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Rule One For Doing Business In China. No Bribery. Rule Two, Make Sure Of It.

Posted in Legal News

Thank you GlaxoSmithKline (GSK).  Though I have zero idea whether GSK is guilty of anything in China, I do know that the media’s near daily coverage of the bribery allegations against it has made my job as a China lawyer much easier.

Let me explain.

One of the issues we constantly face as lawyers that represent mostly American companies doing business in China is the split between the home office and the China office.  For how that so often plays out, I refer you to an excellent article by my friend Janet Carmosky, entitled, What a China Team Needs, and to a somewhat controversial post I did many years ago, entitled, Your Chinese-American VP Don’t Know Diddley ‘Bout China Law And I Have Friggin Had It.  Where this “split” really manifests itself for us as lawyers is on whether our client will operate legally in China or not.

In cleaning out emails yesterday (on a very long flight), I came across an email from co-blogger Steve Dickinson (written a few days after GSK’s China problems went public) in which he described this tension in his own inimitable and pull no punches fashion:

Strange deal. In case you have any doubts, Mr. Y. [the head American in China] will get along perfectly with Mr. S. [a dishonest consultant he wanted to bring in to "assist" us in getting a legal matter done more quickly]. They see the world in the same way. However, our client says they want to eventually go public and so you can imagine what a connection with Mr. S. would do in that situation. Mr. Y. wants to run their China office in the gangster way he thinks is typical of ______ [Chinese City]. In that sense, he is right that we don’t understand “how China works.” However, he is wrong. We understand very well how China works. We also understand that “the way China works” is not acceptable to publicly traded investors and US based investor groups in general.

This is the problem.  Mr. Y. says this is the way it is done in _____ [Chinese City]. When he says that, he is absolutely correct in that a number of Chinese companies and fly by night American companies do operate like that there. That is probably what the advisors to GSK said to them and look what has happened there. The same will happen to our client if they keep relying on a guy like Mr. Y. His seeking out Mr. S. just shows you how his mind works. When I talked to Mr. K [a higher up in the US], he told me that he wanted a China operation that will pass muster according to US Wall Street due diligence standards and this is exactly what we are trying to give them. Mr. Y. does not understand that and he has no intention of delivering that. So, at this time, our client needs to decide what kind of operation it wants to run in China.

No matter what they think, they still need to consider what happened to GSK. If you run a crooked ship in China, you can be run out of town in just one day. That is the risk and that risk is very real. However, this is a classic case where their ENTIRE China operation rests on Mr. Y. So they cannot get rid of him and they cannot make him shape up. It is a very difficult situation. This is a serious matter and it requires careful consideration by our client. Again, consider what the advisors to GSK probably said: “don’t pay attention to those lawyers. They just don’t know how things work in China.” Famous last words ….… At any rate, I will say it again: this has nothing to do with the ______[legal matter we are now working on for the client]. The issue is how the client intends to operate in China. As long as they work through Mr. Y., the straight way will never work. It’s a big deal and it cannot be swept under the rug at this point.

We see this a lot. The lead person in China wants to move quickly and without much regard for legalities.  Our job as lawyers is to insist that things be done legally (and if they are not, we resign) and that means educating the home office on what that really involves.  While all the while, having to fight off accusations from the China office that we just don’t understand China as well as they do.  That may even be true, but our paramount job is to make sure our clients operate legally and thereby stay out of jail.

The GSK problem has made that easier.  Now when we tell our clients that they must abide by the law in China we are getting a lot more knowing nods. Thank you GSK.

In Big Pharma, Bad Medicine, and What GSK Can Teach MNCs in China, David Wolf does a great job setting out some of the lessons that must be learned from GSK.  Wolf nicely sets the stage with a brief description of where GSK is and how it probably got there:

The China operation of GSK stands accused of price fixing, of bribing doctors and hospitals by funneling those funds through travel agencies, hiding the bribes as travel costs and thus engaging in fraudulent financial accounting, and of conducting an internal investigation that failed to turn up any of these actions — actions the company now acknowledges were perpetrated by at least some employees.

This is an ugly litany, but it is not a new one. For over a decade it has been something of an open secret that some major pharmaceutical firms have been pursuing some variant of the pay-for-prescribe model. Doubtless, over the years many of those companies were counseled to cease such practices by employees and advisers. (There is some speculation as to why GSK was singled out as the monkey that would kill the chicken, but I’ll leave that to others.)

