It seems each month there is a fresh reminder that if you do business in China you need to play by the book. For those who think there are “short cuts,” the latest scandal is a wakeup call.
I am referring to the recent detention of employees and consultants connected to GalaxoKlineSmith’s (GSK) alleged involvement in bribing officials, hospital administrators and doctors. The reality in China is if your company breaks the law, you will go to jail or worse. Given China has put two national level ministers to death for corruption, it would be very unwise to assume that you will get a pass.
The current crackdown on corruption started with government officials and is now winding its way through the system to the private enterprises that pay the bribes. Not a big leap of logic, but it has seemingly taken some in the expat community by complete surprise.
Numerous expats have expressed outrage, claiming that the laws are being selectively enforced against foreign companies. For some here, there is a kind of “China Rules” which means anything locals do, expats have the right to do also, legal or illegal. The argument I have heard from a number of people is; “everybody knows you have to pay to sell drugs in China” and “all the Chinese companies do it,” so “why are they targeting foreign firms and individuals?”
In response, I took a look at the current situation, which promises to be the beginning of a larger investigation.
First, this is a different matter from the cases of U.S. businessmen Steve Fleischli, Hu Zhicheng and Chip Starnes, who had their passports taken. Those are civil matters. Bribing government officials is a criminal offense.
There are 60 Chinese and foreign drug firms that are the target of a focused investigation into China’s pharmaceutical market, which has been ongoing for the last half year. In addition, over the past three years, numerous media stories have been run on the high cost of drugs and the involvement of drug companies, doctors and hospital administrators.
According to the company’s website, “GlaxoSmithKline is a global health care company that is committed to helping people to do more, feel better and live longer.” It is also the fourth-largest drug company in the world, has a slew of well-known, branded medicines, including Augmentin, Nicorette, Panadol, Valtrex and Zantac, and a $126 billion U.S. market capitalization.
Senior GSK executives in China are accused of orchestrating fraudulent payments through more than 700 travel agencies and firms to increase market share and for their personal benefit. Money is alleged to have flowed to government officials, hospital administrators and doctors in the pay-to-sell scheme. Chinese authorities revealed last week that police were looking into deals allegedly worth $489 million, which could go back as far as 2007.
Series of events
July 10, 2013 – Four Chinese GSK executives were arrested along with a British Ex-pat, Peter Humphrey, whose Hong Kong based ChinaWhys group provides investigation and risk consultancy services that focuses on fraud and accounting for multinational businesses operating in China. In a released statement, GSK indicates that its own internal inquiries had found no evidence of bribery or corruption in China, but it took the allegations seriously and was willing to co-operate with the authorities.
July 16, 2013 – Liang Hong, vice-president and operations manager of GSK China, confesses on TV to paying bribes and said his actions had pushed up drug prices. GSK calls the allegations shameful and promises full cooperation.
July 22, 2013 – GSK admits Chinese executives broke the law. GSK’s general manager for China, Mark Reilly, is unavailable as he left China shortly before the arrests. A travel ban is imposed on Steve Nechelput, head of finance for GSK China.
July 24, 2013 – The BBC reports that the problem stems from underfunded hospitals and poorly paid doctors. “My basic monthly salary is about $600 – without bribery I couldn’t live a decent life,” said one Chinese doctor who spoke on condition of anonymity to the BBC. According to a report by McKinsey, the global management consultancy group, China’s health spending is projected to soar from $357 billion in 2011 to $1 trillion in 2020. Slowing sales in the West are pushing the global drugs giants toward China’s growing markets.
Remember, GSK paid $3 billion in U.S. fines one year ago for the same practices it is being accused of in China.
So, if you come to China, do not leave your moral compass at home and do not follow the conventional wisdom of those who want to tell you “everybody does it.” As sure as good intentions pave the way to hell, rationalizations will lead you to jail, or worse, if you are in China.
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.
