On September 19, 2014, British pharmaceutical giant GlaxoSmithKline (“GSK”) announced that the Chinese Hunan Province Changsha Intermediate Court found its Chinese subsidiary (“GSK China”) guilty of bribing doctors and governmental officials in China. GSK China as a legal entity was sentenced a record-breaking monetary penalty of RMB 3 billion (approx. US$490 million).
GSK China’s senior management personnel (its general manager and the heads of its legal, operations, business development and HR departments) as individuals were also subject to personal criminal liabilities, varying from two to four years’ imprisonment with probation. It was also reported that several other large international pharmaceutical manufacturers are now on the “blacklist” of the Chinese regulators’ investigation – the pharma industry is viewed as a high incidence zone of commercial bribery in China.
Multi-national companies’ (“MNCs”) businesses in China generally face a two-fold compliance regulation: the Chinese applicable laws, and certain jurisdictions’ extra-territorial anti-bribery legislation, including the U.S. Foreign Corrupt Practices Act (“FCPA”).
I. Chinese Domestic Anti-Bribery Practice
1. Chinese Legal Framework on Corporate Commercial Bribery
Corporate commercial bribery, meaning bribery offered by entity to either governmental organ/official or non-governmental entity/personnel for improper advantage, could be subject to both the Chinese criminal law system and certain lower level administrative legislation. Criminal liabilities apply to the most serious offenses (which are defined by certain monetary thresholds), while smaller commercial bribery cases are governed by lower level administrative legislation, as follows:
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2. Noteworthy Tendency in Recent Judicial Practice
Bribery, to either governmental officials or non-governmental recipients, is a statutory crime in China. Nevertheless, the enforcement of law was criticized as inconsistent, or even sometimes selective. In some previous cases, Chinese authorities kept silent on bribery claims and charges against MNCs’ subsidiaries in China, even though some foreign regulators have found such MNCs guilty of bribing Chinese governmental officials under the FCPA or other extraterritorial anti-bribery regulations.
As shown in the GSK case, however, Chinese procurators and judges now put more weight on penalizing the crime of bribery. It is also evident that under Chinese President Xi Jingping’s anti-corruption campaign, the enforcement has expanded to focus not only on governmental officials, but also on the business communities.
II. International Anti-Bribery Regulations – FCPA
1. Extraterritorial Reach of FCPA
Apart from Chinese domestic legislation, the FCPA is another crucial international consideration for MNCs that are headquartered or organized in the U.S., or that have even tenuous U.S. connections (such as bank accounts or servers in the U.S.).
Enacted in 1977, the FCPA consists of two provisions: (1) prohibition on giving, offering, or promising anything of value to any foreign (non-U.S.) officials, political parties or candidates for public office for the purpose of securing an improper advantage or obtaining or retaining business, and (2) requirements that companies with registered securities and companies required to file periodic reports with the U.S. Securities and Exchange Commission (the “SEC”) establish and maintain accurate books and records and sufficient internal controls.
The Department of Justice (“DOJ”) and the SEC share joint enforcement responsibilities under the FCPA, and they have been keen to aggressively enforce the law. For example, they have established a very broad definition of “foreign official” that encompasses the officers, directors, and employees of stateowned, partially state-owned, or state-controlled entities. They have also taken the position that they have extremely broad jurisdiction to prosecute conduct undertaken by non-U.S. citizens that takes place outside of the U.S.
2. Legal Liability – Civil and Criminal
Compared to the Chinese domestic legislation, the FCPA creates both civil and criminal liability for individual and corporate offenders.
The FCPA’s anti-bribery provisions subject companies to criminal fines of up to $2 million per violation and civil penalties of up to $10,000 per violation, while individuals such as officers, directors, stockholders, employees and agents of U.S. entities may be subject to criminal fines of up to $250,000 per violation and imprisonment for up to five years and civil penalties up to $10,000. Violations of the accounting provisions bear even steeper penalties, including criminal fines of up to $25 million per violation (or twice the gain caused or loss avoided by the conduct) for entities and criminal fines of up to $5 million and imprisonment of up to 20 years for individuals.
III. Tips and Pitfalls of Compliance Control and Guide to Compliance Program Establishment
Given the Chinese government’s increasing enforcement of anti-bribery laws, as well as the broad jurisdiction of the FCPA, MNCs should examine their operations and business methods in China to ensure that their policies are fully in compliance with both Chinese laws and applicable extra-territorial rules.
1. Understand China’s Evolving Anti-Corruption Compliance Landscape
MNCs should familiarize themselves with the Chinese domestic anti-corruption legislation and enforcement. They must understand China’s developing judicial environment and take steps to prevent new and innovative forms of bribery and corruption. The insights and experience of legal professionals specialized in dealing with Chinese government investigations can help minimize compliance risks and potential consequences.
2. Adopt Higher Standards in Partnering with Vendors
Both Chinese domestic legislation and the FCPA prohibit bribery through third-party agents or other intermediaries (e.g., travel agencies, sales representatives, distributors etc.). It is unlawful to make a payment to any third party, while knowing that all or part of the payment will be offered, given, or promised, directly or indirectly, to any governmental or non-governmental personnel for any prohibited purpose. It is therefore worthwhile to always conduct thorough and complete anti-corruption compliance due diligence on potential third party partners.
3. Assess and Adjust Business Practices
It has been reported that GSK (and other major multinational pharmaceutical companies in China) adopted a very aggressive sales strategy and employee incentive mechanism. MNCs in China will need to assess and adjust their business practices, including sales approaches, compensation philosophy, and performance review system, in order to ensure that they are not inadvertently incentivizing misconduct. Setting up a “compliance” bonus for salesmen may also be a good idea.
4. Emphasize the Importance of a Localized Compliance Program
MNCs in China should also consider the appropriateness and completeness of their internal compliance programs, including their compliance training programs for both employees and suppliers or intermediaries, code of ethics/conduct, internal accounting compliance policy, compliance assessment mechanism, etc. The compliance program needs to draw a clear line to distinguish “red flag” activities in sensitive areas, including commission/referral fees, gifts, discounts, overseas training, project bidding, entertainment, hospitality, and charitable contributions that are closely scrutinized by the regulators. An effective compliance program must also be “active and ongoing” – including periodic compliance audits and immediate remediation of any red flags.