The Chinese government’s recent crackdown on alleged bribery and corruption of local officials by multinational pharmaceutical companies could signal a broad trend toward elevated scrutiny of all foreign corporations operating in the country—and provides an even greater incentive for companies to identify and implement anti-corruption practices focused on China’s unique business and legal culture.

In early July 2013, the government of the People’s Republic of China (PRC) announced a milestone investigation into GlaxoSmithKline Plc. (GSK) that has allegedly uncovered bribery involving millions of U.S. dollars that were funneled through more than 700 travel agents and other third parties over the last six years. The exact trigger for the inquiry is currently unknown, but there has been wide speculation about a variety of motives for the timing and targets of the case including a desire to reduce healthcare costs. The PRC government will be targeting foreign pharmaceutical companies with official “requests,” unannounced visits and dawn raids. Indeed, at least one other company has acknowledged being visited recently by government investigators in connection with this investigation.

Recommendations

In the wake of the Chinese government’s launch of a new round of aggressive investigations, multinational companies should begin scrutinizing their operations more carefully to ensure that their policies are well understood, and look for signs of potential bribery being carried out by their employees. To do so, they should truly localize their global compliance policy and program to specifically address their local operations in China, including the development and implementation of the following:

1. Thorough and complete Foreign Corrupt Practices Act (FCPA) risk-based due diligence for mergers with, and acquisitions of, Chinese local companies

2. Thorough due diligence review of third-party business partners, including but not limited to agents, distributors, consultants and travel agents

3. A robust compliance program covering all critical functions, including sales and marketing personnel as well as compliance, legal, finance and human resources staff

4. A well-run ethics helpline with active follow-up to all complaints and queries

5. Ongoing compliance training for local management as well as employees

6. Periodic compliance audits and immediate remediation as necessary

To fully benefit from these compliance efforts, multinationals should consider engaging professionals with the following skills and strengths:

1. Familiar not only with FCPA requirements but also PRC anti-corruption laws and regulations

2. Possess a deep understanding of Chinese business culture, along with a command of the unique nuances of compliance challenges in China, and able to identify and formulate effective responses to new and innovative forms of bribery and corruption

3. Specialized in dealing with Chinese government investigations appropriately and licensed in China

The insights of such professionals would be helpful in minimizing risk and potential consequences, including reputational damage and executives’ liability. Ultimately, global compliance measures superimposed upon China’s unique business environment are not enough. A truly effective compliance program for China needs to be one that identifies and addresses the issues arising out of local business and legal culture.