Background

Foreign companies doing business in China have focused in recent days on the case of GlaxoSmithKline (“GSK”), the British multinational producer of pharmaceuticals, biologics, vaccines and consumer healthcare products headquartered in London. Articles to date, however, have been more descriptive than analytical and have focused more on the alleged acts and potential implications for the individuals allegedly involved and not as much on potential exposure for the corporate entities and those corporate officers who were not directly involved in actions violating PRC law. This article addresses those points while also placing the case in the broader context of China today.

Reported Facts

A newsletter published on the official website of the Ministry of Public Security ( “MPS”) of the People’s Republic of China on July 11 reported that senior executives of GlaxoSmithKline (China) Investment Co., Ltd. (“GSK China”) were suspected of involvement in significant economic crimes. The China police subsequently filed a case and commenced an investigation. They alleged that to promote sales and raise retail prices for its products, GSK China has, in the course of its business operations in recent years, offered bribes, both directly and indirectly (through travel agencies), sometimes sponsoring events and travel for government officials, medical associations, foundations, hospitals, and physicians.

It was further alleged that certain executives of GSK China have received kickbacks and other benefits through travel agencies, and reports indicate that GSK China may have received cash from the fraudulent use of special VAT invoices and/or false invoices issued by the same travel agencies in violation of PRC tax laws. MPS describes the case as “involving numerous people, continuing for a long time, involving huge amounts and constituting serious violations”. Executives of GSK China, detained by the police early in the investigation, have confessed to crimes. The police also presently hold in custody Weng Jianyong (“Mr. Wong”), the legal representative of the travel agency that appears to be at the center of the scandal. The state media has identified that travel agency as Shanghai Linjiang International Travel Agency (“Linjiang Travel”). Mr Wong is said to be suspected of money laundering for one of the vice presidents of GSK China, Liang Hong (“Mr. Liang”).

In a subsequent interview with MPS, Abbas Hussain, GSK President – Emerging Markets, apologized and called the allegations “shameful”. He expressed the desire to cooperate with the Chinese authorities to root out corruption in China, saying that GSK is deeply disappointed by the allegations of fraudulent behavior and ethical misconduct by some individuals at the company and also at third-party agencies. GSK in a later statement confirmed that certain senior executives of GSK China, who should know the operational systems, appeared to have acted outside GSK’s approved procedures and in violation of PRC laws.

On July 11, 2013, MPS officially reported that certain senior executives of GSK China were detained for investigation of potential crimes, and on July 15, 2013 MPS relayed a report of Xinhua Net (www.xinhuanet.com) on its micro blog that indicates that the detained senior executives include two vice presidents, one legal affairs director, and one business development manager, all of whom allegedly offered bribes by funneling up to RMB 3 billion (US$ 488 million) through travel agencies using false and fraudulent invoices in violation of PRC tax laws. It was further reported that there was evidence of illegal behavior dating back to 2007.

Allegedly, the accused officers of GSK China used the travel agencies to distribute illegal payments to government officials, medical associations, foundations, hospitals, and physicians. Apparently the GSK China officers helped the travel agencies to win bids conducted by GSK China for services such as arranging medical conferences, seminars, training sessions, and other activities, some of which never took place, others of which involved fewer participants than had been reported. The travel agencies thereby raised cash by issuing false invoices to GSK China, and then allocated the moneys received, some to officials in Mr. Liang’s name, some to representatives of pharmaceutical companies as bribes to physicians and officers, and some as kickbacks to specific executives of GSK China. The travel agencies would retain a portion of such cash as fees for their services. The false invoices and illegal payments were difficult to detect. “You’d look at invoices and expenses, and it would all look legitimate,” said one senior executive at an accounting firm.

Mr. Wong said that he was not the one who benefited the most from the services provided by the travel agencies, and the reported facts indicate that Linjiang Travel was not the only agency that cooperated with GSK China in the illegal activities.

