China says GSK execs confess to bribery and tax crimes

BEIJING/LONDON Fri Jul 12, 2013 2:43pm IST

1 of 2. A man walks in front of a GlaxoSmithKline factory at Pudong district in Shanghai July 11, 2013.

Credit: Reuters/Carlos Barria

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BEIJING/LONDON (Reuters) - GlaxoSmithKline executives in China have confessed to bribery and tax violations, the country's security ministry said on Thursday, during one of a string of investigations into foreign firms in the world's second-biggest economy.

The ministry said the case against Britain's biggest drugmaker involved a large number of staff and a huge sum of money over an extended period of time, with bribes offered to Chinese government officials, medical associations, hospitals and doctors to boost sales and prices.

GlaxoSmithKline Plc (GSK) executives also used fake receipts in unspecified tax law violations, it added.

China has targeted foreign firms on multiple fronts in recent months, including alleged price-fixing, quality controls and consumer rights, forcing companies to defend their reputations in a country where international brands often have a valuable edge over local competitors in terms of public trust.

Last week, European food groups Nestle and Danone said they would cut the price of infant formula milk in China after Beijing launched an investigation into the industry.

China is an increasingly important country for international drugmakers such as GSK, which are relying on growth in emerging markets to offset slower sales in Western markets where many former top-selling medicines have lost patent protection.

IMS Health, which tracks pharmaceutical industry trends, expects China to overtake Japan as the world's second biggest drugs market behind the United States by 2016.

"We take all allegations of bribery and corruption seriously," GSK said in a statement.

"We continuously monitor our businesses to ensure they meet our strict compliance procedures - we have done this in China and found no evidence of bribery or corruption of doctors or government officials," it added, saying it would cooperate with the authorities.

The charges of bribery make the GSK case the highest profile probe in China since four executives of mining giant Rio Tinto Plc were jailed in March 2010 for taking bribes and stealing commercial secrets.

The four - one a China-born Australian citizen and three Chinese nationals - received jail terms of between seven and 14 years after being found guilty of getting information from confidential strategy meetings of the body representing China's steel industry in negotiations with iron ore suppliers.

Under China's legal system, the GSK executives will be formally charged after the completion of the preliminary investigations.

The security ministry did not give details on the number of executives questioned, their identities, nor when the questioning took place.


It is still too early in the process to know the extent of potential punishments, said Jerry Ling, a Shanghai-based partner for law firm Jones Day who specializes in U.S. and Chinese anti-bribery law.

However, according to guidance set by China's top court last December, there are a number of factors about the case that could increase any fine or punishment, including the involvement of bribes to government officials and the sensitivity of medicine prices.

"The fact that the Ministry of Public Security is running this investigation means that the exposure is more serious," added Ling.

In smaller bribery cases, China's State Administration for Industry and Commerce tends to take the lead. While these cases could lead to fines, they rarely results in criminal sentences.

A full confession - which China says the executives have given - could mean GSK benefits from leniency measures linked to voluntary disclosure.

A Britain-based analyst, who covers GSK and who declined to be named, said the company had worked hard to eradicate malpractice. It pleaded guilty to misdemeanor charges in the United States and paid a $3 billion fine a year ago.

"Given the past experience they've had with depression drugs in the U.S., they would be ultra cautious on anything to do with corrupt practices," the analyst said.

However, the analyst noted that China was an under-developed market where it would be difficult to monitor all sales practices and, in addition, authorities were likely to take a hard line with foreign firms.

GSK shares closed down 0.6 percent on Thursday, compared with a 0.6 percent rise in the wider FTSE 100 index.

GSK has had problems in China before.

It said on Monday it was investigating separate allegations that its staff had used improper tactics to market the cosmetic treatment Botox in China, but had so far found no evidence of bribery or corruption.

GSK, Merck & Co Inc and other foreign and domestic drugmakers are also being investigated by China's top economic planning agency on cost and pricing issues.

(Reporting by Michael Martina in BEIJING, Kazunori Takada in SHANGHAI, Paul Sandle and Adam Jourdan in LONDON; Writing by Jonathan Standing; Editing by Stephen Coates, Ryan Woo and Mark Potter)


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