But one wonders whether, under the circumstances, GSK had a choice. It is a China business truism is that once a company has been through the market entry obstacle course and has begun generating (often spectacular) profits here, the pressure to sustain and grow that flow of cash is enormous. News about a company’s business in China moves the share price, and the prospects for business in the PRC is a key topic at a growing number of quarterly earnings calls. And the question is never “how” a company is doing business in China, but “how much.”

Capital, like justice, is willfully blind.

Wolf then nicely sets out why the Chinese government LOVES (yes loves) going after foreign companies on bribery charges:

In so doing the government has sent a powerful message not once, but twice: no industry or company, however vital to the well-being of the Chinese people, will be allowed to engage in illegal and unethical business practices, and the foreign firms will be punished first and with greatest vigor.

In so doing, the government accomplishes three aims: it slows or stops practices likely to enrage the populace; it sends an unequivocal warning to its own local industry; and it cripples or eliminates foreign competition for its own local firms.

He then comes up with the money quote, which any foreign company doing business in China ignores at its own peril:

To every other multinational company in every other industry in China, ask not for whom the bell tolls. Xi Jinping’s administration has put the world on notice that no matter what local firms do, unethical and illegal business practices on the part of multinationals in China will no longer be tolerated, and in fact they’re coming for the foreigners first.

It is time for an immediate and thorough self-examination for the kinds of business practices that will not withstand government or public scrutiny. The time to clean up is right now, even if it cost contracts, relationships, and hard-won business. Failure to do so only puts off the reckoning and ensures that the cost will be much higher when that reckoning comes.

He concludes by saying that the future in China will belong to foreign companies “prepared to live and die by a better standard of behavior, not to those who follow the lead of the meanest actors in the market.”  Forget about the “everyone else is doing it” defense.

But having hammered home the importance of acting ethically in China, how in fact can a company on the ground there actually accomplish that?  If it were easy, my law firm (and virtually every other law firm that represents companies doing business in China) would not have a lawyer who does almost nothing but help companies comply with various corruption acts.  But generally, you should, at minimum, be doing the following:

  • Have Rules.  You cannot expect your China employees to follow ethical rules if you do not have such rules in place.  You should make clear your stance against corruption when hiring, in your policy manuals, in your contracts, and in the due diligence you conduct of third parties.
  • Make Sure The Rules Are Being Followed.  Do not stick your head in the sand. If your China office is doing exceptionally well, there may be a reason for that.  If they are doing exceptionally badly, maybe they are at greater risk.  In any event, make it your job to know what is going on in your China office, beyond just revenues. Make sure that the rules are being followed.
  • Make Sure Your People Know the Rules Exist for a Reason.  I cannot tell you how many times one of my clients has told me that when confronted regarding a rules violation their employee insisted that he or she had done something for the good of the company and that they thought the rule they had violated was just there to create plausible deniability.  You absolutely must make sure that your people know that you truly do expect them to follow the rules and that there will be severe punishments for those that don’t.
  • Severely Punish/Fire Those Who Violate Your Rules.  You want your people to know that you take your rules seriously? Kill a chicken.
  • Know the Laws.  You can’t have good rules for your people without knowing what is legal and what isn’t.  This means that someone in your company must stay current on the corruption laws that might impact your business.

Got it?

  • Tim

    Dan, For many years you and I both have been advising our clients to avoid using other peoples connections to expedite bureaucratic procedures and to stay as within the law as reasonably possible – there are paradoxes built into rule-by-law systems that make it impossible for any company to operate completely above board. GSK may have made it easier for your clients to accept this mantra but one case in an industry that is economically unsound without a shadow world of bribes does not make a trend.

    The fact is, none of us really knows what happens at the higher echelons in China. All the speculation in the media about Xi Jinping and the new standing committee has gradually developed a portrait of reform that buttresses these types of ‘times are a changin’ prognostications. Sadly, they are rarely founded on verifiable facts.

    The advice today remains the same as 10 years ago: if you intend to develop a long-term successful business in China as a foreign investor you will have to abide by all the rules your local competitors ignore. Disgruntled former employees, amoral competitors, unsavory officials and red-banner campaign du jour are the main threats to most foreign invested firms here. You don’t need to believe me but you also don’t need my services if you don’t. GSK is not yet indicative that their has been a paradigm shift to blanket enforcement.

    Xi Jinping is still an unknown element and anyone who tells you differently, run, do not walk to your nearest exit.

  • John Marlon

    Rule one no bribery. Rule two so not get caught. Hospital director to doctors all get extra money for drugs sold. I am married to a Chinese MR saleswoman and spent one year in hospital doing internship.
    You got to pay to play-period.