Transcript China’s Government & Business Decision-Making

Risk Management
- Takeaways from GSK scandal -
EMAE620007_Doing Business in China (WK9)
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FT says …
What is GSK …
• GlaxoSmithKline, headquartered in London, is one of the largest
pharmaceutical companies in the world. The firm is known for its wide
range of over-the-counter and prescription medicines and vaccines
including its popular anti-depressant Paxil and diabetes drug Avandia.
• GSK, as the company is also known, says it employs some 97,000 people in
more than 100 countries.
• In the last fiscal year, GSK reported more than $11.5 billion in pre-tax
profits and ranked #231 on the Fortune Global 500.
How important is China to GSK …
• In the company's second quarter earnings statement, GSK revealed net
losses in Europe and Japan, with flat turnover in the United States in the
first half of the year.
• The only regional growth occurred in emerging markets and the Asia
Pacific -- of which China is core.
• As China's investigation into GSK expands, the firm's profits from the
crucial emerging growth market are expected to take a hit.
• Sine the bribery allegations first surfaced, GSK's share price has slumped
3.5% in London and 2.4% on the New York Stock Exchange.
What are the accusations …
• An investigation by Chinese authorities into the activities of GSK has
allegedly turned up a bribery network that involves government officials,
doctors, hospitals and at least 700 travel agencies.
• GSK is now attempting to distance itself from its China arm -- which has
been accused of using hundreds of millions of dollars in bribes to
encourage the use of GSK products and artificially boost prices.
• On July 11, China's national police agency accused GlaxoSmithKline of
bribing government and medical officials in some of China's biggest cities - including the country's financial hub of Shanghai and Hunan's provincial
capital Changsha -- to encourage the use of GSK medicines and to push
prices higher.
• The bribes totaled nearly half a billion dollars, according to media reports.
What are the accusations …
• On July 22, GSK executive Abbas Hussain admitted that some of the
company's senior executives in China appeared to have violated the law.
Hussain, the company's president of Europe, Japan, emerging markets and
Asia-Pacific, had been dispatched to China to contain fallout from the
alleged scandal.
• On July 24, China's state media reported that 39 hospital workers were
being punished for taking more than $450,000 in kickbacks from
pharmaceutical firms over a three-year period.
• Nine of the doctors involved had been suspended or had their licenses
revoked, and a case involving a trade union official was referred to the
judicial system.
Who has been caught up …
• Chinese authorities have barred GSK China's Vice President for Finance,
British national Steve Nechelput, from leaving the country since late June.
At least four Chinese executives have also been detained.
• Chinese state media have identified these executives as Vice-President of
GSK China's investment company Liang Hong, Vice-President and human
resources director Zhang Guowei, GSK China's legal affairs director Zhao
Hongyan and the company's business development manager Huang Hong.
• Chinese state television also broadcast an apparent confession by Liang
Hong. It is unclear whether his statement was made under force or duress.
• Liang explained how conferences were faked in order for travel agencies to
create receipts for services never performed. Funds were then used to pay
off bribes encouraging the use of GSK products.
What are the penalties if GSK is found guilty …
• China's investigation could expose the company to legal action in the U.K.,
and possibly the United States, under laws relating to the bribery of
foreign public officials.
• GlaxoSmithKline says it has informed the U.K.'s Serious Fraud Office about
the bribery allegations but had not yet been asked to provide any further
information. The agency, which investigates and prosecutes corruption
cases, said last week that it could neither confirm nor deny an interest in
the claims against GSK at this stage.
