GlaxoSmithKline (GSK), a major British pharmaceutical company, is accused in China of using more than 700 brokers and travel agents to bribe doctors and lawyers with money and sexual favors.
Four directors of the GSK subsidiary in Shanghai were arrested by Chinese authorities and confessed of bribing doctors. Chief financial officer, Steve Nechelput, was barred from leaving the country. The investigation started by Beijing authorities refer to practices dating from 2007, and the value of transactions is around $300 million. The four are suspected of corruption, serious economic offenses and tax offenses, as they were having responsibilities in human resources departments, legal affairs and were co-ordinating the commercial activities in China.
According to the publication “Les Nouvelles de Peking”, more than 20 people were arrested, including officials with ties to the pharmaceutical sector or travel agencies. GSK is one of the major international pharmaceutical companies in China, with a total investment of over $500 million.
Chinese authorities have announced that they have closed a travel agency involved in this scandal. The Shanghai Linjiang International agency was ordered to cease operations because of “illegal activities” including false billings. One of the agency executives, Weng Jianyong, was arrested. GSK Employees made through the travel agency, illegal payments between 40,000 yuan ($6,500) and 500,000 yuan ($81,500).
GlaxoSmithKline says it was informed about the investigation at the beginning of this month and did not find any evidence about corruption, but announced that it will cooperate with the authorities in this case.
Moreover, the company has sent to China its head for emerging markets, Abbas Hussain, and two other executives, to coordinate the company’s response to the crisis triggered by allegations of corruption. The company said it was concerned by the scandal, which it called “shameful” because it is likely to undermine the reputation and business of the company in a growing market. The company hired the auditing company Ernst & Young for an independent review of its system of China. GSK sales in China reached nearly $920 million in 2012, up by 17% compared to 2011, but this market is only a small part of the company’s global revenues.
The health system in China is known for corruption issues. Public hospitals often use the sale of drugs to compensate for insufficient funds from the budget, and doctors supplement their income with bribes and gifts from patients and pharmaceutical companies.
Minor cases of corruption are investigated by trading officials but GSK investigation is led by the Ministry of Public Security, which means that the penalties could be severe if there is sufficient evidence of wrongdoing.
International companies with subsidiaries in China have become the target of investigation by the authorities. National Development and Reform Commission has started an investigation into the case of 60 pharmaceutical companies, including six international, including the U.S. company Merck, Japanese company Astellas and GSK from the UK. Tetra Pak Group became the subject of an antitrust investigation last week. Earlier this month, Beijing announced an investigation related to the price fixing of companies producing baby milk formula: Nestle, Abbott and Mead Johnson have reduced the price by 20% immediately after the start of this investigation.
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