The GSK China scandal in 2013 resulted from bribes made by GSK China, a division of multinational pharmaceutical company GlaxoSmithKline (GSK), to Chinese doctors to increase sales. Chinese regulators received anonymous tips on GSK China's illegal activities as early as December 2011, with GSK China being fined. The GSK board received an email from anonymous whistleblowers in January 2013 notifying them of GSK China's activities, but the allegations were dismissed as a "smear campaign".
In March 2013, senior GSK executives received an email accusing GSK China of bribery; the email was accompanied by a sex tape featuring Mark Reilly, the head of GSK China. An internal investigation reported that it had found no evidence to support the allegations. GSK China hired Peter Humphrey to investigate the source of the sex tape; the investigation identified Vivian Shi, a former senior GSK China employee. Humphrey and his wife were arrested and imprisoned for violating Chinese privacy laws; according to Humphrey, he was tortured and mistreated for refusing to make a forced confession.
Chinese police recovered evidence of GSK China's bribery network in mid-2013. In September 2014, Reilly and three other Chinese executives were convicted and GSK was fined , the largest imposed by a Chinese court at the time. Reilly received a suspended sentence and was deported. The UK Serious Fraud Office investigation ended in 2019 after determining there was insufficient evidence to pursue further legal action.
Background
Chinese market reforms
In 1978, China adopted reform and opening up and began attracting foreign businesses. According to Jerome A. Cohen, there was a longstanding policy of treating foreign enterprises leniently to avoid embarrassment and reduce the perception of widespread corruption within China; the policy has since evolved. According to lawyer Leon Liu, by 2014 China aimed to reform the healthcare sector and the pharmaceutical industry to control costs; this complemented the general anti-corruption drive. Inadequate funding and pay are a perverse incentives for healthcare providers to accept bribes. Growing economic nationalism and state assertiveness put multinational enterprises operating in China under greater scrutiny. GSK bribes continued even as the Chinese market became less permissive to such practices.
GSK policies In the mid-2012, GSK was fined in the United States for misbranding drugs and failing to report drug safety data. Afterwards, GSK entered a five-year agreement with the United States Department of Health and Human Services to reform its compensation policy which tied bonuses to sales targets and providing perverse incentives for misconduct. The company promised to implement a new policy by 2015, which would include financial penalties for existing and former employees found to have engaged in major misconduct. Implementation of the new policy did not begin at GSK China until after the scandal.
GSK corporate governance was ineffective. The head office failed to detect the misconduct in GSK China leading to the scandal, with involved executives circumventing corporate controls. According to The New York Times, an internal November 2011 audit showed serious problems in GSK China facilities. In 2012, 56 of 312 employees dismissed for misconduct were from China.
Whistleblower actions
Early warnings Between December 2011 and April 2012, Chinese regulators received 24 anonymous tips originating from within GSK China about the company's operations. The tips described instances of fraud, corruption, and illicit practices including improper marketing techniques and kickbacks to healthcare professionals. The company learned of the tips in April 2012. Vivian Shi (), GSK China's head of government affairs, was suspected of being the whistleblower; she was fired in December 2012 against company policy protecting whistleblowers for allegedly falsifying travel expenses. Whistleblower emails were also sent to GSK and PricewaterhouseCoopers (GSK's auditors). GSK denied wrongdoing.
In January 2013, senior GSK executives received a detailed, 5200-word email in English accusing GSK China of systemic misconduct. Allegations included covering the full expenses, including recreation, of Chinese medical professionals ostensibly attending international conferences and falsifying financial records to hide marketing drugs for inappropriate uses. In one case, Lamictal, approved in China for treating epilepsy, was aggressively marketed for bipolar disorder; GSK China paid $9000 in hush money to a patient who was almost killed. The allegations were dismissed as a smear campaign.
In early 2013, GSK China established a unit to deal with the continuing whistleblower tips and regulator queries. It bribed regulators to investigate the misconduct as "unequal competition", a lesser offense to "commercial bribery", and limit the potential fine to $50,000.
Sex tape In March 2013, GSK head office executives - including Andrew Witty, the chief executive officer - received an email from "gskwhistleblower" alleging that Mark Reilly, head of GSK China, was using travel agency China Comfort Travel to funnel money to doctors; in return the agency supplied Reilly with women for sex. The email also contained a clandestinely filmed video showing Reilly and his girlfriend having sex at his Shanghai apartment. Reilly moved to a more secure residence after the break-in and email.
