Four Glaxo China Executives Held in Criminal Probe

China detained four senior GlaxoSmithKline Plc (GSK) executives on suspicion of economic crimes involving 3 billion yuan ($489 million) of spurious travel and meeting expenses, and receiving sexual favors.

The alleged offenses date to 2007 and involved 700 travel agencies, Gao Feng, head of the economic crimes investigations unit of the Public Security Ministry, said at a briefing in Beijing today. The executives are Chinese nationals, the Xinhua News Agency said. Glaxo is “deeply concerned and disappointed” and will stop using agencies identified in the probe, the company said in a statement.

The Glaxo case is the most high-profile probe into a foreign company in China since four Rio Tinto Plc (RIO) executives pleaded guilty in 2010 to receiving 92 million yuan in bribes. The probe into London-based Glaxo is part of a broader effort to clean up China’s drug industry, the People’s Daily, the mouthpiece of the ruling Communist Party, reported today, citing an unidentified ministry official.

“There is always a big boss in criminal organizations and in this case GSK is the big boss,” Gao told reporters. Audio from the briefing was uploaded online by a correspondent for the Daily Telegraph. “In order to win the favor of GSK, some travel agencies don’t just offer money to their executives, but also sexual bribes.”

Photographer: Simon Dawson/Bloomberg

A GlaxoSmithKline Plc logo sits on a sign outside the company's headquarters in London. Close

A GlaxoSmithKline Plc logo sits on a sign outside the company's headquarters in London.

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Photographer: Simon Dawson/Bloomberg

A GlaxoSmithKline Plc logo sits on a sign outside the company's headquarters in London.

‘Sufficient Evidence’

The Glaxo investigation was announced June 28 when police in Changsha city, in central China, said senior executives were being probed on suspicion of economic crimes. The ministry has been handling the Glaxo case for more than half a year following police investigations, Gao said.

“We have sufficient evidence to suspect these funds involved illegal activities,” he said.

The ministry also found clues of money transfers involving other foreign drugmakers, Gao said, without identifying them.

The detained executives are Liang Hong, vice president and operations manager of Glaxo China; Zhang Guowei, a human resources director; Zhao Hongyan, a legal affairs director; and Huang Hong, a business development manager, Xinhua reported.

The crackdown aims to frighten companies into spurning bribery and focusing solely on research and on producing cheaper and better drugs, it said.

Glaxo fell 0.3 percent to close at 1,744.50 pence in London trading. The stock has returned 34 percent this year, compared with a 21 percent return for the Bloomberg Europe Pharmaceutical Index.

No Proof

Some Glaxo executives admitted to corruption after Chinese authorities found evidence of serious commercial bribery and tax-related crimes, the Public Security Ministry said on its website on July 11, without identifying the individuals.

They are suspected of trying to increase sales channels and inflate prices by using avenues such as travel agencies to bribe government officials, medical associations, hospitals and doctors, and faking tax receipts, the ministry said on its website today.

Glaxo, the U.K.’s biggest drugmaker, has repeatedly said it has found no evidence of bribery or corruption in China, most recently on July 11, in response to the ministry’s comments.

“We are deeply concerned and disappointed by these serious allegations of fraudulent behavior and ethical misconduct by certain individuals at the company and third-party agencies,” Glaxo said in e-mailed statement today. “Such behavior would be a clear breach of GSK’s systems, governance procedures, values and standards. GSK has zero tolerance for any behavior of this nature.”

Reviewing Relationships

Glaxo will cooperate with the investigation, it said. The company is reviewing all third-party agency relationships and reviewing all transactions with travel agencies, Glaxo said.

Executives in China worked with Shanghai-based Linjiang International Travel Agency to falsely inflate budgets meant for organizing meetings and training in return for cash that could be used for bribes, according to the People’s Daily report. The newspaper also cited interviews with local police in Changsha city and suspects in the case.

The newspaper report cited one of the detained Glaxo executives describing how he listed some meetings as having more attendees than were present to increase his allowance. Some meetings for which he obtained funds never took place, the report said.

‘Resolutely Crack Down’

China wants to “resolutely crack down” on commercial bribery in the sale of medicines because such action boosts drug costs, increasing the burden on patients, Deng Haihua, a spokesman at the National Health and Family Planning Commission, said last week.

The head of Glaxo in China, a British national, left for the U.K. after the investigations began, and Chinese authorities have yet to receive information from the drugmaker’s headquarters in relation to the case, Gao told reporters today.

Mark Reilly, the head of Glaxo’s China pharmaceuticals business, returned to the U.K. on a routine, planned business trip and has been working from company headquarters on the response to the investigation, according to a person with knowledge of the matter who asked not to be identified because he wasn’t authorized to speak on the subject. The person declined to say when or if Reilly will return to China.

“I need to remind foreign pharmaceutical companies that because they occupy a leading position in the industry and reap huge amounts of commercial profits, they should also bear a great responsibility to society and the public,” Gao said. “While we don’t expect them to set a moral example, we expect them to obey the law.”

To contact Bloomberg News staff for this story: Daryl Loo in Beijing at dloo7@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net

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