GSK case shows the importance of internal audits
July 26, 2013 | BY
clpstaffMedia coverage of the GSK investigation has highlighted the need for companies to have strong internal audit capabilities, but deciding which transactions to track and how much background screening to do is not easy
The GSK case quickly gathered momentum in July (see box) with many observers blaming the pharmaceutical giant for missing what now seems like obvious fraud. It has also highlighted how easy it is for whistleblowers to expose fraud. Under the UK Bribery Act and the US FCPA, companies are responsible for transactions completed on their behalf by vendors, partners and agents.
“Companies must be confident that these parties are acting ethically when conducting business on their behalf. Companies need to conduct a background check on its vendors to identify any history of corrupt practices, and question if the vendors compliance protocols are not transparent,” said Violet Ho, senior managing director, Kroll Advisory Solutions.
“However, for a company that has thousands and thousands of vendors globally – adopting the same level of background screening for all will be prohibitively expensive and arduous. Instead clients should adopt a risk-based approach to due diligence, by determining which third parties present the highest level of risk to their organisations and then undertaking an appropriate level of due diligence.” she added.
In addition to the US and UK laws, China has two principle anti-corruption laws – the PRC Criminal Law (中华人民共和国刑法) and the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法). In addition, on December 26, the Supreme People's Court and Supreme People's Procuratorate jointly issued a judicial Interpretation on giving bribes to state functionaries.
All of the three laws prohibit bribery. The Criminal Law primarily prohibits government officials from receiving bribes and includes harsh penalties. The Anti-unfair Competition Law, however, is designed more to regulate general commercial bribery. The judicial Interpretation, for the first time, is specifically directed at criminal bribe-giving cases.
| GSK – investigation timeline |
| January: A whistleblower presents GlaxoSmithKline (GSK) with allegations that between 2004 and 2010, its China sales staff provided doctors with cash and perks for prescribing GSK's products. The email is disclosed to The Wall Street Journal. According to CCTV reports, around the same time, China's Public Security Bureau starts to investigate a local Shanghai travel agency named Linjiang Travel, whose revenue increase by millions of renminbi despite accepting no normal business enquiries. June 27: local police visited GSK's offices in Beijing, Shanghai, Changsha and Nanjing. Four GSK executives and travel agency staffs were detained. June 27: GSK's head of China operation Mark Reilly left China for the UK (according to a July 15 PSB conference). June 28: the news was first posted on the official microblog of Changsha police: “GSK China executives are involved in economic crime and an investigation is underway”. July 7: A GSK spokesman confirmed to The Wall Street Journal that the company had found no evidence of bribery or corruption in its China sales team. July 11: The Ministry of Public Security posted a statement on its official website, saying: “The investigation showed that GSK China used various channels such as travel agencies to bribe government officials, drug associations, medical foundations, hospitals and doctors.” July 15: On July 15, Gao Feng, a Ministry of Public Security official spearheading the GSK probe, said in a media conference that authorities detected that the company, since 2007, has employed more than 700 third party companies (travel agencies and consulting firms) with a financial transaction record for up to Rmb3 billion. July 17: GSK confirmed that its financial chief in China, British national Steve Nechelput, has been banned from leaving China since the end of June. July 21: Abbas Hussain, president of GSK and head of emerging markets, was sent to China to meet with Chinese police. He professed GSK's plan to adjust the company's business model to cut operational costs in drug prices. |
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Strengthening internal audits
Most MNCs already have independent internal audit capabilities, monitoring and improving their operation. In recent years, the need for the internal audits to get involved in anti-corruption and bribery compliance has greatly increased.
However, money paid in bribes will eventually find its way into the companies' financial books, either as operational cost, or marketing expenses. It is hidden, but it can be spotted. Ho suggests internal auditors should look for:
- A large sum of payment to different agents, or a high number of payments to one particular agent;
- Third party requests for cash payment;
- Third party asking for payment via offshore accounts;
- Unnecessary third parties; and
- Making payment to or negotiating a contract through multiple intermediaries.
“A third party investigator will ask for as many receipts as possible for one suspicious payment,” said an investigator for one of the big four accounting firms. “If it is for a conference cost, we want to see the attendees' flight tickets, with their names, the hotel's guest book and payment receipts and event lease contract and other details.”
Susan Munro, a partner of Steptoe & Johnson, recommends that firms should take the following steps:
- Enhance Chinese language training for all staff and third party vendors and consider hiring a law firm to conduct in-person training, ensure that training is conducted regularly and that participants sign certifications;
- Check and if necessary improve the wording of employment and secondment contracts with employees and commercial contracts with third parties in order to require compliance with relevant laws and the right to terminate for material non-compliance;
- Include audit right provisions in contracts with third parties and perform regular audits; and
- Update background checks and due diligence of third parties on a regular basis.
It is clear that businesses in China need to make strengthening internal audit procedures a priority. “The case is a wakeup call for companies operating in emerging markets, enforcement by local and foreign regulators is becoming stricter and penalties higher. For companies that want to operate successfully in China, they must adapt their anti-bribery and anti-fraud measures to mitigate local risks and challenges,” said Ho.
By Eve Yao
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