Analysis of Potential Criminal and Administrative Violations under PRC Law

China prohibits bribery in two laws of wider application: (a) the PRC Anti-Unfair Competition Law, along with the relevant regulations and rules promulgated by the State Administration of Industry and Commerce (“SAIC”) to implement that law, and (b) the PRC Criminal Law, along with the relevant regulations and judicial interpretations issued by the Supreme People’s Court and/or the Supreme People’s Procuratorate. A bribery case under the former will be investigated by SAIC or its local counterparts (“AIC”), and might be subject to administration penalties. A bribery case with more serious implications arising under the latter will be investigated by the MPS and the applicable local counterpart, the public security bureau (“PSB”), or by the procuratorate and then prosecuted by the procuratorate and tried by a court, with potential criminal penalties imposed on those convicted. In the present case, MPS has conducted the investigation and it appears that GSK China and certain of its senior executives might be charged with violation of either or both laws.

To analyze the present case, we apply below these laws to the reported facts.

(A)              PRC Anti-Unfair Competition Law

The PRC Anti-Unfair Competition Law and the Interim Rules on Prohibition of Commercial Bribery, which interpret the PRC Anti-Unfair Competition Law on matters of commercial bribery (the “Interim Rules”), provide that a business operator offering money or property to bribe any organization or individual in order to buy or sell products will be deemed to have committed commercial bribery. The term “money or property” explicitly includes promotion fees, marketing fees, research fees, service fees, consulting fees, commissions, and the reimbursement of expenses, or the providing of other benefits including travel in connection with the transaction.

The key issue when determining whether the offer or granting of a gift or other benefit constitutes a bribe under PRC law is the intent behind the offer or grant, i.e., whether the giving of the benefit was for the purpose of inducing a purchase or sale of products or services. As a practical matter, AIC will consider various factors in determining whether the offer or gift constitutes a bribe, such as: (a) the amount of the benefits conveyed, (b) the description of the expense in the records of the offeror, and (c) the extent to which the accused cooperate with AIC during its investigation.

With respect to (a), though the Ani-Unfair Competition Law does not specify any particular threshold or minimum value for the benefits offered, the applicable AIC in different locations have established thresholds. With respect to (b), the accused may be able to defend itself in an AIC investigation if it can demonstrate that its books accurately reflect only correct and legitimate costs and expenses and that the payments were made based solely on actual transactions. Finally, under (c), if the accused is cooperative during the bribery investigation by, for example, promptly providing documents requested by AIC and responding to AIC’s inquiries honestly and fully, AIC may exempt or reduce the penalty, at least to the extent permitted by law.

(B)              PRC Criminal Law

Under the PRC Criminal Law, giving “money or property” to an official or non-official for the purpose of “securing improper benefits” may constitute the crime of offering a bribe. “Money and property” may include any benefits having monetary value, including offers of home renovation, pre-paid membership cards, gift cards or coupons, the payment of travel expenses, bank cards with pre-paid credit, etc.

As with the PRC Anti-Unfair Competition Law, the determination of whether the crime of bribery has been committed depends principally on the intention behind the offered benefit, i.e., whether the offer was made for the purpose of obtaining (i) benefits that are in violation of applicable laws, regulations, rules, or state policies, or (ii) helping or facilitating the recipients in their violation of any law, regulation, rule, or state policy. The following factors will be considered when determining whether an offer or gift constitutes a criminal bribe rather than a legitimate gift: (aa) the circumstances in which the transaction occurred, for example, the relationship between the parties and the history of transactions between them, (bb) the amount or value of the property offered or given, (cc) the cause, time, and means by which the money or property was presented, and (dd) whether the recipient used his/her position to obtain benefits for the offeror.

The PRC Criminal Law specifies the following trigger points for those who offer or make a bribe in violation of the PRC law:

  1. In cases where the offeror is an individual and the recipient is an individual (e.g., a state functionary, which generally includes any official who is engaged in public services, or any non-state functionary), a criminal investigation will be triggered if the value offered is at least RMB 10,000 (US$ 1,612) (Article 164 and 389 of the PRC Criminal Law).
  2. In cases where the offeror is an individual and the recipient is an entity, a criminal investigation will be triggered if the value offered is at least RMB 100,000 (US$ 16,129) (Article 391).
  3. In cases where the offeror is an entity and the recipient is an entity, a criminal investigation will be triggered if the value offered is at least RMB 200,000 (US$ 32,258) (Article 391).
  4. In cases where the offeror is an entity and the recipient is a state functionary, a criminal investigation will be triggered if (i) the value offered is at least RMB 200,000 (US$ 32,258), or (ii) when the value is less than RMB 200,000 (US$ 32,258), but not less than RMB 100,000 (approximately US$ 16,129), and one of the following is met:
    • the offer is made in return for illegal benefits;
    • the offer is made to more than three persons;
    • the offer is made to one or more high-level officials engaging in judicial service; or
    • heavy losses have been caused to the interests of the State. (Article 393).
  5. In cases where the offeror is an entity and the recipient is a non-state functionary, a criminal investigation will be triggered if the value offered is at least RMB 200,000 (US$ 32,258) (Article 164).

