Clamping down on corporate bribery
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E-mail Beijing Review, July 30, 2013
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GSK is under investigation for alleged commercial bribery charges. [File photo] |
British drug maker GlaxoSmithKline (GSK) has been mired in allegations of corruption in China recently.
On July 11, the Ministry of Public Security (MPS) declared that it has investigated more than 20 employees and detained four senior Chinese executives from GSK China on allegations of offering bribes to government officials, medical industry associations and foundations, as well as hospitals and doctors to expand the company's presence in a competitive drug market and raise the price of its medicines.
Most of the bribes are thought to have been passed through travel agencies, according to the MPS. Since 2007, GSK had transferred as much as 3 billion yuan ($489.4 million) to more than 700 travel agencies and companies, the ministry said.
GSK is also suspected of committing tax-related crimes, including falsely issuing exclusive value-added tax invoices to get cash and colluding with travel agencies to write false invoices and issue fake ones to finance illegal activities.
Some GSK senior executives are also suspected of using their positions to accept kickbacks and bribes from travel agencies, the MPS said.
In recent years, so-called "commercial bribery" has become prevalent in China. Even worse, many cases involve multinational companies, according to Hu Min, a researcher with the Economic Department of the Chinese Academy of Governance.
"Some multinational companies are taking advantage of our imperfect market economy system and laws to expand their presence in China," Hu said. "We should crack down on their criminal acts just as we crack down on misconduct of Chinese companies."
Experts say the GSK case provides an opportunity for authorities to refocus their energy on commercial bribery, a pervasive strand of corruption.
GSK scandal
China's allegations against GSK stem from an investigation that kicked off in late June, when law-enforcement officials visited several GSK offices, seizing documents and detaining some employees. On July 11, the MPS publicly confirmed the investigation.
GSK pledged to "cooperate fully" with Chinese investigating authorities and said it has stopped using travel agencies that have been identified so far. According to the MPS, the case came to light in a police investigation earlier this year. During the first half of 2013, police found abnormalities with the operations of the Shanghai Linjiang International Travel Agency.
"It was only keeping contact with some pharmaceutical enterprises and hardly doing ordinary tourism business. However, its annual turnover has surprisingly surged from several million yuan at its start-up period in 2006 to about a hundred times the figure at present," said Gao Feng, an economic crimes investigator with the MPS.
According to Weng Jianyong, corporate representative of the Linjiang International Travel Agency who was also detained by police, the travel agency provided GSK's Liang Hong, Vice President and General Operations Manager of GSK China, with about 2 million yuan ($326,264) as kickbacks between 2010 and 2012. Liang is alleged to have used the travel agency to organize business conferences. Weng said that Liang would take some of the money and the rest was generally used as bribes to officials and medical professionals.
The GSK case has sparked widening concern across China's pharmaceutical sector. The industry has been subject to various reforms of late in an attempt to control the high cost of medicines. Liang admitted that the bribes would be reflected in higher medicine prices. A product that cost only 30 yuan ($4.89) to make could end up setting patients back 300 yuan ($48.94), he said.
Today, China is increasingly important for big drug groups, which rely on growth in emerging markets to offset slower sales in Western countries. GSK sold $1.15 billion worth of pharmaceuticals and vaccines in China in 2012, up 17 percent from 2011. It represents around 3.5 percent of the group's total. IMS Health, a multinational firm that tracks pharmaceutical industry trends, expects China to overtake Japan as the world's second biggest drugs market behind the United States by 2016.
Commercial bribery
The Chinese Government has repeatedly made clear that it firmly opposes all types of commercial bribery on both Chinese and foreign sides. To stem the practice, the government recently announced that it has begun probing the pricing methods of another 60 pharmaceutical firms, including units of GSK, Merck & Co., and Astellas Pharma.
Foreign firms have been subject to intense scrutiny by the Chinese Government for bribery. In a high-profile case in 2010, four Chinese senior executives from the Australian mining giant Rio Tinto were jailed for accepting bribes and stealing commercial secrets that undermined China's steel industry.
In March 2011, IBM was charged with providing improper cash payments, gifts, and travel and entertainment to government officials in China and South Korea in order to secure sales of products. IBM later agreed to pay $10 million to settle the case. In 2008, Siemens agreed to pay $1.3 billion to settle charges that it bribed officials in China and other countries to win contracts. Other multinationals such as Morgan Stanley, Wal-Mart, Carrefour, Lucent Technologies and Avery Dennison, were also entangled in bribery across China.
"The country provides many preferential policies toward foreign companies in order to attract foreign direct investment; however, it conducts weak supervision and regulation on these companies," said Xu Lingni, a healthcare analyst at CIC Industry Research.
However, Cheng Baoku, a professor with the Law School of Tianjin-based Nankai University, notes that currently in China, commercial bribery is not a legal concept. It is generally considered an illegal means of offering an inducement, usually money or other valuable items, to a purchasing agent to enter into a transaction.
"In the past few years, China has taken great efforts to combat commercial bribery. But an increasing number of covert bribery channels have presented difficulties for authorities to detect such crime," Cheng said. He cites the GSK case as an example of indirect bribery through the use of travel agencies, a method he calls "outsourcing."
Shang Bin, Director of Tianjin Wisely Law Office, believes that bribery through outsourcing isn't necessarily so seamless. "The most covert part of outsourcing lies in the third party who completes the bribery transaction. It's this third party that is prone to detection," he said.
Shang said in an interview with Xinhua News Agency that the function of an outsourcing agency is to channel the briber's money through its own account to the final recipient. The law states that every financial transaction must leave a paper trail, which leaves no room for a broker to make fake accounts. "This is the key to discovering GSK's crimes," Shang said.
Cheng agrees, saying that uncovering these outsourcing agencies is the key to tackling commercial bribery. He suggests the government establish a whistle-blowing system for third parties to come clean.
"By establishing such a channel, we can uncover more corruption in future."
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