Recent Chinese anti-corruption investigations into pharmaceutical manufacturers, beginning with an investigation into GlaxoSmithKline (GSK), have broadened in the last few weeks due to whistle blower allegations against Sanofi, Novartis, and Eli Lilly. One of the spin-offs of the investigations themselves is the arrest, detention and/or travel restrictions imposed on foreign employees or other employees of the companies being investigated. At the outset of the GSK case, following allegations from an alleged whistle blower, Chinese police detained four Chinese GSK executives and placed travel restrictions on one foreign finance executive in connection with allegations that the drug maker had paid nearly $500 million in bribes to doctors and officials in order to boost sales. In late July, the state media reported that 18 GSK employees and some medical personnel had been detained by the police in Zhengzhou, China. An internal probe at GSK may have uncovered evidence that supports some of these claims, but GSK has maintained that the individuals involved were acting outside of corporate compliance controls.

Since then, China’s 21st Century Business Herald has published a series of whistleblower accusations (of behavior similar to GSK’s) against foreign pharmaceutical firms Sanofi, Novartis and Eli Lilly. It has been reported that Chinese authorities have also visited sites operated by Novo Nordisk A/S, H. Lundbeck A/S, AstraZeneca Plc and UCB SA in an industry-wide crackdown.

In light of these increased enforcement actions by China’s various regulatory agencies, foreign executives in China may benefit from understanding liabilities that they may face and legal enforcement measures that may be taken against them.

Most foreign executives serve as the legal representative of a Foreign Invested Enterprise (FIE) in China or as the chief representative of a Representative Office (“rep office”) of a foreign company. A company’s legal representative acts on behalf of and in the name of the company to exercise all rights and perform all obligations. The legal representative is the most important constituent of the Chinese corporation governance structure and represents having the chief power in a company. As such, they are directly responsible for the conduct of the FIE or rep office. The same applies to the chief representative of a rep office. Under Chinese law, senior management personnel such as the board of directors, supervisor or board of supervisors, general manager and deputy managers, and financial officers also have their respective duties and may shoulder potential legal liabilities.

Civil

In general, the operational activities that are undertaken by an executive in the name of the company are professional conduct and the civil consequences are to be borne by the company. However, executives can also be liable for any loss to the company due to gross negligence or willful misconduct. Directors, supervisors and other senior management personnel have a fiduciary duty and duty of diligence towards the company. Violations of fiduciary duty and the duty of diligence may render executives liable. Senior management personnel may also be liable if they use their affiliation to harm the interests of the company.

Administrative

A legal representative or de facto controlling person may be sanctioned and fined in addition to the company if certain regulations are violated. Examples of such behavior that may result in such a fine include activities such as (1) conducting illegal operations beyond the approved and registered business scope; (2) concealing facts from the registration and tax authorities or practicing fraud; (3) secretly withdrawing funds or hiding property to evade the repayment of debts; (4) disposing of property without authorization after the company is dissolved, disbanded or declared bankrupt; (5) failing to apply for registration and to make a public announcement promptly when the company undergoes material changes or termination, thereby causing stakeholders to suffer heavy losses; and (6) engaging in other activities prohibited by law or damaging the interests of the state or the public.

Criminal

If a company as a whole commits a crime, it is usually the company that is penalized, usually in the form a fine. However, some crimes also confer criminal liabilities against managers or other persons directly responsible. These crimes include manufacturing or selling fake and inferior commodities, tax evasion, copyright infringement, falsifying and withdrawing registered capital and illegal business operations. A recent change to China’s Criminal Procedural Law provides for foreign suspects to be tried in grassroots instead of mid-level courts, except for cases involving smuggling and crimes that carry a sentence of life imprisonment.

During recent investigations into GSK, the Chinese police first detained and then formally arrested Peter Humphrey and his wife, both risk consultants and foreign citizens. Mr. Humphrey is the co-founder ChinaWhys Co., of which GSK was a client. In China, an arrest indicates that police believe they have enough evidence for a case to be brought to trial. Detention is an informal stage where authorities gather information that can last for weeks. Mr. Humphrey and his wife were formally accused of illegally purchasing private personal information and not of any charges directly related to investigations into GSK. Mr. Humphrey was recently displayed on CCTV confessing to violating Chinese law.

Enforcement Measures

Typically, law enforcement authorities can take the following measures during a criminal investigation: summons by warrant, bail pending trial with restricted travel, residential surveillance, detention and arrest. Actions that violate the administration of public security, but do not constitute a crime, are subject to punishments such as warnings, fines, administrative detention and revocation of permits. Forced departure or deportation may be applied to foreigners who commit crimes or breaches of public security.

Restriction on travel may be issued against foreign executives, and are often used when their companies have unsettled economic disputes in China. This normally applies if the company is undergoing bankruptcy proceedings, has unfinished civil suits, fails to perform obligations stipulated by court order or has unpaid taxes. The court or other authorities may request assistance from China’s border control authority.

The Current Climate

Whistle-blowing is becoming a significant basis upon which Chinese regulators are relying to kick-off investigations which may, in turn, result in some risk of restrictions on travel, or other restrictions to management on the ground. Accordingly, any internal hot-line or other tips should be assessed immediately. Companies must carefully consider events which could trigger whistle-blower allegations, whether based in truth or not, and be prepared to address them. Such events include the termination of employees, termination of a third-party or negotiations with a potential target or partner. There have been recent cases where, during the course of negotiating business deals, a local company has threatened to report allegations of corruption or other conduct to the authorities to benefit their position. This tactic is not just directed at foreign companies, but is occurring between Chinese companies as well. Companies should manage and plan for these events carefully. Be aware of where such events are scheduled to take place and who should be involved in the process.