The reported actions by certain GSK China executives in arranging for payments to be made to government officials, medical associations, foundations, hospitals, and physicians could constitute violations of Articles 389 and 391 of the PRC Criminal Law in accordance with items 1 and 2 above. In addition, the acceptance of kickbacks from the travel agents or other third parties by such executives could constitute a violation of Article 163 of the PRC Criminal Law, which prohibits the acceptance of a bribe or kickback by a non-state functionary if the payment or benefit offered by the travel agent or other third party had a value of RMB 5,000 (US$ 806) or more.

According to published reports presently available, only certain individual officers of GSK China have so far been accused, not GSK China itself. Based on the reported facts, there may be risk that GSK China also violated Articles 391, 393, and 164 of the PRC Criminal Law, as outlined above.

If certain officers of a company commit criminal violations for the business interest of the company through collective decisions, the company itself and the company’s legal representative may also be liable. We have not so far seen any report indicating that either GSK China or its legal representative is subject to investigation.

Further, sufficient facts are not currently available to analyze the exposure for GSK China’s offshore parent or any of its officers, but we note that the PRC Criminal Law may be applied if a foreign individual commits a crime in violation of PRC law, and the minimum punishment for such crime is three years’ imprisonment, as well as penalties, confiscation of benefits, and imprisonment with a maximum life sentence depending on the seriousness of the violation.

Context and Conclusions

Some commentators have interpreted the actions taken by the PRC authorities in the GSK China case as an indication that the PRC will now begin to enforce its anti-bribery laws against foreign companies and individuals. It response, it is important to recognize that China has in the past taken action against foreign companies and individuals, though its investigations have rarely attracted the level of global attention that we have seen in the present case. Further, the new government in China has announced from the day it took office that it will crack-down on corruption. In almost any jurisdiction, as a practical matter, it will typically be easier to implement such a program through enforcement against foreign parties rather than against local ones. Further, the rising cost of pharmaceuticals and medical devices has in recent years sparked widespread frustration, and being able to explain such inflationary pressures as being the result of criminal misconduct by the executives of a foreign company may be helpful.

Nonetheless, this is far more than a case of targeting the foreigners. If the reported facts prove to be correct, then the extent and nature of the crimes seem clearly to merit enforcement action regardless of who the violators are. Further, to the extent other companies operating in China, whether foreign or domestic, in the medical sector or any other, may be engaging in such practices, the GSK case should serve as a wake-up call, and the shareholders of companies in China should consider undertaking internal due diligence to ensure that existing compliance programs are properly understood and implemented here.

  1. In cases where the offeror is an individual and the recipient is an individual (e.g., a state functionary, which generally includes any official who is engaged in public services, or any non-state functionary), a criminal investigation will be triggered if the value offered is at least RMB 10,000 (US$ 1,612) (Article 164 and 389 of the PRC Criminal Law).
  2. In cases where the offeror is an individual and the recipient is an entity, a criminal investigation will be triggered if the value offered is at least RMB 100,000 (US$ 16,129) (Article 391).
  3. In cases where the offeror is an entity and the recipient is an entity, a criminal investigation will be triggered if the value offered is at least RMB 200,000 (US$ 32,258) (Article 391).
  4. In cases where the offeror is an entity and the recipient is a state functionary, a criminal investigation will be triggered if (i) the value offered is at least RMB 200,000 (US$ 32,258), or (ii) when the value is less than RMB 200,000 (US$ 32,258), but not less than RMB 100,000 (approximately US$ 16,129), and one of the following is met:
    • the offer is made in return for illegal benefits;
    • the offer is made to more than three persons;
    • the offer is made to one or more high-level officials engaging in judicial service; or
    • heavy losses have been caused to the interests of the State. (Article 393).
  5. In cases where the offeror is an entity and the recipient is a non-state functionary, a criminal investigation will be triggered if the value offered is at least RMB 200,000 (US$ 32,258) (Article 164).