“Can You Sleep Well at Night?”: Multinational Executives Detained in China Due to Bribery Concerns

by K&L Gates LLP
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Any company doing business in China has to wonder whether they might find themselves in the unwelcome spotlight recently turned on certain participants in China’s pharmaceutical market. As has been widely reported, four senior Chinese executives of GlaxoSmithKline’s China operations have been placed under arrest for alleged bribery of public officials and medical personnel, and a fifth executive (and U.K. national) was reportedly prevented from leaving the country.

GSK has disputed the charges, noting that it had reviewed the allegations previously and found nothing to support them According to press reports, a GSK spokesman said:  “We take all allegations of bribery and corruption seriously. 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.”

Gao Feng, the head of the economic crimes investigation unit of China’s national police agency, the Public Security Bureau (PSB), said that information had been uncovered suggesting that other pharmaceutical companies operating in China had engaged in similar conduct. He declined to identify them, telling reporters, “Whether they were engaged in illegal behavior, you can go interview them... You just need to ask them one question: Can you sleep well at night?”

Even if the charges here prove to be completely unfounded or based on a misunderstanding, they provide a sharp reminder for companies operating in China (and elsewhere, for that matter) to pause and take stock of their efforts to avoid entanglement in corrupt activities. Chinese authorities have typically not prosecuted non-Chinese companies for violations of law involving corruption of public officials (although there have been numerous enforcement actions involving commercial corruption). However, these developments may signal the end of that era, or perhaps the beginning of an industry-wide enforcement sweep, much like those that U.S. anticorruption authorities have conducted with regard to the pharma, logistics and energy industries in recent years.

Virtually every company operating in international commerce is already well aware of the risks of becoming the target of law enforcement action by U.S. authorities under the Foreign Corrupt Practices Act (FCPA), and many of these companies refreshed their anticorruption compliance programs in response to the enactment of the U.K. Bribery Act of 2010. But many companies may not have devoted the necessary attention to the risk of law enforcement action by “local” authorities, such as China’s PSB. The PSB’s investigation is a clear warning that these anticorruption laws cannot be overlooked, at least with regard to China. As part of evaluating their potential exposure to these risks, it is important to keep the following ten points “top of mind.”

  1. Maintain the correct focus. 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.
  2. Internal investigations of potentially corrupt activities may well be tested later on by law enforcement authorities reviewing the same facts. Companies rightfully place enormous significance on the thoroughness, objectivity and accuracy of these internal reviews, and need to pay close attention to the quality of these efforts while controlling the expense and time that they require.
  3. Risk assessment. “Commercial” bribery, that is, bribery between parties to a business transaction, carries risks that may be as significant as those related to public corruption. Those risks are particularly acute for foreign companies operating in China. In recent years, our experience has been that non-Chinese companies face much higher risks of prosecution by Chinese authorities for commercial bribery than with regard to bribes of public officials, whereas Chinese law enforcement has tended to focus on recipients rather than providers of improper payments.
  4. Internal reporting channels. Although “whistleblower” mechanisms pose particular challenges in the Chinese environment because of cultural reluctance to use them, their importance cannot be overestimated. A channel for company personnel to raise concerns about potentially improper conduct provides an opportunity for the company to address issues before reports appear in the press or the PSB comes calling.
  5. Anticorruption training should devote meaningful emphasis to the risks created by paying or receiving kickbacks in commercial transactions. In addition to raising awareness of these issues, training sessions often result in company personnel asking questions or providing information about questionable transactions.
  6. Employee handbooks should be detailed, clear and specific in terms of permitted and prohibited conduct, as well as the consequences for failing to adhere to company policy. Company policies should address not only FCPA compliance, but also compliance with local antibribery laws, which ordinarily include both commercial and public corruption. Many companies extended their anticorruption compliance efforts to cover commercial bribery when the U.K. Bribery Act became effective in 2011, given that this statute covers commercial bribery as well as corruption of public officials. If company policy fails to address commercial bribery as a ground for discipline, the company may face obstacles in disciplining an employee for causing the company to violate the law unless such employee is found guilty under applicable criminal law.
  7. Corporate promotional and accounting practices need to adhere to the strict requirements imposed by PRC Accounting Law and the Anti-Unfair Competition Law, as well as associated regulations, in the permissibility and treatment of promotional expenses and discounts.  For example, if a customer asks your company to donate funds to sponsor an offsite training for their employees, that is not a deductible business expense under PRC accounting principles, and a transfer of those funds to your customer could constitute an impermissible “off the books” discount or kickback under PRC law.
  8. Companies should examine whether their internal financial controls are structured to enable their finance teams to evaluate the reasonableness and propriety of marketing and entertainment expenses. If sales, finance, compliance and legal functions operate in separate silos, those departments may lack the capacity for effective cross-group collaboration to verify compliance and to identify potential problems. For example, how is the finance department able to assess the appropriateness of claimed marketing expenses? If a company specifies a policy capping entertainment expenses that may be incurred in a single calendar quarter entertaining an individual, how does it track whether its sales people’s expenses do not in fact exceed the cap?
  9. In our experience, 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.

    This would hardly be the first incarnation of such an arrangement. The use of travel agencies as a conduit for paying kickbacks in Korea and China was alleged in the 2011 Securities and Exchange Commission IBM case. Amy Sommers, a Shanghai-based partner in K&L Gates’ Anticorruption Group, has discussed elsewhere how such schemes are often structured in China. Given these risks, companies should be particularly careful about tracking the selection, use and expense documentation associated with travel agencies.
  10. Corporate governance. Both U.S. and U.K. authorities have emphasized the role that the board of directors and senior executives play in assuring the effectiveness of anticorruption compliance. In this regard, U.S. and U.K. authorities have particularly stressed the importance of an ongoing flow of relevant information to enable directors and senior management to understand the company’s specific corruption risks, the systems in place to mitigate those risks, and the effectiveness of those systems.

International businesses operate in dynamic commercial and legal environments, and anticorruption compliance measures should be reassessed, both periodically and in light of significant developments. The recent law enforcement developments in China provide companies with a compelling reason to review the effectiveness of their efforts to prevent and detect corrupt payments.

 

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