China Amps Up Anti-Corruption Effort – What This Means for Your Company

Last Friday, China’s 15-month-long bribery investigation into British multinational pharmaceutical GlaksoSmithKline (GSK) ended after a one-day trial in which the court found GSK’s local subsidiary guilty of bribing doctors and hospitals and fined the company $490 million. The penalty – the largest ever imposed by a Chinese court – included suspended prison sentences for four Chinese GSK managers found guilty of bribery-related charges as well as a three-year suspended prison sentence and deportation order for their British former head of Chinese operations. The Chinese government has said that GSK made more than $150 million in profits by widely disbursing bribes meant to encourage the promotion of their products. In addition to this record-breaking case, GSK is currently being investigated for bribery in Poland, Syria, Iraq, Jordan and Lebanon. In the future, GSK could also be fined for its illegal behavior in China and elsewhere by the United States under the Foreign Corrupt Practices Act and Britain under the U.K. Bribery Act due to these laws’ extraterritorial reach. In China, GSK issued a formal apology to the government and plans to update its procedures to conform with evolving Chinese anti-corruption requirements and begin the long road towards rebuilding its tainted brand in this large, growing, but potentially perilous market.

In a sense, the message sent by the Chinese government in this case is clear: the days when illicit gift-giving and bribery were an entrenched and accepted cost of doing business in China are quickly coming to an end. And most importantly, foreign firms, their executives, and investors are in no way exempt from prosecution in China. In fact, some believe that foreign firms may be even more closely scrutinized than locally-owned businesses. At the same time, the Communist Party’s stronghold on the Chinese government and its courts and the lack of transparency has created an environment in which selective prosecution is a real possibility and the best way to minimize your Chinese compliance risk is often unclear. Fortunately for U.S. exporters the United States’ Foreign Corrupt Practices Act, a model for many of the bribery standards adopted by foreign governments in recent years, requires all U.S. firms (as well as some non-U.S. firms that fall under its jurisdiction) to apply FCPA standards globally. Therefore, remaining FCPA-compliant when transacting with Chinese parties can also ensure that you and your company remain compliant with the similar regulatory requirements that are being increasingly enforced by the Chinese government. As a refresher, a strong global anti-corruption compliance program that would provide protection against U.S. and Chinese prosecution should include:

  • The tone at the top: a zero-tolerance policy with respect to corruption clearly articulated by management to all employees and business partners and reinforced regularly
  • A sufficiently autonomous compliance officer with enough resources and authority (including access to outside counsel) to effectively perform necessary oversight and third party due diligence
  • Written compliance procedures, policies, and certifications as well as periodic training (for both employees and third party business partners)
  • Books and records that accurately reflect all transactions and payments
  • An effective internal investigations apparatus, including confidential reporting and standardized disciplinary measures
  • Continuous improvement through periodic testing, review, and modification of the compliance program based on specific and evolving industry risks and legislative developments

The GSK case is good news in that it signals that China has joined the global fight against corruption, fueling the continued trend towards a single, universally enforced global standard against bribery. As more countries follow suit international companies’ compliance obligations will become increasingly clear and uniform, driving down compliance  costs and cross-border risk. As a result, your company will stand to make ever-larger gains in foreign markets, responsibly expand operations, and safely increase your bottom line.