China Closes Book On GSK Case With Record Fine
One of the highest profile cases in a recent series of probes against multinationals in China has reached an emphatic but reasonably just conclusion, with word that Beijing has fined British drugmaker GlaxoSmithKline (London: GSK) nearly half a billion dollars and handed several of its top local executives suspended jail sentences. I was never a big fan of this investigation, which saw GSK pursued for bribing doctors and other medical professionals to buy its drugs. That’s not because I think GSK was innocent in this case, but rather because I think the company was unfairly singled out for punishment for corrupt practices that are widespread in China’s business culture.
At least this particular punishment seems to draw a line under the case, and sends a potent warning signal that companies that engage in this kind of systematic corruption could face similar treatment in the future. At the end of the day, the penalty against GSK, while large, is also quite digestible for a firm that has a market value of more than $100 billion and sold more than $40 billion worth of drugs last year.
According to the latest reports, Beijing has formally fined GSK 3 billion yuan ($490 million) in the case, which saw the company previously accused of funneling 3 billion yuan through a travel agency to bribe medical officials to purchase its drugs. (English article) At the same time, 5 GSK executives, including the company’s China head, were handed suspended sentences of 2-4 years after a one-day closed-door trial in the central Chinese city of Changsha, the reports say.
As a result of the proceedings, GSK’s China head Mark Reilly, who was forced to remain in China pending the outcome of the trial, will now be deported from the country. GSK issued a formal apology, which is becoming quite routine these days for foreign multinationals in China, saying it “had reflected deeply and learned from its mistakes.” Even Beijing seemed eager to put the case in the past, with the central Xinhua news agency writing in an editorial that GSK could regain the trust of the Chinese people if it could learn from its mistakes and operate in accordance with the law.
GSK’s case is just one in a wide range that have targeted multinationals over the last year, prompting complaints from some that Beijing is unfairly discriminating against foreign companies. But unlike most of the other cases that have involved antitrust probes, the GSK was the only major one that involved criminal behavior that could carry jail sentences.
The GSK fine was also easily the largest in the anti-foreign probes so far. By comparison, luxury car maker Audi (Frankfurt: VOWG) was recently fined about $40 million for anti-competitive pricing practices, or less than a tenth of GSK’s fine, and a group of 12 Japanese auto parts makers was fined a collective $200 million for similar violations.
When the GSK case first broke about a year ago there were rumblings that other foreign drug firms might be targeted with similar charges. But so far that hasn’t happened. That leads me to suspect that Beijing is content to let the GSK case serve as a signal for both domestic and foreign companies, telling them they need to clean up their business practices or risk facing similar criminal investigations and fines.
From my own observer’s perspective, this final outcome for GSK does look fair for a number of reasons. The amount of the fine is large but certainly won’t endanger GSK as a business, and it leaves the company’s China operations largely intact. The suspended jail sentences also send an important signal that future offenders could serve real time in prison for such criminal behavior. With Beijing’s stance on the matter now clear, perhaps everyone can get back to business and all companies will make a serious effort to sharply curtail practices like bribery that seriously undermine China’s business environment.
Bottom line: The fine and suspended jail sentences for GSK and its officials for bribery look reasonably fair, sending an important signal that such practices by major firms won’t be tolerated in the future.
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