Chinese police charge British former GSK China head with bribery

BEIJING/SHANGHAI Wed May 14, 2014 12:19pm IST

A Chinese employee walks into a GlaxoSmithKline (GSK) office in Beijing, July 19, 2013. REUTERS/Jason Lee/Files

A Chinese employee walks into a GlaxoSmithKline (GSK) office in Beijing, July 19, 2013.

Credit: Reuters/Jason Lee/Files

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BEIJING/SHANGHAI (Reuters) - Chinese police on Wednesday said they had charged the British former China head of drugmaker GlaxoSmithKline PLC (GSK.L) and other colleagues with corruption, after a probe found the firm made billions of yuan from bribing doctors and hospitals.

Mark Reilly and two Chinese executives, Zhang Guowei and Zhao Hongyan, were also suspected of bribing officials in the industry and commerce departments of Beijing and Shanghai, the official Xinhua news agency reported, quoting police in Hunan province.

It is the biggest corruption scandal to hit a foreign company in China since the Rio Tinto (RIO.L) (RIO.AX) affair in 2009, which resulted in four executives, including an Australian, being jailed for between seven and 14 years.

"(GSK) departments offered bribes to hospitals and doctors as well as personnel to boost their sales. The money involved was in the billions of yuan," a Ministry of Public Security official told a press conference in Beijing.

The charges - which carry a maximum sentence of life in prison in the case of bribery - were seen as harsher than many industry insiders and China-based foreign executives had expected.

Officials gave no specific details on the amount of bribes paid or exactly how much the company had illegally earned, although they had previously accused the firm of funneling up to 3 billion yuan ($482 million) to travel agencies to facilitate bribes to doctors and officials. A China-based spokeswoman for GSK, Britain's biggest drugmaker, declined to comment on the charges.

Reilly briefly left China when the scandal broke in July last year but voluntarily returned to cooperate with police. Attempts to reach him on Wednesday were unsuccessful.

A spokesman for the British consulate in Shanghai said officials were in regular contact with him and were providing consular assistance. The spokesman declined to comment on the businessman's whereabouts.

FOREIGN EXECUTIVES SURPRISED

The charges against the British executive shocked the business community as GSK had previously said it believed the alleged corruption involved senior Chinese staff only.

Kenneth Jarrett, president of the American Chamber of Commerce Shanghai, said he was surprised at the "strong response" from the police.

"I would agree that it's not what I would have expected because it seemed like GSK were cooperating very closely with the authorities," he told Reuters.

"I don't think that anyone had been lulled back into complacency, but if anybody had this will wake them up,” he added, referring to foreign corporations' efforts to increase vigilance against bribery in the wake of the GSK scandal.

The allegations have damaged GSK's reputation, thrown its China management team into turmoil and forced it to change its China business model, although the firm says head office had no knowledge of alleged wrongdoing. [nL6N0FU27B]

China is a key growth market for large drugmakers, which are counting on the country's swelling middle class to offset declining sales in Western countries. China is set to be the second-biggest drugs market behind the United States within three years, according to IMS Health.

But bribery between sales staff and doctors is rife in the world's second-biggest economy, and it remains to be seen whether the GSK case will be a one-off or the first of a broader campaign to clean up the Chinese health sector.

Chinese officials on Wednesday made no mention of possible sanctions against GSK itself, although Xinhua said the firm had forged accounts, faked transactions to inflate revenue, pressed sales staff to engage in briery and tried to cover its tracks.

GSK's revenue in China leapt to 6.9 billion yuan ($1.11 billion) in 2012 from 3.9 billion yuan in 2009, the first year that Reilly headed operations, Xinhua said.

Before the scandal, GSK's China sales had risen 14 percent year-on-year in the three months to end-June, but revenue in the country plunged 61 percent in the third quarter and 29 percent in the final quarter of 2013 after the allegations surfaced.

The crackdown reflects a growing determination by Chinese authorities to stamp out corporate bribery and corruption, which can drive up prices for consumers.

($1 = 6.2291 Chinese Yuan)

(Additional reporting by John Ruwitch in SHANGHAI and Michael Marrina in BEIJING; Editing by Stephen Coates)

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