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.