Last week a true American original died when Richard Trentlage passed away. If you do not know his name you certainly know signature contribution to American culture, the Oscar Meyer Weiner Song. Rather amazingly Trentlage wrote the jingle in response to a contest sponsored by the Oscar Meyer Wiener Company for a new theme in 1962 and did so in an hour. According to his obituary in the New York Times the song “debuted in 1962 a3 and became the company’s signature advertising tune in 21 English speaking countries until 2010.” Moreover the “song became a part of the fabric of American culture, with airings on the children’s television show ‘Captain Kangaroo’, on the cartoon ‘The Jetsons’ and on an episode of the ‘The Simpsons’ in 1990. The song and its writer were true American originals.
Another original was in the news last week when the UK pharmaceutical giant GlaxoSmithKline PLC resolved its outstanding Foreign Corrupt Practices Act (FCPA) issues with its settlement with the Securities and Exchange Commission (SEC) by agreeing to pay $20 million civil penalty when China-based subsidiaries spent millions of dollars on pay-to-prescribe schemes for several years to pump up sales. Even more amazingly the company received a declination from the Department of Justice. I say even more amazingly because at the time of the conduct at issue, GSK was under a Corporate Integrity Agreement, the pharma equivalent of a Deferred Prosecution Agreement. The CIA required GSK not only to obey laws (and to pay bribes) but have a functioning compliance program in place, which the company obviously did not give one whit about, at least in China.
For those who have long forgotten our friends over at GSK (hum the Oscar Meyer Wiener theme now) they were four or five major corruption scandals ago, way back in the summer of 2013 when news broke that the Chinese government had accused the company of five years of institutional bribery and corruption. Senior GSK business unit leaders were arrested and GSK claimed to be shocked, just shocked that anyone would accuse it of bribery and corruption, especially after just paying the US government $3bn for false labeling products. Yet the corruption continued even after being reported by an anonymous whistleblower (cleverly monikered GSK Whistleblower) the company was not able to turn up any indicia of bribery and corruption in its China business in six months of looking.
As lightly as GSK apparently took these allegations, the Chinese authorities took them very seriously and in a few months of investigation turned up the massive and pervasive bribery scheme. They put numerous senior GSK China employees under house arrest and even managed to illicit a confession or two on public television.
All of this led to a secret trial in August 2014 where the company was fined approximately $490MM and the four top executives of GSK China were convicted. The non-Chinese citizens were deported. There was even a sex tape aspect to the matter but it was somewhat tangential to the case and (apparently) not a part of the SEC enforcement action. Most interestingly the SEC Order did not mention the fine paid in China and it is not part of the Order, although surely the SEC took it into account. At least I hope so.
Yet the SEC enforcement was not without some interest. The Order noted, “Between at least 2010 and June 2013, employees and agents of GSK’s China-based subsidiary and a China-based joint-venture engaged in various transactions and schemes to provide things of value to foreign officials, including healthcare professionals (“HCPs”), in order to improperly influence them and increase sales of GSK products in China. This misconduct was facilitated in part by the use of collusive third parties that ostensibly provided legitimate travel and other services. The funds used for the improper inducements were frequently obtained under the guise of, and falsely recorded in GSK’s books and records as, legitimate travel and entertainment expense, marketing expense, speaker payments, medical associations payments, and promotion expense. Throughout this period GSK failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anticorruption compliance program. The deficiencies in GSK’s internal accounting controls and compliance program also led to instances of similar improper conduct in connection with sales in other countries in which GSK operates.”
Yet we learned more in the SEC Order about GSK China’s bribery scheme. One emphasis was the China business unit wide pervasiveness of the corruption. The Order noted that bribes were actually written into sale plans for the company, stating, “a 2013 work plan submitted by a sales representative to a regional sales manager described the intent to pay, among other things, an HCP RMB 20/box of prescribed product every month, and deliver appropriate gifts on each holiday in exchange for a guarantee of more than 40 boxes of prescribed product every month.”
There was also some attempt to investigate the conduct of the China business unit but they all failed uncover the systemic bribery of GSK China. One set of investigations noted, “During this period, local internal audit and compliance reviews identified controls deficiencies and evidence of some mechanisms that were used to fund the improper payments, but they were treated as isolated instances rather than signs of a larger problem.”
Even more damning was the following, “As early as 2010, internal audit identified problems related to sales and promotions staff practices in China. Among other findings it noted: [d]uring 2010, several new policies governing commercial activities such as grants and donations and sponsorships were introduced. The significant changes, combined with the high staff turnover, contribute to an environment where many commercial and medical staff do not understand how to apply policies or the rationale behind them. This was evidenced by approval of non-compliant activities, a lack of clarity on which policy to apply for activities such as grants, and weaknesses in documentation to support the legitimate intent of activities such as advisory.”
One wonders whether the internal audit staff was simply not competent to properly identify the bribery and corruption or if they simply knew not to look with any more depth or seeing their findings as “signs of a larger problem.” However given the finality of these resolutions with the SEC and DOJ, it is doubtful there will be any further investigations going forward as to GSK’s China issues.
Nevertheless the matter continues to present multiple lessons to be learned for the compliance practitioner. Assuming one wants to actually find nefarious conduct, stop it and then remediate it, GSK in China presents several lessons on what to look for and how to move forward. The SEC Order also re-emphasizes the bribery schemes used by the company. What the SEC Order and DOJ declination may ultimately symbolize is the end of a long and sordid affair for the company.
One might also consider the damage the scandal did to the parent company and the legacy of the soon-to-retire chief executive Sir Andrew Witty. While the scandal did not reach either the corporate parent in England and certainly not Sir Andrew, the $490MM fine in China and the $20MM fine in the US, pale beside the true cost to GSK, which was its sales targets in China. GSK had targeted the over $30 bn Chinese medical product and services market to be 20% of GSK total revenue by 2020. That strategy is now in tatters as the Chinese prosecution made GSK a non-entity in the Chinese health care market. Any transaction involving GSK involving a Chinese health care provider, invites government scrutiny. It is far easier for health care providers to purchase pharmaceuticals, health care products and medical services from companies which have not gone through such a prosecution.
The SEC Order and DOJ declination end the long and sordid bribery scandal of GSK in China.Click to tweet
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© Thomas R. Fox, 2016