Saturday, July 20, 2013

GSK chief Andrew Witty set to admit China 'scam’

Andrew Witty, CEO of GlaxoSmithKline

Sir Andrew Witty is set to use the company’s second-quarter results next week to reveal that GSK’s own investigation into allegations of a “huge economic scam” has uncovered evidence that senior executives in the country were involved in an orchestrated attempt to falsify invoices, pay sweeteners to third parties and siphon off payments.

It appears that the fraudulent activity continued for a number of years without being picked up by GSK’s own compliance unit in the country. In 2012, GSK was fined $3bn (£2bn) for abusive practices in marketing drugs in America.

In what will be another significant blow to GSK’s global reputation, senior figures close to the company’s inquiries in China have revealed that the business now expects to face fines which could total tens of millions of pounds, as well as criminal trials for the individuals involved. Sir Andrew is said to be personally shocked by the evidence that has been uncovered.

Such is the seriousness of the allegations against executives that GSK has even considered whether execution could be an ultimate sanction if criminal trials go ahead. In 2007, the head of China’s State Food and Drug Administration, Zheng Xiaoyu, was executed after admitting taking bribes totalling $850,000 (£557,000).

GSK believes that if the total amounts involved breach a certain figure – thought to be the equivalent of £10m – then execution is available to the authorities. News that Sir Andrew is to admit to failings comes nine days after the Chinese authorities revealed that police were looking into Rmb3bn (£300m) of deals which could go back as far 2007. GSK believes that the fraud only involved a small fraction of that figure but that it could still amount to a total fraud of several million pounds.

Four GSK executives have been arrested in China as part of the police investigation and it has been claimed by the Chinese authorities that GSK employees have confessed to the bribery allegations. GSK believes that the allegations only involve the four arrested officials who were acting in concert to “disrupt the business”, according to one source.

On Friday, Sir Andrew sent Abbas Hussain, GSK’s president of emerging markets, to China to deal with the crisis along with the global head of internal audit and a senior legal official. The pharmaceutical firm has also hired auditors Ernst & Young to carry out an independent review of its systems in China.

Sir Andrew plans to travel to China to offer to solve the problem. The allegations centre on GSK’s use of around 25 “travel agencies” in China which organise conferences for doctors. Bribes were paid to “stimulate contracts” – that is, encourage the agencies to host GSK events in what is a competitive market with more than 700 operators. Invoices were also falsified. But an opaque system of sub-contracting made it difficult for compliance officers to follow payment trails.

GSK has halted the use of travel agencies and has launched an investigation into all third-party relationships in the country. Although it is now reviewing its business in China, which accounts for 3pc of the company’s global sales, it appears unlikely that it will pull out of the country, where there are still major expansion opportunities.


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