GlaxoSmithKline Fined Record $490 Million by China for Bribery as Antibribery Troubles Continue

On Friday, September 19, 2014, GSK China Investment Co. Ltd (GSKCI), the Chinese branch of the London-based GlaxoSmithKline PLC (GSK), was found guilty of bribing non-government personnel. The verdict was reached after a one-day trial in Changsha, China. The Chinese court fined the pharmaceutical company a record three billion yuan (US $488.5 million) for offering money or property to doctors and hospitals in exchange for endorsing their products. According to China’s official news agency, the fine represents the largest corporate fine ever imposed by a Chinese court.

The court also convicted several former GSKCI officials of bribery-related charges, including former GSK China manager and U.K.-citizen Mark Reilly. Reilly was ordered to serve a suspended three-year sentence and will be deported from China. In addition, four other Chinese nationals, including former human resources director Zhang Guowei, former Vice President and operations manager Liang Hong, former legal affairs director Zhao Hongyan and former business development manager Huang Hong, also received suspended sentences of two to three years. The sentences were reduced because all five executives pled guilty, the court explained.

The trial concludes a 15-month-long investigation that launched in July 2013 when Chinese authorities accused GSKCI of paying $482 million in bribes to health officials, doctors and hospital personnel to amplify sales. According to China’s Ministry of Public Security, GSKCI had retained 700 travel agents to dispense the illegal payments since 2007.

GSK posted an apology on its Chinese website after the verdict, stating that it “is deeply disappointing that these issues were not identified and addressed. GSK plc has reflected deeply and learned from its mistakes, has taken steps to comprehensively rectify the issues identified at the operations of GSKCI, and must work hard to regain the trust of the Chinese people.”

GSK announced the fine in a press release and indicated that the company will pay the fine with cash on hand and take a charge against third-quarter earnings. The fine amounts to approximately 4 percent of GSK’s 2013 operating profits. The company’s press release also referenced comprehensive remedial steps taken to address the bribery-related conduct, including fundamental changes to the company’s salesforce incentive program and corporate controls enhancements.

Read additional coverage at ReutersBusiness Insider and USA Today.

In related news, earlier this month, it was reported that a U.S. probe into GSK’s alleged violations of the FCPA may be more far-reaching than pharmaceutical corruption, extending into the company’s procurement practices in its Chinese consumer healthcare business. Three preservation notices that were issued by GSK in 2012 and that were related to the U.S. investigation were recently made public. Although these notices do not serve as evidence of wrongdoing, they indicate that the company faces investigatory scrutiny in additional sectors of its business beyond those targeted by the Chinese bribery action. 

The pharmaceutical and biotechnology company is also facing a number of other bribery allegations, with investigations ongoing in Poland, Syria, Jordan, Lebanon and Iraq. GSK also disclosed that it is facing a separate investigation by the U.K.’s Serious Fraud Office (SFO). Learn more about these investigations in our May 2014 issue.

Russian Subsidiary of IT Giant Pleads Guilty to Bribery; Sentenced to Almost $59 Million Fine and Faces Potential Ban from Supplying Products to Canadian Government

As we reported in April, Hewlett Packard (HP) and three foreign subsidiaries agreed to pay $108 million to settle FCPA charges with the DOJ and SEC. On Thursday, September 11, 2014, an international HP subsidiary, ZAO Hewlett-Packard A.O. (“HP Russia”), pled guilty to conspiracy and substantive violations of the anti-bribery and accounting provisions of the FCPA in federal court in San Francisco. Following the guilty plea, and pursant to the plea agreement, U.S. District Judge D. Lowell Jensen of the Northern District of California sentenced the company, imposing an agreed $58.8 million fine on the Russian subsidiary. 

The DOJ announced the guilty plea and fine in a press release, describing the bribery perpetrated by officials of HP Russia as “brazen,” involving “millions of dollars in bribes from a secret slush fund,” to obtain a lucrative government contract with Russia’s top prosecutor’s office. According to the statement of facts filed with the plea agreement, HP Russia executives created surplus profit margins through an elaborate buyback arrangement by selling their computer and technology products to a Russian channel partner and then buying them back at grossly inflated prices. The payments made to buy back the products at inflated prices were funneled through an intricate web of shell companies, several of which were affiliated with Russian government officials. HP Russia then sold the same products at inflated prices to the Office of the Prosecutor General of the Russian Federation as part of a technology contract valued at more than € 35 million (US $44.2 million).

To conceal these corrupt payments, conspirators inside HP Russia maintained two sets of corporate records: one containing secret spreadsheets detailing bribe recipients, and a sanitized version that masked the bribes from outsiders. The conspirators also used off-the-books side agreements to further disguise the bribes.

Court filings indicate that authorities recognize HP’s extensive cooperation with the DOJ and the extensive anti-corruption remedial efforts undertaken by the company.

As a result of this guilty plea, Canada is considering imposing a 10-year ban on the sale of HP products and services to the government. This will be the first significant test of stringent new Canadian integrity rules implemented by Public Works and Government Services. Introduced in March, these regulations stipulate that corporate entities as well as their affiliates are subject to an automatic ban on government contracts if they or any of their affiliates are convicted of various wrongdoings, including bribery, even if those crimes occurred outside of Canada. Public Works has not provided a timeline for issuing a decision but indicated they will conduct their review as quickly as possible. To learn more about this impending penalty, please see The Globe and Mail.

