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China Fines GlaxoSmithKline Nearly $500 Million in Bribery Case China Fines GlaxoSmithKline Nearly $500 Million in Bribery Case
(about 9 hours later)
HONG KONG — China, a country that has enticed the world’s multinationals to invest billions of dollars over the past decade with the prospect of selling to 1.4 billion people, sent its strongest signal yet on Friday of a tougher climate for those companies. A Chinese court imposed a fine of nearly $500 million on the giant British pharmaceutical company GlaxoSmithKline for bribery. HONG KONG — Global multinationals have invested billions of dollars in China over the last decade, with the prospect of selling to 1.4 billion people. But the promise of China’s growth is increasingly offset by the dangers of being caught up in the country’s anticorruption campaigns and rising economic nationalism.
After a one-day trial held in secrecy, the court also sentenced Glaxo’s British former country manager, Mark Reilly, and four other company managers to potential prison terms of up to four years. The sentences were suspended, allowing the defendants to avoid incarceration if they stay out of trouble, according to Xinhua, the official news agency. The verdict indicated that Mr. Reilly could be promptly deported. In the strongest signal yet, a Chinese court on Friday imposed a fine of nearly $500 million on the British pharmaceutical giant GlaxoSmithKline for bribery, dwarfing the penalties in earlier criminal cases.
The report said they had pleaded guilty and would not appeal. Glaxo said in a statement that it “fully accepts the facts and evidence of the investigation, and the verdict of the Chinese judicial authorities.” Multinational companies broadly have been under pressure in China, with technology companies, automakers and food manufacturers under investigation. As new cases and penalties have emerged, companies have been nervously preparing for their own potential fallout.
The scale of the $487 million fine dwarfs previous criminal penalties on companies doing business in China. It comes at a time when numerous automakers, technology companies and other multinationals are also under investigation by the Chinese authorities and are nervously watching for what penalties might be imposed on them. Last week, Chinese authorities fined the Audi unit of Volkswagen $40.5 million for violations of antitrust laws. In a similar case, a dozen Japanese auto parts and bearing manufacturers were assessed $200 million in penalties last month.
Previous large fines against foreign companies include $40.5 million on the Audi unit of Volkswagen last week and a total of $200 million in fines levied last month on a dozen Japanese auto parts and bearing manufacturers; those fines were for violations of antitrust laws. Beijing officials have gone out of their way in the last two weeks to deny complaints by foreign business groups and governments that China’s continuing legal crackdown represents an effort to discriminate against multinational companies and help Chinese companies compete. The Glaxo case showed that “an open China is not a lawless one,” Xinhua, the official news agency, said in a commentary.
Glaxo’s case was unusual in that it involved accusations of criminal bribery by the company to persuade hospitals and doctors to administer or sell Glaxo pharmaceuticals to their patients. The company said it was contrite. But the Glaxo case underlines the dangers for multinationals as they continue to do business in a country where corruption has been widespread and where the legal and regulatory system has shown a greater willingness to prosecute foreign companies.
“GSK P.L.C. sincerely apologizes to the Chinese patients, doctors and hospitals, and to the Chinese Government and the Chinese people,” the company said. Two antitrust lawyers involved in other cases said in separate interviews that Chinese officials had rushed investigations along, sometimes in a few weeks, with little chance for multinationals to present their side. In some antimonopoly cases this summer, multinational company executives have not even been allowed to bring their lawyers to meetings with regulators, the lawyers said, both of whom insisted on anonymity because they were representing clients in litigation.
The case underlined the dangers for multinationals as they have continued to do business in a country where corruption has been widespread and where the legal and regulatory system has shown a much greater willingness this year to prosecute foreign companies, and sometimes their executives as well. No other multinationals, however, have faced the same huge bribery charges and criminal trial as Glaxo. In many cases, regulators demanded that multinationals sharply reduce prices for products. Glaxo and a growing list of automakers have already done so.
“It’s very hard to do business in the Chinese health care and pharmaceutical sectors without doing payoffs,” said David Zweig, the director of the Center on China’s Transnational Relations at the Hong Kong University of Science and Technology. “Everyone else pays bribes. Glaxo just got caught.” Few companies have faced the level of scrutiny that Glaxo has.
