Evans reported that in addition to this security breach, GSK believed the sex tape to be a “threat or blackmail attempt”. One of GSK’s responses was to hire the firm ChinaWhys Co., to investigate the matter. The firm’s principals, former journalist Peter Humphrey and Yu Yingzeng, a naturalized US citizen, were not able to determine who placed the video camera in Reilly’s Shanghai apartment, who shot the video or who sent it to GSK executives. However Evans reported “But a few months after starting to investigate Miss Shi, Mr Humphrey was arrested along with his wife Yu Yingzeng, a US citizen and daughter of one of China’s most eminent atomic weapons scientists. According to the Sunday Times, Mr Humphrey’s arrest and detention in July was at around the same time that China began a police probe into GSK’s alleged bribery.” And, unfortunately for Humphrey and his wife, they were arrested last August for allegedly breaking of Chinese laws relating to information privacy.

In addition to the investigation into the provenance of the sex tape and its sender, GSK had also engaged in an internal investigation into the substantive allegations of bribery brought forward by the “GSK Whistleblower” in emails to the GSK Board in January and May, 2013. As reported by Evans, “The emails laid out a series of sales and marketing practices described as ‘pervasive corruption’.” Unfortunately for the company, GSK “found ‘no specific evidence’ to substantiate the claims. However, the accusations are virtually identical to the charges laid by police against Mr Reilly and 45 other suspects. Last month, Britain’s Serious Fraud Office announced it is to investigate the company’s ‘commercial practices’.”

‘Honey-pots’ and ‘Sparrow-nests’ are well known terms for anyone who has read cold war tales of espionage between the former Soviet Union and the US. However, the Reilly sex-tape and the GSK bribery scandal would seem to be an entirely different can of worms. In an article in Time, entitled “What the GSK Sex Tape Says About Surveillance in China, Hannah Beech wrote that in China, “Surveillance – or the threat of surveillance — is a constant in China. As a journalist, I may be more interesting to the powers that be than some other foreigners here. But other expat friends who’ve been followed, hacked or otherwise tracked in China include diplomats, NGO staff and businesspeople. Also, artists and academics.” Such surveillance includes having “email auto-forwarding mysteriously activated or to be tailed by a black Audi while on assignment in the Chinese countryside.”

For the compliance practitioner the lessons of GSK in China continue to resonate, unfortunately for the negative consequences to GSK and its employees. All of the above articles note that the allegations of bribery and corruption presented to GSK by the “GSK Whistleblower” were also made to Chinese officials, who then began to investigate the company. Andrew Ward, reporting in a Financial Times (FT) entitled “Sex tape adds to murk of GSK China scandal”, said “A separate internal investigation was already under way into the bribery allegations that had first been made by a whistleblower in January.” Unfortunately for GSK, its internal investigation failed to turn up any evidence of bribery and corruption. More unfortunately for the company, “Mr. Reilly, a Briton and long-time GSK executive, was among 46 company employees identified by Chinese police in May as suspects when they handed evidence of “massive and systematic bribery” to prosecutors after a 10-month investigation.”

It does seem incredible at this point that any serious internal investigation could fail to turn up any of the evidence that the Chinese government has been able to develop against GSK. This points to the absolute importance of your internal investigations. Although the GSK investigation was focused in China, the same is true in the US, particularly for a US listed company subject to Dodd-Frank. Further, we must invoke that well-known British author George Orwell for reminding you that in some countries Big Brother really is watching you. And finally, you may not be paranoid as people really may be watching you and filming your most intimate acts.

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

June 26, 2014

Coolness in Being the Bad Guy? Eli Wallach and GSK

Eli WallachEli Wallach died Tuesday. For my money, he was about the coolest bad guy out there. Not tough like Lee Marvin, just cool. My favorite Wallach roles were as Calvera in The Magnificent Seven and as Tuco in The Good, The Bad and The Ugly. An early proponent of method acting, Wallach performed on the stage and in films for over 60 years. Although originally from Brooklyn, Wallach was also a fellow Texas Longhorn, having attended the University of Texas. He served in France as a Second Lieutenant in France during World War II.

