GSK: Should Have Seen It Coming?

August 6, 2013

Until now I haven’t written anything on the corruption scandal rocking pharma giant GlaxoSmithKline, partially due to other commitments but also because I didn’t really see an interesting angle. Let’s face it, this is not the first corruption story to hit the China foreign investment community, and it will not be the last. Neither is this exactly breaking news for China’s healthcare sector, which is swimming in this sort of thing.

However, if one reads enough news, something thought provoking is bound to leap out at you. For me, this was a combination of stories by the Wall Street Journal and The Guardian, the latter of which ran about a week ago with the headline “GlaxoSmithKline should have seen the warning signs in China.”

Rather judgmental, I thought. I’ve counseled quite a lot of foreign companies in China over the years, and I can tell you that anti-corruption measures are much easier to comment about and criticize than actually implement within a multinational corporation. We’ll get back to that in a second, but the other story that jumped out at me was the WSJ’s piece about Baxter, another multinational health care company, which is apparently having problems in China similar to that of GSK. Big surprise? Hardly.

If you’re unfamiliar with the type of scamtastic shenanigans going on at Baxter and GSK, the details are a bit murky. The big picture is that these companies have pretty good anti-corruption rules that prohibit gifts to certain third parties; these restrictions often involve specific dollar limits.

So if you want to throw some cash at a doctor or hospital but can’t do so directly without the Baxter/GSK finance guys finding out? Disguise the money.

With GSK, the money went out to travel agencies to pay for things like conferences, some of which never took place. Instead, those funds were spent on good old fashioned bribes, and probably hookers. It’s always hookers, isn’t it?

For Baxter, they were also apparently in the fake conference game, and several hotels have now been identified as venues where these meetings never actually took place. It’s not clear to me whether these hotels were part of the scheme, but I assume some of them were since they must have issued receipts. Of course, if Baxter had something going with intermediaries (like GSK and the travel agencies), then the hotels might be blameless.

Fun stuff, eh?

I only mention a few of the details to give you a flavor for this sort of scam. There are a million of ‘em out there. We human beings are rather creative little monkeys, and we spend a lot of time and energy coming up with ways to screw each other over for a few bucks.

Which leads me back to that Guardian headline and the idea that GSK should have seen this coming. I’m going to go out on a limb here and say “Maybe, maybe not.” Brave of me, yes?

Look, on one hand, GSK certainly knows all about the healthcare industry in China and many of the previous scams that have been perpetrated here (not to mention in other countries). They absolutely have a relevant compliance plan to deal with these sorts of things, and the issue is, I assume, always “on their radar screen.” In that sense, they always know that this is coming.

That being said, anti-corruption measures are sort of like planning for war. You have a tendency to create strategies that defend against the previous battle plan instead of anticipating what the enemy might dream up next. I’m thinking Maginot Line here, trite as that reference has become.

We could also look at anti-corruption measures as Sisyphean in nature, or refer to these scams with one of the favorite references used to describe the Iraq War insurgency, “Whack-a-Mole.” If you missed that one or don’t understand it, no worries.

The point here is that as an organization, you can’t just stop a certain kind of activity and hope that you’ll never see that problem again. The bad guys are smart and creative, and they will always come up with a new idea. Corruption will be persistent so long as the incentives are there to encourage it. And by the way, I’m not just referring to the perverse incentives in China’s healthcare sector, but the basic way that folks are compensated in companies worldwide: commissions and bonuses. (It should all be abolished. Straight wages for all, says I.)

I don’t know enough about either GSK or Baxter’s situation to say with any confidence whether they should have expected this. Certainly the front line finance guys were looking at valid receipts; it was the second line of receipts that were phony (e.g., hotel and travel bookings). If you get bad guys at two levels cooperating with each other, that type of scheme is very difficult to ferret out.

Disclaimer: I am not a forensic accountant, nor do I know what the internal processes are at Baxter or GSK. Someone with the proper background might very well be able to point to a specific kind of compliance program and say “See, if they had just done X, they could have caught all this.” Perhaps. And yet, I wonder whether Policy X, Y or even Z will be able to stop the next scam that comes around.

4 thoughts on “GSK: Should Have Seen It Coming?

  1. hehe

    There are other things that GSK could (and should) have done, for instance:
    (i) moving people around and not leave the same sales VPs, legal VPs, compliance VPs in place for many years, leaving them so many opportunities to create a system of corruption; (ii) compare sales expenses across jurisdictions – if your salesmen in China are spending four times as much than their Europe or US counterparts then you know something is going on; (iii) do periodic audits and check that trips really happened and conduct due diligence over third parties.

  2. Chris Devonshire-Ellis

    Hi Stan; it’s not an issue of “seeing it coming”. It’s an issue of “it’s systematic and has always been like this”. The way in which Chinese doctors are renumerated in China is through what is essentially a corrupt drug distribution system itself. All Pharma companies, including Chinese ones, and the State, are complicit. I had one of my long term China mates – now retired but who up until recently was the GM and Legal Representative for a large European drug manufacturer in China, to explain the entire drug distribution system on China Briefing, which he did, albeit anonymously for obvious reasons. The piece – which goes into some detail about the systematic problems in Chinese pharma – can be read here “Why Corruption Is Inevitable In China’s Pharmaceutical Industry” – http://www.china-briefing.com/news/2013/07/25/why-corruption-is-inevitable-in-chinas-pharmaceutical-industry.html
    I think you’ll find that explains rather a lot. – Chris

  3. Jay

    But this is not China-specific. Rather, this is Pharma-specific. Other industries may do it too, but it is common knowledge that (Big-)Pharma around the world does the conference thing for doctors and hospital and insurance big-shots, gov’t fact-finding missions to nice golf-resorts, etc. They just got caught this time (maybe forgot to swap HW-dynasty invitees for XL-dynasty invitees).
    Besides, this sort of thing might be fairly easy to stamp out if anyone wants to, but it takes more than paper-policy. For example, establish and publicize an anonymous fraud tip-line, investigate after X-number of separate tips to weed-out the odd disgruntled individual, then maybe send somebody scrutable (they do exist) to see if they can get themselves invited by manager XYZ to a “conference” or whatever else the instrument of fraud is.
    Of course, they may have had such a thing in place, only they sacked the “anonymous” tipsters (for going against shareholder interests if not confidentiality clauses) instead of manager XYZ (who after all deserved promotion for looking after shareholder interest).

  4. fdawei

    Hi Stan, something that begs attention is the government is “going against” the foreign firms which are easier to identify because of their global stature and name recognition. The problem is much more acute in the local and domestic pharma industry where the financial improprieties reach much farther down and much higher up the chain and if they were brought to the surface, heads would have to roll.