Bad News for the Drug and Device Industries: Glaxo’s Systemic Breakdown in China (Part I of III)

imagesCATTJ71OMark Twain, one of my favorite authors, always said it bestDo the right thing. It will gratify some people and astonish the rest.”

For drug and device companies, Mark Twain’s observation is becoming the industry standard.  Since 2009, the drug and device industry has been the proverbial punching bag for FCPA enforcement.  While the overall numbers are less than the major FCPA cases involving the oil and gas industry, the number of companies investigated, prosecuted and under current investigation is mind numbing.

The recent Glaxo controversy in China is another watershed moment in FCPA enforcement:

First, Glaxo represents the first serious enforcement action against a non-Chinese company.  It also represents the first time that non-Chinese citizens are facing potential punishment under the Chinese legal system.  Rio Tinto and several individuals were prosecuted but the individuals involved were Chinese nationals.  The recent Glaxo enforcement action in China represents the dawning of a new set of risks – Chinese prosecution of foreigners.

The recent Chinese enforcement action represents the culmination of China’s entrance into the global, anti-corruption enforcement arena.  It began when China enacted its own law prohibiting foreign corruption by Chinese companies.  And it gained steamed when China and the United States law enforcement agencies started to build a bridge of cooperation in information sharing.

Further, political forces have moved China even faster given the number of FCPA cases brought against companies for bribery in China.  Not surprisingly, the Chinese were disturbed by the regular headlines describing yet another bribery prosecution involving Chinese officials.glaxo

Second, Glaxo’s systemic breakdown in internal controls is inexplicable given Glaxo’s recent enforcement actions for off-label marketing and its pending investigation in the United States for foreign bribery.  How could Glaxo miss such a large breakdown in its compliance system?  If it was not missed but known and then either ignored or blessed, Glaxo and its executives could face serious consequences, both in China and the United States.

To make matters worse, the Serious Fraud Office has now launched its own inquiry into Glaxo’s operations in China.  Could this be the first real UK Bribery Act prosecution or will it be another follow-on UK prosecution?

glaxo2For the drug and device industries, the news could not get much worse.  The industries have long been the focus of FCPA enforcement.  The Glaxo case is the equivalent of the Siemens prosecution for the drug and device industry – it is a sign that China will be prosecuting bribery violations against foreign nationals in addition to the US and the UK. It is hard to imagine but drug and device companies may look back on the 2009-2012 time period of FCPA enforcement and long for the “good old” days of FCPA enforcement.

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