I thought about Wallach’s über coolness when considering the most decided uncool position of the UK pharmaceutical giant GlaxoSmithKline PLC (GSK) recently. Last month the Chinese government issued a most very stern warning to GSK when it accused the former head of GSK’s China business of direct involvement in bribery and corruption. But more than this direct accusation, the move was a clear warning shot across the bow of not only western pharmaceutical companies doing business in China but also all western companies. In an article in the Wall Street Journal (WSJ), entitled “Beijing Warns Sernly on Glaxo”, Laurie Birkett quoted Helen Chen, a director and partner at consultancy L.E.K., as saying “Focusing much of the blame on a foreigner sends a strong message to all. Companies will see that if authorities are willing to accuse even a foreigner, who is in senior management, the issue is being taken seriously, it’s a clear message that bribery is unacceptable in the market.” Burkitt went on to say, “Experts say China’s medical system is deeply underfunded, giving doctors, hospitals and administrators an incentive to overcharge and overprescribe. Glaxo, in the past, organized trips for doctors around China and to places such as Budapest and Greece as part of a broader effort involving perks and cash to get doctors to boost drug prescriptions, according to documents previously reviewed by The Wall Street Journal.”

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

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

But with this recent round of accusations against GSK it appears that the Chinese government has opened a new front. In an article in The Telegraph, entitled “GSK bribery scan could cause ‘irreparable damage’, says China”, Denise Roland reported that “Beijing has apparently issued a warning to all foreign firms, cautioning that the corruption charges against GlaxoSmithKline executives could cause “irreparable damage” to the drug maker’s Chinese operations.” She quoted from the state news agency Xinhua for the following, “GSK’s practices eroded its corporate integrity and could cause irreparable damage to the company in China and elsewhere. The case is a warning to other multinationals in China that ethics matter.”

In addition to these charges against a senior GSK executive, which could lead liability up to the GSK boardroom, Jonathan Russell, also writing in The Telegraph, in an article entitled “GlaxoSmithKline is facing more than double jeopardy”, said that “GlaxoSmithKline’s problems are multiplying fast. In China authorities have identified 46 individuals connected to the company they claim were involved in “massive and systemic bribery”. In the UK the Serious Fraud Office (SFO) marked out its pitch this week, revealing it has opened an official investigation into allegations of bribery; and an internal GSK probe is looking at potential wrongdoing in Jordan and Lebanon.” More ominously, he also noted that “Given the slew of allegations so far it seems a fair assumption that other international law enforcement agencies, notably the US Department of Justice, will be taking a long, close look at the allegations.”

While Russell points to the general UK prohibition against prosecutions, which might invoke double jeopardy, he says “As ever with the law there are exceptions to the principle. However they are limited in scope and rare in number. It may also be the case that the principle of double jeopardy may not be invoked in this case if the alleged offences the SFO is investigating are separate to those under investigation in China. They could relate to matters that took place in Jordan or Lebanon.” Russell also pointed out that “international prosecutors carving up parts of prosecutions so they can all have their pound of flesh. A very painful prospect for GSK.” It will also be interesting to see if GSK is charged under the UK Bribery Act, under the prior law or both. If charges are brought under the Bribery Act, which became effective on July 1, 2011, do you think GSK would try and raise a compliance defense based on the Six Principals of Adequate Procedures? I guess having a compliance defense is pretty useless if your company engages in bribery and corruption.

While Russell talks about the aggressiveness of US prosecutors under the Foreign Corrupt Practices Act (FCPA), he does not discuss what may be GSK’s greatest exposure in the US. GSK was under the equivalent of a Deferred Prosecution Agreement (DPA) called a Corporate Integrity Agreement (CIA) for its prior sins related to off-label marketing. This CIA not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the FCPA. In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, inclusive of the Compliance Officer (CO) and other members of senior management necessary to meet the requirements of this CIA, whose job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required Deputy Compliance Officers for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified. Further, there was detail down to specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”.

For the compliance practitioner, one clear message from the GSK matter is to monitor, audit and continuously review your Chinese operations. I will have more to say about the China corruption crackdown in an upcoming blog post but just like Eli Wallach as Calvera in The Magnificent Seven told the gunmen hired to protect the Mexican village, you have been warned.

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

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