BREAK
I. General Context of Anti-Corruption in China
• China ranked 75 out of 182 countries in the Transparency Corruption
Perception Index 2011
• Traditionally, higher tolerance in China of behavior that would be regarded
as “corrupt” in the West
• “Guanxi” fundamentally part of the culture
• Gift-giving tradition in business
• Highly bureaucratic and administrative state
• Overlap between state administration and business enterprise
• Use of intermediaries in the business process
• Underpaid healthcare service providers tend to turn to corruption for
making money
I. General Context of Anti-Corruption in China
• Tend - Improving Regulations
− In 2006, China ratified the UN Convention against Corruption
− In 2006, the National People’s Congress (NPC) passed the 6th
Amendment to the Criminal Law, expanding the scope of commercial
bribery
− In November 2008, the Supreme People's Court (SPC) and the
Supreme People's Procuratorate (SPP) released interpretations on
commercial bribery regulations
− In 2011, the NPC passed the 8th Amendment to the Criminal Law,
adding that any act of paying bribes to non-PRC public officials also
constitute a crime of bribery
− Chinese government and the Chinese Communist Party released
various anti-corruption rules in the past years
I. General Context of Anti-Corruption in China
• Trend - Enforcement
− Six areas have been focused since 2006:
• (i) construction; (ii) grant of state-owned land-use rights ; (iii) transfer of stateowned assets ; (iv) pharmaceutical and medical; (v) government procurement and
(vi) exploitation and distribution of natural resources
• Pharmaceutical and medical area has been emphasized by enforcement authorities
almost every year, e.g. emphasized again in SAIC’s notice dated 13 Aug. 2013
− Bribery in the form of cash payment or expensive gifts is more likely to
be investigated
• “Grey-area” market practice is paid more attentions by authorities
• More cooperation between the AIC and the Public Security Office
• When choosing targets of investigation, the AIC tends to prefer multinational
companies to small local firms
II. Anti-Bribery Laws − Introduction
• Anti-Unfair Competition Law (AUCL)
− Commercial Bribery
• Criminal Law (CL)
− Official bribery (involving State officials)
− Commercial bribery (involving non-State officials, e.g. employees of
private companies)
• Other governmental rules and judicial interpretations
II. Anti-Bribery Laws − AUCL
• Text of Article 8 of AUCL
− Business operators should not use bribery, by giving property or
through other methods, to sell or purchase products.
− Those that grant secret, off-the-book rebates to their transactional
counterpart entities or individuals shall be treated as giving bribes.
− Transactional counterpart entities or individuals that accept secret,
off-the-book rebates shall be treated as taking bribes.
II. Anti-Bribery Laws − AUCL
• SAIC’s Interpretations
− Property: cash and physical property, including payments in the name
of promotion fee, advertisement fee, sponsor fee, research fee,
service fee, consultation fee, commission fee or reimbursement of
various forms of fees.
− Other methods: measures of providing benefits other than cash and
physical property, e.g. tours or study
− Secretly and off-the-book: payments that are not truly recorded
according to accounting rules, including any failure to record item on
financial record or any act of recording the item into other financial
record or making false record, etc.
II. Anti-Bribery Laws − AUCL
• Exemptions
− Discount or commission provided expressly and recorded properly on
the books of both parties to the transaction is permitted.
− Discount refers to profits returned to the purchaser during product
sales and can be made in two forms: (i) deducted from the price to be
paid proportionately, and (ii) returned proportionately after the total
price is paid.
− Commission refers to service fees paid to the legally qualified agent
who provides service to the business operator during the market
transaction.
− Gifts are permitted in business transactions, provided that they are:
− of small value; and
− in line with the practice of the industry.
II. Anti-Bribery Laws − AUCL
• Liabilities
− Administrative liability
• Fine of between RMB10,000 - 200,000
• Confiscation of illegal income
• Illegal income = sales - costs - paid taxes
• “Costs” refers to (i) for manufacturers, costs of raw materials; (ii) for distributors or
retailers, buying prices; or (iii) for service providers, costs of merchandises used in
services
− Civil liability
• Liable to losses incurred by competitors
− Due to ambiguity in legislative language, authorities have large room to
interpret
II. Anti-Bribery Laws − Criminal Law
Active Official Bribery
• Articles 389, 391, 393 of CL
− An individual or entity commits a crime of offering bribes if it offers
articles of property to a state official or a state organization in order to
secure an illegitimate benefit
• Penalties
Individuals:
Entities:
•
Fixed-term/life imprisonment
•
Fine
•
Confiscation of illegal income
•
Confiscation of illegal income
•
Confiscation of property
•
Fixed term imprisonment (the person in
charge or directly responsible)
II. Anti-Bribery Laws − Criminal Law
Active Official Bribery
• Key Concepts
− “State official”
• Officials in government organizations
• Persons “engaging in public service” in SOEs, including directors, managers,
supervisors of SOEs having the responsibilities of managing and supervising stateowned assets
• Persons appointed by government organizations or SOEs to “engage in public
service” in non-state-owned enterprises (e.g. directors of JV appointed by a
government department or SOE)
• Other persons who engage in public service according to law
II. Anti-Bribery Laws − Criminal Law
Active Official Bribery
• Key Concepts
− “Articles of property”
• Cash
• Assets other than cash, e.g. cars, houses, shares in a business, assets acquired for a
price that is obviously lower than the market price, etc.
