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GSK's Chinese executives, but not company, likely to face charges in China: sources

A Chinese national flag flutters in front of a GlaxoSmithKline (GSK) office building in Shanghai July 12, 2013. REUTERS/Aly Song
A Chinese national flag flutters in front of a GlaxoSmithKline (GSK) office building in Shanghai July 12, 2013. REUTERS/Aly Song

By Adam Jourdan

SHANGHAI (Reuters) - Chinese police investigating allegations of widespread corrupt practices at GlaxoSmithKline Plc (GSK) are likely to charge some of its Chinese executives but not the British drugmaker itself, legal and industry sources said.

A charge against GSK itself would be a much more serious outcome for the company because it would imply higher-level corporate involvement and could result in major fines and even disruption to its operations in China.

Police are also unlikely to lay criminal charges against Briton Mark Reilly, GSK's former head of China operations, the sources said.

Reilly has been voluntarily assisting authorities following Chinese police accusations in July that GSK funneled up to 3 billion yuan ($492 million) to travel agencies to facilitate bribes to doctors and officials to boost its drug sales. The alleged bribery took place over a six-year period from 2007.

The accusations are the most serious made against a multinational in China in years. GSK's sales in China, one of its most important emerging markets, dived 61 percent in the third quarter after hospital staff shunned visits by its sales teams in the wake of the probe.

The investigation has coincided with stepped-up Chinese scrutiny of how foreign firms do business in the world's second biggest economy, with the spotlight especially on graft and pricing in the pharmaceutical and infant milk formula markets.

The police investigation into GSK is likely to be concluded around the end of November or in December, said a person with direct knowledge of the probe.

The sources noted it was difficult to predict what Chinese authorities would ultimately do.

But the most likely legal scenario was that they would charge Chinese GSK executives, said the person with direct knowledge of the investigation and two other sources familiar with the matter. The sources declined to be identified because of the sensitivity of the case.

The official Xinhua news agency in early September said the police investigation had found that the bribery of doctors was coordinated by GSK and was not solely the work of individual employees.

Indeed, the Ministry of Public Security had tried to find evidence tying GSK as a legal entity to the alleged wrongdoing, but it was unlikely authorities would be able to prove its involvement at a corporate level, said the person with direct knowledge of the investigation.

"There will likely be big fines, but it's unlikely GSK will be thrown out of the country," the person said.

The Ministry of Public Security, which is spearheading the investigation, did not respond to requests for comment.

GSK has said some of its senior Chinese executives appear to have broken the law. It has also said it has zero tolerance for bribery, calling the allegations in China "shameful".

"The investigation is ongoing and we are fully cooperating with the authorities. The investigation is subject to Chinese law and GSK respects this. As such, we are unable to comment further at this stage," said GSK spokesman Simon Steel.

RARE FOR CHINA TO CHARGE A FOREIGN FIRM

Police have detained four senior Chinese GSK executives. They include vice president and operations manager Liang Hong, who gave an account on Chinese television in July of how the alleged bribery was carried out.

Reilly, who was in charge of the business at the time the accusations were made, left the country in early July for London and was replaced as head of GSK operations in China on July 25. He has since returned to help authorities.

Lawyers said it would be extremely rare for the Chinese government to pursue a criminal case against a foreign company, but if one was charged, the result would likely be significant fines and disruption to its operations in China.

The State Administration of Industry and Commerce (SAIC) issues all firms in China a business license, which under extreme circumstances can be revoked.

"It would be unprecedented frankly. I don't know any previous case in which the Chinese government has laid criminal charges against a foreign company," said Daniel Chow, professor of law at Ohio State University.

Four executives from mining giant Rio Tinto were jailed in March 2010 for taking bribes and stealing commercial secrets in the most serious previous case against a multinational firm. The company was never charged.

Individuals found guilty of serious bribery can face 10 years to life in prison, according to China's criminal code. A voluntarily confession can result in a sentence reduction.

If allegations of bribery are not found to be criminal but administrative in nature, authorities can fine individuals up to 200,000 yuan.

Under Chinese law, action may be also be taken against managers with responsibility over a region or sector, although lawyers said this would also be unusual.

"For senior management to be charged you have to prove that this person has awareness or knowledge of the criminal act, or at least should have known but did not exercise his duty of care," said the second source, a China-based lawyer with knowledge of the investigation.

"I'm not sure the government has the evidence supporting these allegations."

Lawyers said any fines levied against GSK would depend on the severity of the charges against its executives.

CHINA A MAGNET FOR BIG PHARMA

Spending in China's healthcare sector is forecast to nearly triple to $1 trillion by 2020 from $357 billion in 2011, according to consulting firm McKinsey.

China is also set to be the second-biggest drugs market behind the United States by 2016, according to IMS Health.

GSK sold 759 million pounds ($1.15 billion) of pharmaceuticals and vaccines in China in 2012, up 17 percent on 2011, representing around 3.5 percent of the group total.

In the wake of the probe, GSK has pledged to reform its operating model in China to root out any incentives for corruption and also bring down the cost of medicines.

China's health sector is riddled with graft, fuelled in part by low base salaries for doctors at the country's 13,500 public hospitals, the main buyers of drugs.

U.S. authorities are also investigating the British drugmaker for violations of U.S. anti-bribery laws in the wake of the China accusations and it could also face questions from Britain's Serious Fraud Office.

(Additional reporting by Ben Hirschler in LONDON and Kazunori Takada in SHANGHAI. Editing by Dean Yates)

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