The GSK investigation in China has understandably attracted media attention, both in China and internationally. The investigation is high profile, possibly high stakes and it follows on from other troubles that the company has faced in a number of jurisdictions. The investigation is in early stages, but from what we have read thus far, there appear to be a number of lessons to be learned. At the outset, it is important to remember that major multinationals like GSK have comprehensive well thought out compliance programs and policies and procedures designed to prevent corrupt practices. That may not, however, be sufficient in all cases and for all locations, including China. Local knowledge and expertise is critical.
The GSK investigation appears in a context of significantly heightened anti-corruption and anti-bribery investigations throughout China. Each week, new cases and new sentences are reported in the local and national Chinese media. These actions cross industries and localities. Some but not all involve whistleblower reports from close associates (and mistresses). Whistleblower activities appear to be on the rise, and there also appears to be an increasing awareness in China of the SEC whistleblower program. (The Haiwen Alert on that topic can be found here.) Reports indicate that the GSK investigation was preceded by the termination of an R&D employee, but it is not clear whether that employee or his or her associates may have blown the whistle. It would not be unusual, however, for a disgruntled employee or former employee to do just that. We have seen this in a number of contexts, including allegations of tax irregularities, labor non-compliance, basic corporate compliance matters and of course allegations of corruption. More recent stories have implicated travel agencies – third party service providers who may have been in a position to funnel improper payments. This reinforces the need for heightened care in the selection of all service providers, and with respect to on-going monitoring of activities, payments and invoicing practices.
Reports indicate that the investigation involved the detention of a number of employees in several locations in China. State media is reporting that four senior executives suspected of "serious economic crimes" are in custody. Administrative detention and detention in connection with criminal investigations are frequently employed investigatory tools. There are rules regarding the authority of the police to detain persons. Some commentators are of the view that there is a great degree of room for the authorities to extend detention periods. Aside from detention, the rules permit imposing a period of bonded release (which can involve surveillance), placing restrictions on travel and other actions designed to preserve the integrity of the investigation. Of course, the police also have broad search and seizure powers, and these powers are usually deployed as well.
So, who is at risk? The trends show that corporate risk can be heightened if offshore compliance proceedings are announced. Multinational cooperation may become a norm, even if that cooperation is not formalized in a specific bilateral agreement. Some observers are of the view that criminal investigations and proceedings in China are generally not as transparent as in certain other jurisdictions. Moreover, cross border cooperation may implicate broader diplomatic considerations. Accordingly, it is not possible to conclude with certainty whether and to what extent multilateral enforcement activities may be on the rise. We note, however, that China does have in place a number of mutual assistance treaties, and in another context, China and the US have recently agreed to a framework intended to facilitate sharing critical documentation in the context of audits of Chinese issuers listed on US exchanges. We expect these trends to gain momentum, with more multi-jurisdictional investigations triggering or implicating concurrent or subsequent Chinese enforcement actions.
Media reports also indicate that individuals in China may be at risk personally, regardless of nationality. The police here, as in many other countries, have broad investigatory authority that includes the authority to detain suspects and question witnesses. Detention rules here are fairly well spelled out, both for administrative and criminal proceedings. Some commentators, however, believe the rules also give the authorities a significant degree of flexibility to extend a detention and restrict access. In certain cases, one can expect that at least for an initial period, there may be no access to counsel, and in many cases, no outside contact will be permitted. Signed statements are expected, and refusal to sign a statement may be taken as lack of cooperation (with perhaps an implication of guilt). Experience shows that a cooperative deferential approach is usually the best course of action, both for the company and the individuals involved. Of course, the degree of cooperation and deference that may be appropriate will vary from case to case. It is advisable, however, to create contingency plans for these circumstances, including procedures for surprise "dawn" raids, reporting lines, emergency contacts and general guidelines for communications with the authorities. Making sure the contingency plans and procedures are well understood by all is also critical.
Employment matters play a critical role, and it would be prudent to revisit your employment procedures, policies and training programs periodically. In addition, given what appears to be an uptick in whistle blowing activities, internal reporting and whistle blowing processes should be robust, fair and responsive across the board.
Recent trends point to more investigations, more enforcement, more sanctions and increasing attention to multi-jurisdictional cooperation. The best measures are those designed to mitigate compliance risk and to address compliance irregularities before the situation spirals into an investigation. Reliance on relationships to step in and resolve a crisis is naïve, and can often back fire. That being said, having the right team lined up -- with the right experience and ready to respond -- is a must. That team will often include outside professionals -- not only lawyers, but also risk mitigation experts, communications consultants, forensic accountants and others. The team should be readied in advance so that proactive, timely responses and strategies can be employed when the police do come knocking. Moreover, compliance programs across the board should be tailored to account for the Chinese regulatory and business landscape. From start to finish, local knowledge and expertise is essential.
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