May 2014 saw the UK Serious Fraud Office (SFO) and a number of other international authorities (including the US Department of Justice (DOJ) open investigations into GSK’s sales practices in China.

These investigations followed a very public investigation by the Chinese authorities into GSK’s hospitality practices, with almost daily reports in the global press about the allegations of corrupt behaviour. In particular, the authorities alleged that GSK were bribing local doctors and oficials in order to secure drug orders. Following a one day trial in China in September 2014, GSK was found guilty of bribery and was ined USD 490m. Five GSK executives were also given suspended jail sentences. The former head of Chinese operations, Mark Reilly (a British national), was given a three year suspended jail sentence and deported from China.

With investigations by the SFO and DOJ ongoing, this may not be the end of the matter for GSK but, notwithstanding the substantial ine, the global negative publicity alone has caused signiicant damage to GSK as a brand and caused a number of multinationals, particularly in the Lifesciences sector, to consider whether their operations could fall victim to the changing regulatory and political environment in China.

Lessons learnt

Incentive arrangements: One of the key criticisms arising out of the Chinese authorities’ investigation was that GSK’s pay/bonus packages focused too heavily on sales performance, which it considered incentivised people to engage in bribery. Those looking to reduce risk may wish to review the way in which they reward staff to stop people behaving unethically to maximise their remuneration.

HQ oversight: From the outset of the investigation, GSK’s UK HQ maintained that it had no knowledge of the practices undertaken by its Chinese subsidiary, in breach of the company’s governance and compliance procedures. The UK Bribery Act corporate offence is a strict liability offence, and so a lack of knowledge of bribery committed by associated persons (such as subsidiaries or employees) after 1 July 2011 for the benefit of the UK business would not avoid liability. The only defence will be where the UK HQ had “adequate procedures” to prevent or mitigate the risk of bribery occurring. What constitutes adequate procedures is yet to be tested or clarified by the courts but one may expect the courts to look closely at whether the defendant company was aware of market or country speciic risks and had taken steps to mitigate them, was monitoring the effectiveness of its policies by its global subsidiaries, and had sufficient management reporting on corruption risks.

Understand the country risk: Multinationals operating globally need to understand the unique risks and issues presented by the jurisdictions in which they do business. The changing political and regulatory climate in China meant that GSK (and other multinationals operating within China) faced a greater risk in relation to practices that historically may have been acceptable or at least overlooked by the relevant authorities. It is important to understand how a changing environment (either as a result of changing laws, governments, economic or regulatory situations) may impact on the level of risk posed to the company, so that applicable governance and compliance programmes may be adapted to reduce any additional risks. It is also important to be alive to the types of methodologies employed in different sectors and jurisdictions to facilitate corruption - in the GSK example in China, there was reportedly wide use of bogus travel agents to mask and enable the funding of improper payments.