U.K. pharmaceutical giant GlaxoSmithKline will pay a civil money penalty in the amount of $20 million to the Securities and Exchange Commission to resolve charges concerning bribery payments made to government officials in China.
From at least 2010 and June 2013, employees and agents of GSK’s China-based subsidiary, GSK China Investment, and a China-based joint-venture, Sino-American Tianjin Smith Kline & French Laboratories, engaged in various transactions and schemes to provide things of value to foreign officials in China, including healthcare professionals (HCPs), to improperly influence them and increase sales of GSK products in China.
These corrupt payments took varied forms, “including gifts, improper travel and entertainment with no or little educational purpose, shopping excursions, family and home visits, and cash,” according to the SEC administrative proceeding. “The costs associated with these payments were recorded in GSK’s books and records as legitimate expenses, such as medical association sponsorships, employee expenses, conferences, speaker fees, and marketing costs.”
This misconduct was facilitated in part by the use of collusive third parties that ostensibly provided legitimate planning and travel services—in the amount of nearly RMB 1.4 billion (US$225 million). 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, the SEC said. “Test sampling showed that approximately 44 percent of the sampled invoices were inflated and approximately 12 percent were for events that did not occur,” according to the SEC.
Internal control failures
“Throughout this period, GSK failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program,” the SEC said. “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.”
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. For example, internal audit conducted a sales rep office audit in 2013 with respect to the Guangzhou office. Among the problems identified were:
Issues of falsified POS slips and fake bank statements;
Issues of fake invoices claimed from hotels and restaurants for sales meeting activities, which came from a local preferred meeting agency used by the Guangzhou office;
Compliance and new employee training not timely completed; and
Sales employees’ salaries were significantly driven by commissions that could lead to an incentive to improperly inflate sales.
As a result of this misconduct, GSK was found in violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act. As part of the settlement, GSK must cease and desist from committing or causing any future violations of 13(b)(2)(A) and 13(b)(2)(B).
In accepting GSK’s settlement offer, the SEC said it took into consideration GSK’s cooperation and the following remedial acts:
GSK provided prompt and regular briefings regarding its own internal investigation in China, and with respect to other countries. Respondent timely conveyed the facts it learned in the course of its own investigation, promptly responded to document requests by the Commission staff, and provided translations of documents as needed.
GSK provided detailed and timely information regarding its remedial efforts, enhancements to its compliance program, and implementation of key initiatives.
GSK made global changes to its business, including the elimination of most payments to doctors, including fees to HCPs to speak about the Company’s prescription medicines, and altering the compensation structure for its sales force to eliminate incentive pay based on the number of prescriptions generated.
GSK enhanced its global risk assessment process, strengthened its monitoring and risk assessment tools, and increased its global compliance organization.
GSK enhanced its third-party oversight program, including increasing the number and scope of third-party audits, and increased training and education of employees on anti-bribery issues.