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Items Of Interest From GSK

By now you likely know that GlaxoSmithKline (“GSK”) is the subject of bribery scrutiny for its business practices in China.

This is hardly earth-shattering as the pharmaceutical industry (and more broadly the healthcare sector) has been the subject of much scrutiny in the past few years including for business practices in China.

What is unique about GSK’s scrutiny, as I explained to National Public Radio, is the Chinese government is investigating the alleged conduct at issue.

What is also interesting is the chronology of the story.

As noted in this prior post, last month the Wall Street Journal reported that GSK was “investigating allegations from an anonymous tipster that it sales staff in China was involved in widespread bribery of doctors to prescribe drugs, in some cases for unauthorized uses, between 2004 and 2010.”  As reported in the WSJ article, a Glaxo spokesman confirmed that the company was investigating the allegations, but that after thoroughly investigating “each and every claim” from the anonymous source, the company “has found no evidence of corruption or bribery in or China business.”

Earlier this week, GSK issued this release stating:

“Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behaviour of this nature.”

In short, that is quite a sequence of events and raises two questions.  How thorough was GSK’s earlier investigation and why didn’t the earlier investigation uncover the conduct disclosed earlier this week?

Yesterday, in an earnings conference call, GSK CEO Andrew Witty seemed to offer an explanation.  In actionable statements to the market, Witty suggested, not once, but several times, that the GSK-China employees defrauded the company.  The below cites are from a transcript of the earnings call posted by the website Seeking Alpha.

“Certain senior managers in the Chinese business have acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system. To see these allegations made about people working for GSK is as we have said shameful and for me personally they are deeply disappointing. The alleged activities are not what we expect of our people and are totally contrary to our values.”

“In terms of sales force practices, basically what we have been told, what we understand from the Chinese investigators is that, what happened here was a number of managers who seem to be operating outside of our processes and systems in controls to allegedly generate this fraud …”.

“We haven’t been able yet to get into a full investigation mode ourselves. But working with the Chinese authorities, it appear that this is a consequence of the individuals working outside of the controls and processes of the company to defraud the company as well as, so then go on and do things which are potentially illegal.”

“We are going to continue to work with the authorities on this, our understanding at this point in time from the authorities is that this is around individuals, and the co-people and the senior management of the company in China, who are alleged to have worked around our systems and controls to both defraud us and then to potentially do things in appropriate in the marketplace.”

Was GSK the victim of rogue employee conduct?

The U.S. Attorneys’ Manual recognizes that “no compliance program can ever prevent all criminal activity by a corporation’s employees.”  In addition, high-ranking DOJ officials have recognized that “there will always be employees who decide to take matters into their own hands – they are a fact of life,” and that “even the best compliance program may not stop fraud or corruption from occurring.”  The former Assistant Chief of the DOJ’s FCPA Unit candidly stated “most government attorneys realize that a company can take every reasonable step to prevent wrongdoing but ultimately is powerless if somebody really wants to break the law.”

If GSK was the victim of rogue employee conduct will it even matter?

Here it is interesting to note that difference between the U.K. Bribery Act and FCPA enforcement.

As reported elsewhere, the U.K. Serious Fraud Office is also investigating GSK – hardly surprising given that GSK is a U.K. based company.  If any of the conduct under investigation occurred after the Bribery Act went live on July 1, 2011, the Bribery Act would apply including Section 7 which states that a “commercial organization will have a full defense if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing.”  The U.K. Ministry of Justice has recognized  that “no policies or procedures are capable of detecting and preventing all bribery” and that “no bribery prevention regime will be capable of preventing bribery at all times.”

Adequate procedures or good faith compliance efforts of course are not relevant as a matter of law when it comes to FCPA enforcement (they should be – see my article Revisiting an FCPA Compliance Defense), but the enforcement agencies have stated that this is a factor considered in determining whether and how to proceed in a case.

The involvement of Chinese law enforcement, U.K. law enforcement, and U.S. law enforcement sets up a potential and very interesting competition issue.  China and the U.K. would seem to have a greater and more direct interest in the conduct at issue compared to the U.S.

China vs. U.K. competition could get very interesting given the U.K.’s unique double jeopardy provisions.  These provisions were highlighted in connection with the 2010 BAE enforcement action in the U.S. and U.K.  Even though the offense BAE pleaded guilty to in the U.S. was not an FCPA offense, the U.K. was limited in the charges it could bring against BAE under its double jeopardy principles because of the U.S. first-filed action.  Then Serious Fraud Office Director Richard Alderman, responded to my question as follows:

“Q: Are you suggesting that simply because facts are alleged in a U.S. prosecution to support a non-corruption charge, that the U.K. is thereby prohibited from bringing a corruption charge as to those facts?

A: Yes. Our double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offence. 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. As a result I could not continue to consider whether to prosecute BAE for an offence relating to Central and Eastern Europe once BAE had pleaded guilty in the US.”