In April 2013, GSK hired ChinaWhys, a small risk consultancy firm also serving Dell and Dow Chemical, to investigate the whistleblower and the break-in of Reilly's residence. ChinaWhys was led by Peter Humphrey and his wife, Yu Yingzeng. The investigation was called "Project Scorpion." Reilly told Humphrey that the company suspected Shi and to investigate her influence and connections to the Chinese state. According to law professor John Coates, the corporate-sponsored investigation "smack[ed] of retaliation". Humphrey's investigation Shi's personal life included illegally acquiring, but commonly sold, confidential documents. Project Scorpion may have drawn additional state scrutiny onto GSK. Humphrey's report to GSK in early June identified Shi as the likely whistleblower, but provided no evidence linking her to the emails or the video.
In early July, a week before the arrests of GSK executives by Chinese police, a four-month internal GSK investigation reported that there was "no evidence of corruption or bribery in our China business."
Police investigations
Early evidence The Chinese police denied that it was because of the internal conflicts and tips from inside the company that they launched the investigation.
According to Xinhua, a state run media outlet, and the police report, the Chinese investigations started with an investigation into an unknown Shanghai travel agency in early 2013. According to Shanghai-based media the Economic Observer, the travel agency, namely Shanghai Linjiang International Travel Agency Co., Ltd. (), was founded 7 years ago before the investigation, by a Shanghai real estate developer and a major Chinese footballer. The Chinese police said that the travel agency had few products but its revenue rose from million to hundreds of millions RMB. An investigation into the travel agency with help from other government offices identified its links to GSK and other pharmaceutical companies.
Police action The Public Security Ministry assigned Changsha Police to form a task force to investigate into the lead. The task force gathered evidence for GSK's bribery in ten plus Chinese provinces including Beijing, Shanghai, Liaoning, Xinjiang in a year-long period. Shanghai and Zhengzhou Police were also assigned to make the investigation into the suspected economic crimes.
On 27 June and 10 July 2013, the Changsha Police, with the help from Shanghai and Zhengzhou Police, carried out raids in multiple GSK offices and related travel agencies in Beijing, Shanghai, and Nanjing, acquiring files and laptops and interrogating employees. 4 executives were arrested in Shanghai, including Mike Reilly, the company's China head and protagonist of the sex tape. A total of 14 were arrested. The Changsha Police announced the operation in a short statement on Weibo on 28 June. Besides, AstraZeneca, UCB and other pharmaceutical companies' employees were also questioned by the State Administration for Industry and Commerce and the police.
GSK response Mike Reilly left China on 27 June when police took action at GSK China, which was not stopped by the police. In a police press, head of China's fraud unit Gao Feng said GSK was the boss in the bribery networks. Gao continued, "This is a very serious violation and a high-profile case. We are wondering why we have not received any information. As for the chief of the China business, you had better ask him yourself why he has left China and is not willing to return so far." But he also said he was willing to cooperate with overseas partners. GSK responded that it would closely cooperate with the Chinese authorities. Later, Reilly voluntarily returned to China to help the police with the investigations.
Chinese media coverage
Bribery to doctors The patent of GSK's leading hepatitis drug, Heptodin, expired in 2006. To cope with this, the company launched Changcheng () and Longteng () where the company used bribery to disincentivise Chinese doctors from using a Chinese equivalent of Heptodin.
According to Gao Feng, head of the economic crimes investigation unit at China's Public Security Ministry, GSK transferred 3 billion yuan to over 700 travel agencies and consultancies during a 6-year period, through which the company bribed doctors, hospitals, officials and medical associations. GSK bought services from the travel agencies at prices much higher than real prices, so that the agencies were able to serve as a fund for bribery which was independent of internal financial regulations of the company.
Xinhua described the hierarchy of GSK's bribery networks, where the company reps bribed ordinary doctors, area managers bribed major clients, regional manager bribed VIPs, the marketing department bribed academics, and the VIP department bribed institutes. To avoid regulation, the company paid 7 smaller drug companies including Jiangsu Tailing () to sell its products. The company bought cars, cameras, televisions, electrical autos and other non-medical equipment to bribed centers of disease control and vaccine injection centers for ¥13m.
Distorted drug prices GSK's Lamivudine was priced at 142 RMB in mainland China, while it only cost 18RMB, 26RMB, 30RMB to buy the drug in Korea, Canada and Britain respectively. Adefovir Dipivoxil, another product of GSK, was as expensive as 182 RMB, but it only costs 103.5RMB and 59.92RMB to buy them in Japan and Hong Kong. The police investigation also showed how GSK manipulated their drug prices in China, which took 5 measures:
The company would first do market research in China. If there were similar drugs in China, they would make the prices of the drugs as a reference, or else, the company could price the drug "as high as it wanted." GSK China then reported the prices to the financial sector of GSK. GSK then sent the prices in China to GSK's transfer pricing (TP) center to calculate the importing prices and cost prices. When the prices were approved by the TP center, GSK China would import the drugs at the calculated importing prices. GSK China then would apply for approval from China's Development and Reform Commission for a new price based on the calculated importing price.