Life Science Compliance Update

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August 16, 2013

Increased Enforcement in China Could Result in Large Fines in US and UK

Recent articles have focused on the story of China baring GlaxoSmithKline executive from leaving the country as it turns up the heat on medical products companies over allegations of corruption.

The U.K. pharmaceutical manufacturer has been accused by China of using a network of more than 700 travel agencies and other firms to channel bribes to health officials since 2007.

On July 22, 2013, GlaxoSmithKline admitted that some of its executives in China appear to have violated Chinese law.

"Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law," Abbas Hussain, GSK's international president said in a statement.

"Like many other large pharmaceutical companies, Glaxo has been investing significantly in China and other emerging markets, seeking to capitalize on a growing middle class that can increasingly afford to pay for prescription drugs."

Interestingly: "GSK's admission came as AstraZeneca, the Anglo-Swedish drugmaker, said Chinese police had visited its Shanghai office "regarding a local police matter focused on a sales representative", making it the latest western pharmaceutical company to be investigated. Belgian drugmaker UCB said last week it had also been visited by Chinese authorities."

Although China still accounts for a small fraction of Glaxo's business, sales in the country grew 17 percent in 2012, to $1.2 billion.

Sales in emerging markets accounted for about a quarter of the company's business in 2012."

"How much damage the scandal will do to GSK's reputation or bottom line remains unclear. But the episode underscores the challenges of doing business in China, an enormous, rapidly developing market in which bribes and corruption are often deeply ingrained.

China's investigation could expose the company to legal action in the U.K., and possibly the United States, under laws relating to the bribery of foreign public officials."

The New York Times reports the similarity to previous accusations against Eli Lilly: "In 2012, the company agreed to pay $29 million to settle accusations of making improper payments to government officials and physicians in Brazil, China, Poland and Russia.

In the Eli Lilly case, the United States government said employees from the company's China subsidiary had "falsified expense reports in order to provide gifts and cash payments to government-employed physicians."

Among other things, the company's sales representatives used reimbursements to provide doctors with meals, card games and "visits to bath houses."

It is doubtful that the senior leadership outside of China had any inkling that this was going on in China. Companies face serious fines for contributing to international corruption via the Foreign Corrupt Practices Act and the UK Bribery Act, there are significant motivations to monitor countries as close as possible. Companies have paid fines in the hundreds of millions of dollars for self disclosed corrupt practices in Asia, Eastern and Southern Europe. It is likely that companies operating in China and other emerging markets will increase their audit functions to ensure that bad behavior from local affiliates discontinues.

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