What All Multinationals Can Learn from the Glaxo China Trouble

“This is the first time that the Chinese have enforced their domestic anti-corruption laws against western corporations doing business in China. It makes clear that doing business the ‘old fashioned way’ in China through bribery and corruption will no longer be tolerated.” (Thomas Fox)

The story is unfortunately all too common – major multinational accused of corruption – but the scope and seriousness of the investigation into what Chinese authorities say involves nearly $500 million in illegal bribes by pharmaceutical giant GlaxoSmithKline should put all foreign companies doing business in the country on notice.

Some key lessons from this unfolding story for companies active in China:

1. Anti-bribery programs are only effective if they stop corruption:

“Corporate anticorruption compliance programs have one core purpose that overshadows any other: to stop company personnel and agents from making improper payments. Success is measured by the impact on corporate conduct and not by merely ticking off items on a checklist. The remaining nine points below address the active application of compliance programs and companies should consider whether their programs are using these applications to achieve maximum impact.” (K&L Gates)

2. Compliance personnel should report directly to corporate leadership:

“A foreign company’s reporting structure should ensure that Chinese in-house counsel report to corporate headquarters, not local Chinese management. Compliance personnel – including local and foreign lawyers – must have access to responsive and supportive management outside of China and must be provided the tools to perform their jobs independently and without fear of retaliation from local managers.” (Sheppard Mullin)

3. Third party relationships create significant risks and must be managed accordingly:

“… the greatest corruption risks tend to involve third party intermediaries, and those relationships will often require the lion’s share of compliance efforts. As the U.S. Department of Justice’s FCPA Resource Guide notes, ‘devoting a disproportionate amount of time policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors may indicate that a company’s compliance program is ineffective.’ News reports regarding the GSK case indicate that the PSB has alleged that hundreds of separate travel agencies were used to facilitate as much as RMB 3 billion in unlawful payments.” (K&L Gates)

4. Pharmaceutical companies in China should expect increasing scrutiny:

“China is already investigating at least four multinational drugmakers as it widens its probe of GSK. In the last two days Chinese police visited another pharmaceutical company’s main sales office in central Shanghai and detained one employee, a Chinese national, for questioning. As GSK’s story continues to unfold, more lessons are likely to emerge and will apply to most implicated parties.” (NAVEX Global)

5. Ultimately, every businesses should be on alert:

“It would be a mistake for any company doing business in China to watch the unfolding investigation of the pharmaceutical and medical device companies and breathe a sigh of relief that it did not stretch to their industry. While healthcare is a significant consumer market in China, it does not take much of logical leap to start focusing on other consumer goods, including telecommunications, high-tech, real estate, consumer durables, automobiles and other industries which are high-risk in China. All of these industries produce goods and services which are important to China’s consuming class. It does not take much to stretch almost every industry under the scrutiny of China’s law enforcement for bribery enforcement.” (Michael Volkov)

The updates:

Find additional commentary and analysis on the GlaxoSmithKline China investigation at JD Supra Law News>>