UK fraud office probes GSK after claims of foreign bribery

LONDON Wed May 28, 2014 1:52pm IST

The GlaxoSmithKline logo is seen at the entrance of a building in Luxembourg, September 10, 2013. REUTERS/Yves Herman/Files

The GlaxoSmithKline logo is seen at the entrance of a building in Luxembourg, September 10, 2013.

Credit: Reuters/Yves Herman/Files

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LONDON (Reuters) - Britain's fraud office has launched a formal criminal investigation into GlaxoSmithKline (GSK.L), posing a new challenge to the drugmaker, which already faces claims of bribery in China and four other countries.

The Serious Fraud Office (SFO) said late on Tuesday that its director had "opened a criminal investigation into the commercial practices of GlaxoSmithKline and its subsidiaries", confirming an earlier brief statement from the company.

Shares in the company - Britain's biggest drugmaker and the sixth-largest pharmaceuticals group in the world by sales - fell 1.5 percent in early Wednesday trading on the news.

"GSK is committed to operating its business to the highest ethical standards and will continue to cooperate fully with the SFO," the company said.

Neither the SFO nor GSK gave any further details about the case, and a company spokesman declined to elaborate.

In an apparent plea for more information from GSK insiders, the SFO added that whistleblowers were a valuable source of information and it welcomed approaches "from anyone with inside information on all our cases including this one".

The SFO action comes less than two weeks after Chinese police announced on May 14 that they had charged the former British boss of GSK's China business and other colleagues with corruption, after an investigation there found evidence of an elaborate scheme to bribe doctors and hospitals.

The case 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.

The decision by the British fraud office does not come as a complete surprise, since lawyers and industry analysts had pointed out that allegations against GSK in overseas markets could expose it to charges under the 2010 UK Bribery Act.

The new act, like the long-established U.S. Foreign Corrupt Practices Act (FCPA), prohibits payments to government officials, including state-employed doctors, to obtain business overseas.

However, GSK can claim mitigation against prosecution if it can demonstrate that it had robust policies and procedures in place that were circumvented by rogue employees.

U.S. authorities are already investigating the British drugmaker for possible violations of U.S. anti-bribery laws in China, sources familiar with the matter told Reuters last September.

Societe Generale analyst Stephen McGarry said the ability to claim mitigating circumstances meant GSK might not face major fines, but the bad publicity "may restrain GSK's share price performance in the near-term".

CHINA ALLEGATIONS "SHAMEFUL"

Authorities in China first accused GSK last July of funnelling up to 3 billion yuan ($480 million) in bribes to encourage doctors to use its medicines in a case that the company described in 2013 as "shameful".

Since then, allegations have surfaced in other countries and GSK is now investigating claims that bribes were also paid to doctors in Poland, Iraq, Jordan and Lebanon.

The allegations that bribes were paid in Poland could be particularly damaging, according to some lawyers, since the country belongs to the European Union and GSK would be expected to uphold the same standards there as in any other EU state.

The persistent controversies about its sales practices in emerging markets are a major headache for Chief Executive Andrew Witty, who has tried to make ethical behaviour a high priority since taking charge in 2008.

Despite the barrage of bribery reports, GSK insists it does not have a "systemic" problem with improper behaviour and says it has a clear system for dealing with violations, which resulted in 48 dismissals and 113 written warnings last year.

In a bid to try and put the problems behind it, GSK is rolling out a new sales model designed to eliminate sharp marketing practices.

The firm aims to become the first in the industry to stop paying outside doctors to promote its products, end payments for medics to attend conferences and delink incentives for sales representatives from individual sales targets.

Other large drugmakers have also run into problems over bribery allegations in emerging markets. Pfizer (PFE.N) and Johnson & Johnson (JNJ.N) have both settled claims under the U.S. FCPA within the past three years, and a Reuters examination in 2012 of filings by the world’s top 10 drug companies found that eight of them had warned of potential costs related to charges of corruption in foreign markets.

In China, meanwhile, the authorities are continuing to investigate potential corruption cases involving other companies, with the eastern city of Hangzhou the latest to crack down on graft in the healthcare sector this week, according to an internal memo from the local government.

($1 = 6.2486 Chinese Yuan)

(Additional reporting by Andy Bruce; Editing by David Evans and Mark Potter)

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