• Benefits that have monetary value, e.g. reimbursement service for a house,
traveling expenses, club membership card, etc.
II. Anti-Bribery Laws − Criminal Law
Active Official Bribery
• Key Concepts
− “Securing illegitimate benefits”
• Bribe offeror seeks to obtain benefits in contravention of laws, regulations, rules or
policies;
• Bribe offeror is seeking from the bribe recipient assistance or facilitation that
contravenes laws, regulations, rules, policies or the standards applicable in the
industry; or
• In commercial transactions such as auctions or government purchases, bribe
offeror seeks competitive advantage in violation of the principle of fairness.
II. Anti-Bribery Laws − Criminal Law
Active Official Bribery
• Value thresholds under Judicial Interpretations
− bribe offered by an individual: RMB 10,000 or above
− bribe offered by an entity: RMB 200,000 or above
− No value threshold if
− the purpose of bribe is to gain “improper benefit” or “illegitimate gain”
− bribes were paid to 3 or more State officials
− bribes were paid to government leaders, judicial officials, etc.
− bribe caused severe damage to national or social interests
II. Anti-Bribery Laws − Criminal Law
Passive Official Bribery
• Articles 385, 386, 387, 388 of CL
− A state official commits a crime of accepting bribes if he takes
advantage of his office to demand or illegitimately accepts articles of
property from other persons and procure benefits for other persons.
− A state organization is also criminally liable if it accepts bribes.
II. Anti-Bribery Laws − Criminal Law
Active Commercial Bribery
• Article 164 of CL
− An individual or an entity commits a crime of offering bribes if the
individual or the entity offers articles of property to a staff member of
a company, an enterprise or other organizations or a foreign public
official for the purpose of securing illegitimate benefits.
• Penalties
Individuals:
Entities:
•
Fixed-term imprisonment
•
Fine
•
Confiscation of illegal income
•
Confiscation of illegal income
•
Fine
•
Fixed term imprisonment (the person in
charge or directly responsible)
II. Anti-Bribery Laws − Criminal Law
Passive Commercial Bribery
• Article 164 of CL
− A staff member of a company, an enterprises or other organizations
commits a crime of accepting bribes if he takes advantage of his office
to demand or to illegitimately accept articles of property from other
persons and procure benefits for other persons.
• Penalties
− Fixed-term imprisonment
− Confiscation of illegal income
− Confiscation of property
III. Most Concerned Issues in Pharmaceutical Sector
• Gifts, hospitality and entertainment
• Sponsorship to meetings and events with healthcare providers
• Payments to intermediaries
• Donations
III. Most Concerned Issues in Pharmaceutical Sector
• Gifts, Hospitality and Entertainment
Gifts, entertainment and hospitality are prohibited if they are:
− not approved by the competent persons of the company in advance;
− excessive; or
− promised, granted or accepted with the purpose of influencing a
decision relevant to the business of the company
III. Most Concerned Issues in Pharmaceutical Sector
• Sponsorship to Meetings and Events with Healthcare
Providers
When sponsoring meetings and events attended by healthcare providers,
the company should ensure:
− not used to market products or services
− no remuneration offered to participants
− expenses of participants paid on a reimbursement basis subject to a detailed review
− remunerations paid to external speakers are reasonable and not excessive
− selection of appropriate location and resorts should be avoided
− establishment of audit procedure ensuring each meeting is actually held and each
payment is appropriate
III. Most Concerned Issues in Pharmaceutical Sector
• Payments to intermediaries
Any payment to intermediaries should only be made after a detailed
review of whether:
− the payment is reasonable in view of specific services provided by the intermediary
− the services have a clear economic benefit for the company
− the payment is made upon a written contract, detailing the services and payment
− there is a written invoice from the intermediary, detailing the specific services provided
− the intermediary chosen must have specific expertise in the field in which the company
asks for his or her services
III. Most Concerned Issues in Pharmaceutical Sector
• Donations
Donations are prohibited if they are offered:
− to healthcare providers with which the company has business
relationship, whether directly or indirectly
− in order to obtain or retain business
− with the intent to influence governmental decisions
• Review your paper on doing business in China with a viewpoint that
– Is there any legal obstacle for starting up this business as a foreign investor
• If the answer is yes, how to overcome it
– Is there any particular regulations that my business has to follow
– What will be the most likely risks associated with my business and how to handle them
• Then, put the above within 300 words on a A-4 paper
• Send to TA by 30 November 2013
THANK YOU AND SEE YOU NEXT WEEK