The April 2014 announcement also included “criminal resolutions with HP subsidiaries in Poland and Mexico which violated the FCPA in connection with contracts with Poland’s national police agency and Mexico’s state-owned petroleum company, respectively.”

To learn more about the bribery case surrounding HP Russia and other subsidiaries, please see the DOJ’s press release and news coverage from the FCPA Blog and USA Today

General Cable Investigates Potential FCPA Violations in Four Countries

General Cable Corp. disclosed in its 8-K filing on September 22, 2014 that the company is examining business dealings in its Angola, Thailand, India and Portugal operations for possible abuses of the FCPA and other international anticorruption laws. The investigations relate to “payment practices with respect to employees of public utility companies, use of agents in connection with such payment practices and the manner in which the payments were reflected on our books and records.” In its 8-K, the Kentucky-based company announced its determination that certain employees in its Portugal and Angola subsidiaries have made potentially improper direct and indirect payments from 2002 to 2013 to officials of Angola government-owned public utilities. In conjunction with outside counsel, the company is now assessing its use and payment of agents in its Thailand and India operations.

In its 8-K, the company further stated that it is initiating a screening process related to its foreign sales agents, including a review of their retainer agreements and a risk-based assessment to “determine the scope of due diligence measures to be performed by a third-party investigative firm.”

General Cable has voluntarily disclosed these matters to the SEC and the DOJ and has complied with requests for more information. In the 8-K filing, the company cautioned that it is unable to predict whether the agencies will take any action and recognized the potential “imposition of substantial fines, civil and criminal penalties.”

See additional coverage at the FCPA Blog and The Wall Street Journal.

Enforcement Agencies Drop FCPA Investigation of Technology Firm; Decline Prosecution

Image Sensing Systems, Inc. (ISS), which creates video-image-processing products for use in traffic management systems, announced in a press release on September 8, 2014 that the DOJ has closed its inquiry into ISS’ previously disclosed potential FCPA violations. ISS was also previously under investigation by the SEC, but the investigation was closed without enforcement action.

In early 2013, two employees of ISS’ Polish subsidiary, Image Sensing Systems Europe Limited SP.Z.O.O., were charged with criminal violations of certain laws related to a project in Poland. When ISS learned of the investigation by Polish authorities, the company hired outside counsel to conduct an internal investigation, voluntarily disclosed the matter to the DOJ and the SEC, and cooperated fully with the agencies’ review. DOJ cited these attributes, along with ISS’ voluntary enhancements to its compliance program, when declaring the end of the investigation.

To read more, see coverage at Compliance Week and the FCPA Blog.

Italian Company Executives Investigated for Internal Corruption in Nigerian Oil Transaction

Italian prosecutors are investigating Eni S.p.A’s newly appointed CEO, Claudio Descalzi, in connection with the company’s 2011 acquisition of a 50 percent interest in OPL 245, a large Nigerian offshore oil block. Chief Development, Operations and Technology Officer Roberto Casula is also being investigated as part of the probe.

The Wall Street Journal has reported that the investigation is examining potential international corruption regarding the Nigerian asset purchase by Eni and another large oil company for $1.3 billion. The acquisition faced scrutiny from anticorruption advocates lobbying for increased transparency from oil companies conducting business with non-Western governments that have access to natural resources. Eni currently has the largest operations in Africa among multinational energy companies.

At the request of the Italian prosecutors, a British court recently froze two bank accounts containing $190 million belonging to an individual who allegedly served as an intermediary for the OPL 245 block acquisition.

Eni has denied any illegal conduct, indicating that it is cooperating with the prosecutor’s office whose inquiry will ultimately demonstrate the “correctness of its [Eni’s] actions.” The Rome-based company has also asserted that the OPL 245 block purchase deal did not involve any intermediaries, and no funds were used to sway public officials or the purchase process.

See more coverage at the FCPA Blog and BBC.

U.K. Appeals Court Upholds Two Innospec Executive Convictions; Reduces One Sentence

In July and August 2014, we reported the convictions and sentences of four executives in the drawn out Innospec Limited bribery case. On September 19, 2014, the U.K. Court of Appeals upheld the convictions of two of the defendants, Dennis Kerrison and Miltiades Papachristos. The global specialty chemicals company and its executives were found guilty of making payments to officials in Indonesia in exchange for securing contracts from the government to supply an Innospec chemical, Tetraethyl Lead, whose use was prohibited in the United Kingdom in 2000.

The justices in the U.K. Court of Appeals reduced Kerrison’s sentence from four to three years on the basis of an error in the trial judge’s sentencing calculation. Although the justices found that the trial judge appropriately deducted 12 months from Kerrison’s sentence for personal mitigation, they held that the judge should have used a sentence of four years as the starting point for the sentence calculation, rather than five years. The sentences of all other parties, including Innospec, Papachristos and the other two executives sentenced in August for their role in bribing state officials in Indonesia and Iraq, were not affected. 

Read the press release issued by the SFO and the full judgment.