Even though the U.S would seem to have the least direct interest in the conduct at issue, should there be an FCPA enforcement action against GSK (it shares do trade on U.S. exchanges), the U.S. would likely extract the largest settlement amount.  Of course as a foreign issuer, GSK could only be subject to the FCPA’s anti-bribery provisions to the extent a “means or instrumentality of interstate commerce” were used in connection with any improper payment scheme.  Not so of course with the FCPA’s generic books and records and internal control provisions.

The evolution of GSK’s bribery scrutiny, the conduct of potential rogue employees, and the competition between various law enforcement agencies that is likely to ensue, these are the items of interest from GSK’s scrutiny.

Friday Roundup

Another individual defendant added to the broker-dealer enforcement action, scrutiny alert, want to open a building in China open to the public?, and additional boondoggle specifics.  It’s all here in the Friday roundup.

Additional Individual Defendant Added to the Broker-Dealer Enforcement Action

This previous post highlighted the SEC examination that led to DOJ and SEC charges (including FCPA charges) against Tomas Clarke (a Direct Access Partners (“DAP”) Executive Vice President who worked out of the company’s Miami office) and Alejandro Hurtado (a back-office employee of DAP in Miami).  The enforcement action is based on alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acts as the financial agent of the state to finance economic development projects).

Earlier this week, the DOJ announced here that Ernesto Lujana (a managing partner at DAP and a branch manager of its Miami offices) was arrested and charged (see here for the criminal complaint) in connection with the same alleged bribery scheme.   As noted in the DOJ’s release “Lujan was charged with one count each of conspiracy to violate the Foreign Corrupt Practices Act (FCPA), violation of the FCPA, conspiracy to violate the Travel Act and violation of the Travel Act [as well as] conspiracy to commit money laundering and money laundering.

Like in the previous enforcement action, the SEC also brought an enforcement action (see here for the complaint) against Lujana.  In this SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated as follows.  “For a scheme this bold to succeed, it required the sneaky collaboration of several individuals including the head of the Miami office.  Lujan and the others may have believed they were covering their tracks, but the SEC’s exam and enforcement teams unraveled their fraud.”

Scrutiny Alert

The Wall Street Journal reported yesterday in this article that GlaxcoSmithKline “is investigating allegations from an anonymous tipster that it sales staff in China was involved in widespread bribery of doctors to prescribe drugs, in some cases for unauthorized uses, between 2004 and 2010.”

The article reported as follows.  “According to e-mails and other documents reviewed by the Wall Street Journal, the tipster has alleged that Glaxo’s China sales staff provided doctors with speaking fees, cash payments, lavish dinners and all-expenses-paid trips in return for prescribing the drug firm’s products.”  As reported in the WSJ article, a Glaxo spokesman confirmed that the company is investigating the allegations, but that after thoroughly investigating “each and every claim” from the anonymous source, the company “has found no evidence of corruption or bribery in or China business.”

The WSJ article further noted that “in 2010 Glaxo disclosed it had been contacted by the Justice Department and the SEC about its overseas operations as part of a wider FCPA investigation into pharmaceutical industry practices abroad.”

As noted in this prior year in review post,  in 2012 50% of corporate FCPA enforcement actions involved, in whole or in part, foreign health care providers (such as physicians, nurses, mid-wives, lab personnel, etc.).  See here for a prior post on the origins and prominence of this enforcement theory.

Want to Open a Building in China Open to the Public?

This recent article in the South China Morning Post reminded me of the many business barriers (including arcane and complex licensing, certification and inspection requirements) which often funnel companies seeking to do business in a foreign country into an arbitrary world of low-paying civil servants who frequently supplement their meager salaries through payments condoned in the host country.

The article states, in pertinent part, as follows.

“To obtain a fire-safety certificate from a local fire department, a business owner must pass five ‘checkpoints’ in a complicated and lengthy administrative process.  Each checkpoint is guarded by officials in charge of site inspections and reviewing construction blueprints, equipment and contingency plans. Bribes considerably expedite the process that officials might otherwise draw out for weeks, months or years. Bribes range from a few thousand yuan to hundreds of thousands, per official, depending on their rank and the size of the project. But money isn’t everything – some officials must be wined and dined or given luxury cigarettes. Others request the services of prostitutes. […] Salaries of firefighters are quite low – about 3,400 yuan (HK$4,300) a month in Shanghai – and many come from poor or rural families, as the job hazards dissuade many people from joining. […] However, competition for administrative posts within fire departments was fierce, and only those with strong connections or family influence would stand a chance of winning non-frontline jobs where the real money was made.”

Additional Boondoggle Specifics

This recent Friday roundup detailed boondoggle specifics concerning Wal-Mart’s FCPA scrutiny and related investigation.  As noted here, Jeff Gearheart, the executive officer overseeing global compliance for Wal-Mart Stores Inc., told analysts last week that “300 legal and accounting professionals have logged more than 100,000 hours toward FCPA issues.”


A good weekend to all.

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