The news last summer was startling: China had been investigating GlaxoSmithKline for suspected economic crimes. In fact, Chinese officials had accused the British pharmaceutical company of behaving like a “criminal godfather”—using a network of more than 700 middlemen and travel agencies to bribe doctors and lawyers with cash and even sexual favors in return for prescribing its drugs.
In the latest twist, GlaxoSmithKline recently confirmed the existence of a covert sex tape of its former China head, Mark Reilly and his girlfriend, which had been sent to company executives, according to an article on The Guardian. Accompanying the footage were detailed allegations of sales and marketing practices described as “pervasive corruption” by an anonymous writer, the article explains.
This news comes a little more than a month after Chinese police shocked the foreign business community when they filed corruption charges against Reilly, alleging he helped set up and expand sales departments that offered bribes to doctors in return for prescribing drugs. The Briton, who has been barred from leaving China, could face decades in prison. The London-based company also faces a U.K. criminal probe.
Over the course of the Chinese anti-corruption investigation, all big drugmakers in China have come under scrutiny from police or regulators. Last year authorities visited Novartis AG of Switzerland, Britain’s AstraZeneca Plc, Sanofi SA of France, U.S. firm Eli Lilly & Co, Germany’s Bayer AG and Danish drugmaker Novo Nordisk A/S. All said they were cooperating with the authorities and that they do not condone bribery.
The larger implications are the real news in all this, however. Indeed, China’s crackdown on corruption in the pharmaceutical sector has given foreign executives such anxiety that some fear they could be jailed and have asked their lawyers if they should leave the country for six months, reports a Reuters article. The same article notes that other executives and in-house counsel had sought legal advice about leaving China to avoid getting caught up in any future probes. Still others are actively pursuing career options outside China, said one source.
Many clients are asking about personal liabilities and insurance, with executives asking if they are put in jail what will happen to their families and how the company will provide protection for them, says John Huang, Shanghai-based co-founder and managing partner at law firm MWE China, in the article.
Some drug makers are even changing their executive leadership practices. These companies are putting more Chinese nationals in important positions in the country to avoid the kind of bribery scandal plaguing GlaxoSmithKline.
“Some companies are having more Chinese people in key positions,” Richard Bergstroem, director general of the Brussels-based European Federation of Pharmaceutical Industries and Associations, says in a Bloomberg article. “To conduct audits further down in the organization, and to understand what’s going on, they need people on the ground. Preferably you have someone who speaks the local language.”
While companies are taking steps to ensure they don’t harbor improper practices in their Chinese divisions, the larger issue that needs to be addressed is that reforms to the Chinese health system are needed to remove incentives for corruption, Bergstroem says. Some Chinese hospitals get as much as half of their revenue from prescribing drugs and procedures, leading to over-prescription, he said.
“This hasn’t been fixed yet in China,” Bergstroem said in a telephone interview with Bloomberg reporters. “Despite years of attempts and numerous reports, they’ve not been able to take out these strange incentives in the system. For a Western company coming in with its rules and—hopefully—its values, it’s very difficult to operate in an environment where the other side isn’t governed properly.”
What do you think? Will China’s crackdown eliminate bribes and kickbacks? Will having more Chinese executives create a culture change?