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Chinese Investigation of GlaxoSmithKline Broadens as Details Emerge

Written by: Aaron Tidman

In the weeks since our first post on the Chinese investigation of GlaxoSmithKline (GSK) for alleged “widespread bribery of doctors” to induce the prescription of GSK’s drugs, more details have emerged about the bribery scheme.  The investigation has also broadened to potentially involve other pharmaceutical companies and foreign nationals, including one U.S. citizen who Chinese police detained today.

On July 17, 2013, after the investigation of GSK became public, the Chinese State Food and Drug Administration announced a six-month crackdown on misconduct in its drug market.  From July to December 2013, the crackdown will focus on unauthorized drug production, improper online drug retailing, and sales of fake traditional Chinese medicines.

Last week, in addition to detaining four GSK executives, Chinese officials barred GSK’s China finance director, Steve Nechelput, from leaving the country, and Shanghai police detained Peter Humphrey, a British citizen who runs an international business risk advisory firm that works with drug companies, including GSK.  On July 22nd, GSK admitted in a statement that some of its executives “appear to have acted outside of [GSK’s] processes and controls, which breaches Chinese law.”  That same day, AstraZeneca announced that police in Shanghai visited its office there “regarding a local police matter focused on a sales representative,” but the company stated that the inquiry related to an individual case rather than a wider investigation.  GSK has sent several senior executives to China to deal with the crisis, including Abbas Hussain, GSK’s president for emerging markets.  Abbas told Chinese police that GSK will review and reform its business model in China in an effort to reduce drug prices.

Chinese police have said that GSK employees engaged in a complex scheme that provided doctors, government officials, pharmaceutical industry groups, and hospitals with cash and gifts in exchange for promoting sales of GSK’s pharmaceutical products.  As much as $490 million may have been funneled through as many as 700 travel agencies and consulting firms over the course of six years to evade GSK’s internal controls and compliance policy.  According to Chinese police, one way in which the travel agencies funneled GSK’s money to government officials and doctors was by organizing health care conferences on behalf of GSK, some of which did not actually exist.  The money from GSK for the conferences was then passed through to the officials.

Chinese authorities have ordered one of the travel agencies used by GSK – Shanghai Linjiang International Travel Agency – to stop doing business due to “illegal activities,” including fake billing.  Linjiang’s legal representative in China told Chinese state television that Linjiang arranged cash payments of $6,500 to $81,000 for GSK.  Other pharmaceutical companies based in the U.S. and Europe have also used Linjiang in the past, but all of the companies have since terminated their relationships with the travel agency.

Today, in the latest news to come out of China regarding the GSK bribery investigation, the Chinese Health Ministry announced that 39 employees at a hospital in southern Guangdong Province would be punished for taking illegal kickbacks of $460,000 from two unnamed drug companies between January 2010 and December 2012.  The 39 employees include nine doctors who were dismissed, suspended or had their licenses revoked for allegedly directly receiving kickbacks, as well as the vice chairman of the hospital’s trade union and two people in charge of the hospital’s relationship with the drug companies.  Moreover, an unnamed American citizen has been detained in China in connection with the wider Chinese investigation into that country’s drug company corruption scandal.  It is not known which drug company employed the American citizen.

China has a history of selective enforcement of its anti-bribery laws, despite having criminal codes with some of the harshest penalties in the world.  In one stark example from 2007, China executed the former head of the State Food and Drug Administration after he was convicted of accepting $850,000 in bribes to register medical companies’ products without the necessary licensing checks.

Although pharmaceutical and medical device companies have been investigated for bribery issues in China before, it has been the U.S. government who has typically enforced American anti-bribery laws against culpable individuals and companies.  The investigation into GSK marks one of the first instances where Chinese authorities appear to have independently enforced its own anti-bribery laws against employees of non-Chinese companies.

The details on this rising tide of Chinese anti-bribery enforcement are coming fast and furious from multiple news outlets, so we will continue to monitor  and report on these new developments.

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