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The Real Implications of the Glaxo Enforcement Action in China

china4The headlines get worse and worse.  More companies under investigation.  More individuals detained and under investigation.  The shockwave in the pharmaceutical and medical device industries is palpable.  It is all understandable.  The message from the Chinese is two-fold – they are going to enforce China’s bribery laws, especially in those markets that have a direct and immediate nexus to China’s consumers.

We all have heard the stories about China meting out the death penalty to purveyors of tainted heparin, milk and pharmaceuticals.  It reminds me of Darth Vader who would summarily execute the latest Admiral for failing to catch Luke Skywalker and the rebels, and then turn to the next in line and promote him to Admiral.   Can you imagine the gulp in the person’s throat who was appointed to take over from the recently executed boss?

Under Chinese law, it is illegal to give or take a bribe.  There are three types of bribery: (1) commercial bribery of business staff of a company; (2) official bribery of state functionaries or government organs; and (3) foreign bribery of any foreign public official or of an international public organization.

The maximum penalties for bribery violations vary but the official bribery offense is punishable by death; the other two offenses, commercial and foreign bribery are punishable up to life imprisonment.china

It would be a mistake for any company doing business in China to watch the unfolding investigation of the pharmaceutical and medical device companies and breathe a sigh of relief that it did not stretch to their industry.  While healthcare is a significant consumer market in China, it does not take much of logical leap to start focusing on other consumer goods, including telecommunications, high-tech, real estate, consumer durables, automobiles and other industries which are high-risk in China.  All of these industries produce goods and services which are important to China’s consuming class.  It does not take much to stretch almost every industry under the scrutiny of China’s law enforcement for bribery enforcement.

China recognizes the impact that the GSK investigation is having and will quickly realize the benefits of an active enforcement program which will generate revenue for its government, send a strong deterrence message to domestic and foreign actors, and improve China’s overall anti-corruption standing in the world.

China’s entry into the global anti-corruption enforcement arena is the single most important anti-corruption development for the year.  Do not underestimate the implications of China’s rise from the ashes and its willingness to subject foreign national companies and individuals to bribery prosecutions.

china3Global companies which have entered China have a new and significant risk – they are and will be subject to prosecution under the Chinese penal system.  For many ex pats who are considering working in China, this may cause them to reconsider whether or not they are willing to enter the market for fear of being caught up in the Chinese judicial system which is not known for protecting individual due process rights.  This factor should not overblown – China is sensitive to world opinion and they are not going to start meting out Chinese justice to foreign nationals without any regard for individual rights and protections.  Even so, there is still a greater risk now for companies and individuals operating in China.

Time will tell how significant China’s enforcement efforts will become.  For now, the drug and deice industry has to redouble their compliance efforts, investigate their operations, and take affirmative steps to improve their programs before the Chinese knock on their door.  For companies in other industries, now is not the time to be penny wise and pound foolish – they should begin a re-examination and improvement of their compliance programs.

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