How did GSK obtain a declination?


Bill Coffin | November 22, 2016

Back in September, our old compliance friend GlaxoSmithKline plc (GSK) settled with the Securities and Exchange Commission for violating various provisions of the Foreign Corrupt Practices Act, namely for improper payments, gifts, and other bribes made by GSK subsidiaries in China to Chinese officials to boost sales in that country. Back in 2013, GSK got itself into trouble for a wide-ranging bribery scheme in China, which included the involvement of top-level country managers down to individual sales personnel. The bribery schemes were numerous, including direct bribe payments to all healthcare personnel (HCPs) who could be influenced to prescribe the company’s pharmaceutical products, indirect payments to hospital administrators who could then dole out the money, excessive and over the top gifts, travel and entertainment, and very large payments for speaking events. According to the SEC, the corruption within GSK’s China unit was pervasive, with bribes actually written into the sales plan for the company.

For this, the SEC fined GSK $20 million and declined to prosecute, citing GSK’s cooperation with the Commission during its investigation and global remedial actions taken by GSK to eliminate payments to doctors, improve risk assessment, and improve third-party oversight. This declination might have made more sense with a different company. But this is GlaxoSmithKline here, and this was hardly the company’s first brush with the law, nor its most severe.

Corporate integrity agreement. In July 2012, GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data and for false price-reporting practices in what the Justice Department at the time called the largest healthcare fraud settlement in U.S. history and the largest payment ever by a drug company for legal violations.

You would think that any company that has paid $3 billion in fines and penalties for fraudulent actions would take all steps possible not to engage in bribery and corruption. Indeed, as part of that settlement, GSK agreed to a Corporate Integrity Agreement (CIA) that applied not only to the specific pharmaceutical regulations that GSK violated but all of GSK’s compliance obligations, including the Foreign Corrupt Practices Act (FCPA).

In addition to requiring a full and complete compliance program, the CIA specified that the company would have a compliance committee, inclusive of the compliance officer and other members of senior management, whose job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required deputy compliance officers for each commercial business unit, integrity champions within each business unit, management accountability, and certifications from each business unit. Training of GSK employees was also specified. Further, there was detail down to specifically state that all compliance obligations applied to “contractors, sub-contractors, agents, and other persons (including, but not limited to, third-party vendors).” So, while GSK may have separate FCPA liabilities to be investigated by the Justice Department; it may be more of an issue that the company could be in violation of its CIA.

“Transparency is what enables the public to understand why particular results are reached in particular cases and helps to reduce any incorrect perception that our enforcement decisions may be unreasoned or inconsistent.”

Leslie Caldwell, Assistant Attorney General

Chinese criminal conviction. But that is not all. In September 2014, barely two years after its historic DoJ settlement, GSK was convicted in a secret trial in a court in the Hunan province of China for bribery and corruption related to its Chinese business unit. The amount of the fine was approximately $490 million, roughly equal to the 3 billion Rmb that Chinese investigators alleged that GSK had paid in bribes. Five GSK senior executives from this China business unit were also convicted. Mark Reilly, the former head of GSK in China, was sentenced to prison for three years with a four-year suspension. He was deported and reportedly has left the company. Zhang Guowei, GSK China’s former human resources director, was sentenced to three years in prison with a three-year suspension. Liang Hong, GSK’s former China unit vice president and operations manager, was sentenced to two years in prison with a three-year suspension. Zhao Hongyan, GSK China’s former legal-affairs director, was sentenced to two years in prison with a two-year suspension. Finally, Huang Huang, the GSK China business-development manager, was sentenced to three years in prison with a four-year suspension.

There is even more. The New York Times recently ran a front-page story about GSK and China, focusing not so much on the bribery schemes or individuals, but on GSK’s inept response to whistleblowers’ allegations of bribery and corruption in the company’s Chinese business unit. “The Glaxo case was fueled by missed clues, poor communication, and a willful avoidance of the facts,” the Times wrote. “For more than a year the drug maker brushed aside repeated warnings from a whistleblower about systemic fraud and corruption in its China operations.

It turned out that the company had received substantive information concerning the bribery schemes by way of e-mail, written in excellent English about the company’s operations in China. Yet the GSK response was to try “another common gambit in China: bribing officials” who were doing the investigating. The company “set up a special ‘crisis management’ team in China and began offering money and gifts to regulators.”

In the midst of this corruption investigation crisis, the company received a video of its country manager, Mark Reilly, having sex with a Chinese woman. An e-mail alleged that a Chinese company, seeking to corruptly gain business favors with Reilly and seek additional business with GSK China, provided the woman. GSK officials in London thought this sex tape video was the work of the same person who was the whistleblower for the corruption allegations against the company and set out to discover the identity of the corruption whistleblower, as well as the sex tape whistleblower. Rather amazingly, GSK’s internal investigation turned up no evidence of bribery in its Chinese business unit, in spite of the detailed information provided by the whistleblower for the corruption allegations. At some point the whistleblower for the corruption allegations provided the same information to Chinese authorities, and this led to arrests of GSK China personnel in late June and July 2013.

The declination.

The DoJ’s declination order did not reference the Chinese trial, penalty, or investigation and seemed to sidestep GSK’s still-existing CIA for their prior violations and all of the facts developed in the Chinese governmental investigation of GSK. Assistant Attorney General Leslie Caldwell has consistently communicated that the Justice Department is committed to the international fight against corruption, often leading the way. The Department has been training prosecutors from other nations in the techniques of investigating corruption and enforcement of anti-bribery laws.

Moreover, with this increase in the international fight against bribery and corruption, it would seem appropriate that a company not be double penalized by paying a penalty for the same offenses in multiple countries. However, if the Justice Department were providing such credit to GSK, it would seem appropriate that such information be communicated to heighten the transparency around the entire process. From the outside, it does not appear that GSK met at least two of the four prongs required under the FCPA Pilot Program. GSK did not self-disclose the violations of its Chinese business unit and did not cooperate with the authorities. While there were certainly some remedial steps taken by the company in China, they have not been detailed in any manner.

Whatever the reason for the declination, it would have been much better if the Justice Department had been more transparent in their decision-making calculus. Indeed, in recent remarks at the George Washington University School of Law, Caldwell spoke about the importance of transparency in the process. She said, “Transparency is what enables the public to understand why particular results are reached in particular cases and helps to reduce any incorrect perception that our enforcement decisions may be unreasoned or inconsistent.  Transparency also informs corporate actors and their advisers what conduct will result in what penalties and what sort of credit they can receive for self-disclosure and cooperation with an investigation.”

Just how GSK was able to get a complete pass from the Justice Department may well remain a mystery, and such mysteries do no one any good.

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