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Friday Roundup

GSK announces verdict in China, the silly season, interesting read, Alibaba, and get it right!  It’s all here in the Friday roundup.

GSK Verdict in China

Earlier today, GlaxoSmithKline announced [1]:

“[T]he Changsha Intermediate People’s Court in Hunan Province, China ruled that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel. The verdict follows investigations initiated by China’s Ministry of Public Security in June 2013.  As a result of the Court’s verdict, GSKCI will pay a fine of £297 million [approximately $490 million USD] to the Chinese government. […] The illegal activities of GSKCI are a clear breach of GSK’s governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees. GSK has published a statement of apology to the Chinese government and its people on its website (www.gsk-china.com [2]).  GSK has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI. This includes fundamentally changing the incentive program for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments. GSK Chief Executive Officer, Sir Andrew Witty said: “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. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being. We will also continue to invest directly in the country to support the government’s health care reform agenda and long-term plans for economic growth.”

For more, see here [3] from the BBC.

“The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha, according to the Xinhua news agency.”

The GSK penalty was described as the biggest fine in Chinese history.  The $490 million fine is also believed to be one of the largest bribery/corruption fines ever.  For instance, a $490 million settlement would rank third on the top ten list of FCPA settlements [4].

Perhaps the most interesting aspect of the GSK development is reference in the company’s release to the charges involving “non-government personnel.”  In the U.S., it is a prominent enforcement theory that employees of various state-run health care systems – including in China – are “foreign officials” under the FCPA.  (See here [5]).

Another interesting aspect of the GSK development – and one foreshadowed in this [6] 2013 post – is how the Chinese verdict will impact GSK’s scrutiny in its home country (United Kingdom).  As highlighted in the post, the U.K. has a unique double jeopardy principle and, as explained by former SFO Director Richard Alderman, the U.K. “double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offense.  Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction.”

GSK remains under investigation for conduct outside of China as well.

The U.S. does not have a similar double jeopardy principle, relevant to the extent GSK has shares listed on a U.S. exchange and its conduct in China and elsewhere has been under FCPA scrutiny.

As indicated in the prior post, GSK’s scrutiny – and now liability – in China makes for an interesting case study in enforcement competition.

The Silly Season

Offensive use of the FCPA to accomplish a business objective or advance a litigating position is an observable trend highlighted in my article “Foreign Corrupt Practices Act Ripples [7].”  As noted here [8], the FCPA has also been used offensively to score (or at least attempt to score) political points.

The election season is upon us and during this “silly season” perhaps the silliest use of the FCPA ever is happening – not once – but twice.

As noted in this [9] article:

“Michigan Democrat Gary Peters profited from a French oil company [Total S.A.] that admitted to bribing Iranian officials for access to their oil fields.  […] The Peters campaign did not return requests for comment about whether he was aware of the bribery scandal. […] Republican Senate nominee Terri Lynn Land called on him to divest from the company, but the three-term congressman refused. […] “Gary Peters will do anything to make a dollar and say anything to win an election,” Land spokesman Heather Swift said in a statement. “The more Michigan voters learn about Gary Peters the more they know they can’t trust him to put Michigan first.”

Silly.  And there is more.

As noted in this [10] separate article from the same source:

“Sen. Jeanne Shaheen has invested tens of thousands of dollars in a French oil company that admitted to bribing Iranian officials.  […]  Shaheen’s family owns between $50,000 and $100,000 of stock in Total S.A., the fourth-largest oil company in the world, through a mutual fund.”

Two scoops of silly.

And now for some facts.

Per the DOJ/SEC’s own allegations [11] in the 2013 Total FCPA enforcement action, the vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 17 to 19 years ago).  So old was the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the resolution document that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

Interesting Read

Speaking of those FCPA ripples, Hyperdynamics Corporation has been under FCPA scrutiny since 2013 and its recent annual report [12] makes for an interesting read as to the wide-ranging business effects of FCPA scrutiny.  Among other things, the company disclosed approximately $7.5 million in the prior FY for legal and other professional fees associated with its FCPA scrutiny.  Not all issuers disclose pre-enforcement action professional fees and expenses, so when a company does, it provides an interesting data-point.

Chinese Issuers

I began writing about Chinese companies and the FCPA in this [13] 2008 article at the beginning of the trend of Chinese companies listing shares on U.S. exchanges.  This [14] 2009 post returned to the issue and noted that with the IPO market showing signs of life again, and with foreign companies increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase.  That, of course, has turned out to be true.

Today, of course, is the IPO of Chinese company Alibaba, expected to be largest U.S. IPO ever.  The company’s business model does not exactly rank high in terms of FCPA risk, but recall that the FCPA has always been a law much broader than its name suggests because of the books and records and internal control provisions.

Even as to the anti-bribery provisions, it is at least worth noting, as highlighted in this [15] recent New York Times article:

“Alibaba’s [recent acquisition of a company] provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials.  […]  Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business. “To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July [16] after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.”

As noted in the article, over the past year JPMorgan and several other financial services companies have come under FCPA scrutiny for alleged relationships with princelings.

Get It Right!

It’s a basic issue.

If you are writing about the Foreign Corrupt Practices as a paid journalist you have an obligation to get it right and engage in due diligence before hitting the publish button.

This [17] Corporate Counsel article states:

“It’s already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law.”

For the record, in the first half of 2014, there have been three corporate FCPA enforcement actions: HP, Alcoa and Marubeni.

*****

A good weekend to all.