The fact that GlaxoSmithKline (GSK) has been on China’s radar for bribery is nothing new – the Chinese authorities instituted an investigation against the company in July 2013. What is new is that GSK’s former Vice President of Pharmaceuticals in China, Mark Reilly, was identified last week as the ringleader of a “massive bribery network”. Reilly and two other Chinese executives have been accused of orchestrating a system to bribe hospitals and doctors to use GSK’s liver drugs instead of Chinese-made equivalents, as well as bribing the Ministries of Commerce in Beijing and Shanghai to block investigation into their activities. The Chinese authorities have claimed that more than RMB 3 billion (USD 494 million) in bribes were paid, resulting in illegal revenue of “hundreds of millions of dollars” for the company.

Reilly is the first non-Chinese executive to be targeted in such an investigation in China, and he may serve a lengthy prison term as a result. This is a complete “game changer” as far as anti-corruption prosecution in China is concerned. Here’s why:

• The pharmaceutical industry has been under a microscope in China for years.  Not only has it been a known hotbed of corrupt activity, but the industry has been a strategic focus for the government. China has been trying to reform its health care system, and foreign pharmaceuticals are perceived as roadblocks due to charging excessively high drug prices. This has led to anger among Chinese consumers, which has garnered attention by the government. Targeting GSK now, and punishing one or more foreign executives, kills two birds with one stone. Pharma, along with industries such as automotive, agriculture, consumer products and food and beverage, are all sectors of the economy the Chinese government seeks to change in response to consumer dissatisfaction. Foreign investors operating in these industries should assume they have targets on their backs.
• This action sends a clear message to foreign companies: you are not above the law in China. The authorities are flexing their regulatory muscles and directly confronting large and powerful foreign companies. Hefty fines against corporations get attention, but the message cuts clear down to the bone when someone goes to jail (especially when that someone is a foreign-national).
• President Xi Jinping and his cabinet have made anti-corruption a focus of their political agenda. Anti-corruption prosecutions have been steadily rising in China, and this action shows enforcement is taking a new direction with an added bite.
• GSK had anti-corruption compliance systems in place during the periods of the accused violations. The Chinese government alleges that Reilly and other executives established complex schemes to circumvent those systems, such as funneling payments through travel companies. Foreign companies in China need to heed this warning and take a very critical look at both the systems they have in place and whether those systems are working. Good accounting practices should help uncover questionable payment systems like the ones alleged against Reilly. It is also important to ensure local management is trustworthy and on board with the company’s global ethics practices.
• This kind of corruption doesn’t just mean enforcement in China. As a public company listed in London and New York, GSK is also subject to the UK Anti-Bribery Act and the U.S. Foreign Corrupt Practices Act. It is possible for companies to be bitten two or three times for the same corrupt activity under different regulatory systems. So far, the U.S. and UK authorities have not commented on whether they are also pursuing investigations of GSK, but don’t be surprised if they exact their pound of flesh as well.

As our partner in Beijing, Bing Wang, said in a recent news article for the South China Morning Post, “it is really mind-boggling how a British [executive] can behave like this” given the strict ethics and anti-bribery laws in the UK. That is certainly true, but the scary thing is that this is probably not an isolated incident. This may be the first anti-corruption prosecution of its kind in China, but it is undoubtedly not the last. It’s time for foreign investors to re-examine their anti-corruption practices and policies in China and adjust accordingly.