On September 19, 2014, pharmaceutical giant GlaxoSmithKline plc (GSK) announced that its Chinese subsidiary had been found guilty of bribing health officials in the country and was forced to swallow a 3 billion yuan ($492 million CDN) penalty, the largest corporate fine in China’s history. Five of the company’s managers were also given suspended prison sentences of two to four years’ probation after the one-day trial in Hunan Province. GSK has announced that it is not seeking to appeal.

This bulletin will review what led to GSK’s bitter medicine in China’s courts and what lessons this example holds for other foreign companies operating in the country or trying to combat their own corruption risks more broadly.

“A Massive Bribery Network”

In June 2013, the Wall Street Journal reported that GSK was investigating allegations from an anonymous tipster that its sales staff engaged in widespread bribery to sell drugs between 2004 and 2010. According to the reports, employees of the company would often treat doctors and others to trips and pay their expenses. Yet after a four-month investigation, GSK announced that its internal probe found no evidence of corruption. Then, in May 2014, Chinese officials launched their own investigation after accusing Mark Reilly, GSK’s manager in China, of operating “a massive bribery network” since 2009 by having his salespeople pay doctors and hospital officials bribes to boost GSK’s drug sales. According to Chinese officials, these bribes resulted in several billion yuan in “illegal revenue” for the company, an amount commensurate with the fine levied against it. GSK announced it was cooperating with authorities in the investigation, which may account for the probation sentences being more lenient than may have otherwise been expected.

Though it may be too early to say what went wrong for GSK in China, what is known about this case and the corrective actions GSK has since announced it has taken, provide some key lessons for other companies trying to combat their corruption risk.

Understand the Shifting Landscape of Local Compliance Risks

For over 30 years, the United States, through the Foreign Corrupt Practices Act, was effectively the world’s anti-corruption police. It was only four years ago that the United Kingdom joined the fray through its tough Bribery Act and Canada finally began to enforce its own Corruption of Foreign Public Officials Act. Yet even then there was often little incentive to comply with local anti-corruption laws in developing countries to the dearth of such prohibitions or their virtual non-enforcement.

This compliance risk is now changing. The fact that the Chinese have now levied a near half billion-dollar corruption fine against a foreign company, even before the Serious Fraud Office in the UK and the Department of Justice in the US concluded their own investigations, changes the risk calculus for corruption in China. Commercial bribery is a crime in China. However, its enforcement has not always been consistent. While there are complaints that some enforcements are selective, there are also reports that several other large pharmaceutical manufacturers are on the list of suspected investigations and have received uninvited visits by Chinese authorities. Foreign companies operating in China in other industries may now find local authorities emboldened to prosecute efforts to seek business advantages through illicit means.

This is also becoming ever more the case in Brazil under the recently enacted (and harsh) Clean Companies Law, in India under the new Lokpal Act and with the newly elected Prime Minister Modi’s corruption crackdown, and in many other developing countries instituting and better enforcing their own anti-bribery scheme.

Constantly Monitor Internal Accounting Controls

In announcing its criminal fine, GSK admitted that the illegal activities of its subsidiary were “in clear breach” of its compliance systems and that it was “expanding processes for reviewing and monitoring of invoicing and payments.” GSK’s response underscores the fact that internal accounting controls are only as effective as a compliance tool to the extent that they are constantly audited through, ideally, a system of sophisticated data analytics and continuous monitoring. GSK would have had some systems in place to track expenditures and, presumably, required proper authorizations and documentation for larger outlays. However, those systems appear to have failed to properly detect potentially hundreds of millions of dollars worth of bribes, gifts and illicit expenses. While no internal control system is perfect, a more sophisticated data review process, tailored to specific red flags for bribes, may have detected problems earlier and avoided such a massive penalty.

Manage Employee Incentive Risk

Sales commissions and salaries tied to specific sales targets are a classic incentive risk for bribery by employees or contractors, especially in higher risk jurisdictions such as China. According to public reports, GSK’s management adopted very aggressive sales tactics and incentive mechanisms which influenced the occurrence of the commercial bribes. Similar sales tactics are reported to have been used by some other pharmaceutical companies as well, but GSK was reviewed as one of the worst offenders. It has been reported that the training and remuneration systems of GSK and some other large pharmaceutical manufacturers have been significantly changed to mitigate such issues. Progressive companies have sought to manage these risks in a number of ways, including paying higher salaries to reduce the incentive to bribe, aggregating bonus structures or commissions over a longer period to provide more opportunities for compliance oversight, and providing ‘compliance’ bonuses.

GSK’s problems in China exemplify the importance of properly managing internal employee incentive risk, as does the company’s announcement that it is “decoupling sales targets from compensation” for its sales force. Other large pharmaceutical manufacturers are expected to follow suit.

Companies Need Clear Client Engagement Guidelines

Lastly, if reports are true that many of GSK’s illicit activities were paid trips and expense reimbursements for doctors and other hospital officials through travel agencies and other intermediaries, this will be just the latest example of a “bribe by any other name.” Gifts, entertainment and travel for public officials are prime targets of corruption probes given that anti-bribery legislation in Canada, the UK and US all prohibit the offer of a “benefit” to a public official, which need not be cash, in return for an improper business advantage for the offeror. We have previously provided guidance on gift giving in this context, but all companies should also have clear guidelines on entertainment, hospitality and travel when engaging clients, especially when those clients are public officials. It is also crucial to make sure these guidelines are understood and followed by intermediaries such as agents, consultants and the like.