Beijing officials have gone out of their way in the last two weeks to deny complaints by foreign business groups and governments that China’s continuing legal crackdown represents an effort to discriminate against multinationals and help Chinese companies compete with them, at a time when economic nationalism is rising in China. But the scale of the fine against Glaxo was far greater than fines known to have been leveled against Chinese companies for bribery. Chinese authorities accused Glaxo of bribing hospitals and doctors, channeling illicit kickbacks through travel agencies and pharmaceutical industry associations — a scheme that brought the company higher drug prices and illegal revenue of more than $150 million. In a rare move, authorities also prosecuted the foreign-born executive who ran Glaxo’s Chinese unit.
The case showed that “an open China is not a lawless one,” said Xinhua, in a commentary. “This case has set a benchmark for sales practices in the medical and pharmaceutical sector.” After a one-day trial held in secrecy, the court sentenced Glaxo’s British former country manager, Mark Reilly, and four other company managers to potential prison terms of up to four years. The sentences were suspended, allowing the defendants to avoid incarceration if they stay out of trouble, according to Xinhua. The verdict indicated that Mr. Reilly could be promptly deported. The report said they had pleaded guilty and would not appeal.
Two antitrust lawyers involved in cases in China said in separate interviews that Chinese officials have rushed cases along, sometimes in a few weeks, with little chance for multinationals to present their side of the issues. In some antimonopoly cases this summer, multinational executives have not even been allowed to bring their lawyers to meetings with regulators, said the lawyers, both of whom insisted on anonymity because they were representing clients in litigation. Glaxo said in a statement that it “fully accepts the facts and evidence of the investigation, and the verdict of the Chinese judicial authorities.” “GSK P.L.C. sincerely apologizes to the Chinese patients, doctors and hospitals, and to the Chinese government and the Chinese people.”
In many of these cases, regulators have demanded that multinationals sharply reduce prices for patented products. Glaxo and a growing list of automakers have already done so. Bringing prices down closer to manufacturing costs makes many goods more affordable for Chinese consumers, but puts pressure on multinationals to cover their research and development costs through higher prices in other markets. The British Embassy in Beijing said that it had no information on the possible deportation of Mr. Reilly and that while an appeal remained possible, it would have no comment on the trial.
Chinese police had accused Mr. Reilly of orchestrating a “massive bribery network” that brought the company higher drug prices and illegal revenue of more than $150 million, investigators said in May. Mr. Reilly, a Briton, and two Chinese-born executives, Zhang Guowei and Zhao Hongyan, had even bribed government officials in Beijing and Shanghai, they said.
The names of the other defendants are Liang Hong and Huang Hong.
In its statement, Glaxo said that the southern court, the Changsha Intermediate People’s Court, had found the company guilty only of bribing nongovernmental personnel; the statement made no mention of any conviction for bribing government officials, which would be a more politically delicate issue.
The Chinese authorities have also asserted that people working for the drugmaker bribed doctors and hospital staff members and channeled illicit kickbacks through travel agencies, pharmaceutical industry associations and other channels.
The British Embassy in Beijing said that it had no information on the possible deportation of Mr. Reilly and that while an appeal remained possible, it would have no comment on the outcome of the trial.
“We note the verdict in this case,” an embassy spokesman said. “We have continually called for a just conclusion in the case in accordance with Chinese law. It would be wrong to comment while the case remains open to appeal.”“We note the verdict in this case,” an embassy spokesman said. “We have continually called for a just conclusion in the case in accordance with Chinese law. It would be wrong to comment while the case remains open to appeal.”
The Xinhua report said of the verdicts and the fine: “This means that a final full stop has been put on this case of commercial bribery by the GlaxoSmithKline China investment company that drew intense social interest.”
The report said that Glaxo was the first multinational in the Global Top 500 to be put on criminal trial in China.
According to Xinhua, the court accepted the prosecutors’ case that from 2009, Mr. Reilly and the other four defendants pushed an aggressive drugs sales strategy in China, and their techniques evolved into a “sales-through-bribery model.” Those techniques included lavish rewards for doctors and hospital managers who attended ostensibly academic conferences. The company also rewarded potential buyers by paying for their outings and tours, as well as by giving fees for lectures.
The report said the case against Glaxo emerged when the police in Shanghai began scrutinizing an obscure travel agency that had been doing booming business. The investigators found that much of that business came from Glaxo and other multinational drug corporations.
The court said that in deciding how to punish Mr. Reilly, it had taken into account that he had returned from Britain to face the investigators, and that he had “truthfully recounted the crimes of his employer,” meriting a relatively lenient punishment, the Xinhua report said. The other defendants also confessed and also earned relatively light sentences, according to the report.The court said that in deciding how to punish Mr. Reilly, it had taken into account that he had returned from Britain to face the investigators, and that he had “truthfully recounted the crimes of his employer,” meriting a relatively lenient punishment, the Xinhua report said. The other defendants also confessed and also earned relatively light sentences, according to the report.
In August, business partners in the investigative firm ChinaWhys were sentenced to prison terms by a Chinese court after they were hired by Glaxo to look into whether a former company employee was passing information about suspected fraud at the company to Chinese authorities. The Glaxo case — and sizable fine — represents a setback for the company.
According to people familiar with that case, the former employee was targeting Mr. Reilly. When the accusations first emerged last year, the company said that employees were “outside of our systems of controls.” It said the scandal involved a few rogue Chinese-born employees.
One partner, the investigator Peter Humphrey, was sentenced to two and a half years in prison; the other — his wife and a Chinese-born American citizen, Yu Yingzeng — was sentenced to two years. The court said Mr. Humphrey would be deported after he served his term. But the case escalated in May, when Chinese police accused Mr. Reilly, a Briton, of orchestrating a “massive bribery network.” Mr. Reilly and two Chinese-born executives, Zhang Guowei and Zhao Hongyan, had even bribed government officials in Beijing and Shanghai, they said. The names of the other defendants are Liang Hong and Huang Hong.
In its statement, Glaxo said that the court, the Changsha Intermediate People’s Court, had found the company guilty only of bribing nongovernmental personnel. The statement made no mention of any conviction for bribing government officials, a more politically delicate issue as President Xi Jinping of China pursues a broad campaign to root out corruption.
The accusations sent a chill through the industry when they came out last year. Many global drug makers used the same Shanghai travel agency that the authorities in the Glaxo case said altered corporate travel expenses to pay cash bribes.
“It’s very hard to do business in the Chinese health care and pharmaceutical sectors without doing payoffs,” said David Zweig, the director of the Center on China’s Transnational Relations at the Hong Kong University of Science and Technology. “Everyone else pays bribes. Glaxo just got caught.”
Glaxo has also loomed large over another case.
In August, business partners in the investigative firm ChinaWhys were sentenced by a Chinese court after they were hired by Glaxo to look into whether a former employee was passing information about suspicions of fraud at the company to Chinese authorities.
Glaxo hired the couple in spring 2013, to look into whether a former employee had sent the company emails and a sex video of Mr. Reilly recorded without his knowledge or consent, according to people who were briefed on the situation and spoke on the condition of anonymity. The video was recorded with a camera inside his Shanghai apartment bedroom.Glaxo hired the couple in spring 2013, to look into whether a former employee had sent the company emails and a sex video of Mr. Reilly recorded without his knowledge or consent, according to people who were briefed on the situation and spoke on the condition of anonymity. The video was recorded with a camera inside his Shanghai apartment bedroom.
ChinaWhys, which specialized in due diligence work, completed an inconclusive preliminary report on the sex video of Mr. Reilly by June 2013 and suggested continuing the inquiry. In July 2013, the couple was detained, and they were formally arrested a month later, accused of illegally obtaining private information for their company.ChinaWhys, which specialized in due diligence work, completed an inconclusive preliminary report on the sex video of Mr. Reilly by June 2013 and suggested continuing the inquiry. In July 2013, the couple was detained, and they were formally arrested a month later, accused of illegally obtaining private information for their company.
The couple’s family has said the arrests were almost certainly linked to the Glaxo investigation, adding that Glaxo had not told Mr. Humphrey the full details and accusations of the suspected whistle-blower. The couple’s family has said the arrests were almost certainly linked to the Glaxo investigation, adding that Glaxo had not told Peter Humphrey the full details of the person suspected of being a whistle-blower.
Glaxo appeared to distance itself from ChinaWhys in its statement on Friday evening, saying that, “GSK P.L.C. also apologizes for the harm caused to individuals who were illegally investigated by” one of its subsidiaries in China. One partner, the investigator Mr. Humphrey, was sentenced to two and a half years in prison. The other, his wife, Yu Yingzeng, who is a Chinese-born American citizen, was sentenced to two years. The court said Mr. Humphrey would be deported after he served his term.
Glaxo appeared to distance itself from ChinaWhys in its statement Friday evening, saying that, “GSK P.L.C. also apologizes for the harm caused to individuals who were illegally investigated by” one of its subsidiaries in China.