China: Multinationals Continue to Adapt to Active Enforcement Environment

Skadden's 2015 Insights - Global Litigation

Bradley A. Klein

Over the past few years, the U.S. authorities have continued their aggressive stance toward corrupt activity in China; 2014 saw significantly increased enforcement efforts by Chinese authorities, both of local companies and multinationals doing business in China.

Two of the highest-profile FCPA settlements in recent years involved alleged conduct in China. Avon paid $135 million in 2014 in its settlement with U.S. authorities and reportedly spent nearly $400 million on its five-year FCPA investigation. Diebold Inc. paid $48 million in 2013 in its settlement with U.S. authorities and reportedly spent nearly $23 million on its own FCPA investigation.

Chinese enforcement actions against prominent multinationals have ramped up considerably in connection with both China’s well-publicized anti-corruption campaign and the increasingly expansive application of its Anti-Monopoly Law. Those actions have involved multiple government agencies, including the State Administration for Industry and Commerce (SAIC), the Ministry of Public Security (MPS) and the National Development and Reform Commission (NDRC). Chinese authorities have emphasized that they are not targeting multinationals per se, yet investigations of businesses based overseas appear to be increasing in number, reflecting at least a heightened interest in the conduct of foreign entities operating in China.

The Anti-Corruption Campaign and Heightened Anti-Monopoly Enforcement

As has been well-reported, the Chinese authorities are in the midst of a wide-ranging anti-corruption campaign, which has resulted in the detention or arrest of a large number of current and former Chinese government officials. In December, authorities arrested Zhou Yongkang, former member of the Chinese Communist Party Politburo Standing Committee and the most prominent official to be arrested thus far. But the anti-corruption campaign has targeted multinational companies operating in China as well. The investigation into GSK, a multinational pharmaceutical company headquartered in the U.K., was perhaps the largest and best-publicized enforcement action against a non-Chinese company. It was alleged that GSK sales representatives made improper payments or offered other incentives to doctors to prescribe GSK pharmaceuticals, including via third parties such as travel agencies and consultancies. In July 2013, the Chinese police detained large numbers of China-based GSK personnel, and on September 19, 2014, GSK’s Chinese subsidiary was found guilty in the Changsha Intermediate People’s Court in Hunan Province of bribing nongovernment personnel to obtain improper commercial gain and fined almost $500 million.

The GSK enforcement actions were not limited to the company itself. GSK’s former top executive in China, Mark Reilly, also was convicted of bribery charges, received a suspended three-year prison sentence and will be expelled from China. Four other senior GSK executives received suspended sentences as well. Chinese authorities also prosecuted Peter Humphrey and Yu Yingzeng, a husband-and-wife team of investigators hired by GSK to examine the whistleblower allegations, on charges that they illegally purchased personal data in connection with their investigation. Humphrey and Yingzeng were sentenced to two and a half years and two years in prison, respectively.

While the investigation of GSK is perhaps the clearest example of the increased regulatory scrutiny of multinationals, Chinese authorities reportedly also have initiated investigations or made inquiries of other multinational pharmaceutical companies doing business in China, including AstraZeneca, Roche, Bayer, Eli Lilly and Novartis. Nor have these inquiries been confined to the pharmaceutical industry. Multinational automobile and chipmakers also have come under scrutiny by the NDRC and SAIC, often for alleged violations of China’s anti-monopoly laws. The NDRC has pursued Qualcomm Inc. for alleged monopolistic behavior, claiming that Qualcomm charged excessive licensing fees. The SAIC also announced an anti-monopoly probe of Microsoft after reportedly visiting company offices in Beijing and several other cities. In July, foreign car companies including Mercedes-Benz, Audi and Jaguar Land Rover reportedly agreed to cut prices for cars, parts or service following pressure from the NDRC probes, and both Chrysler and General Motors’ Shanghai joint venture reportedly have been subject to regulatory inquiries. Some of these regulatory inquiries can have ripple effects outside China, prompting investigations in other jurisdictions. For example, the Qualcomm investigation reportedly has triggered inquiries by the U.S. Federal Trade Commission (FTC) and the EU, and GSK is reportedly now facing additional corruption probes in the U.S., the U.K., Iraq, Jordan, Lebanon, Poland and Syria.

Adjusting to the New Enforcement Environment

The recent wave of enforcement activity in China requires continued vigilance for multinational companies and underscores the importance of an integrated global compliance infrastructure responsive to the different enforcement environments in various jurisdictions. Rigorous and regular evaluation and refinement of corporate compliance programs, enhanced monitoring of operations and careful attention to the regulatory and enforcement landscape will assist multinationals in limiting their risks worldwide. However, it seems clear that companies increasingly must have the capability to manage an ever larger number of regulators and respond to multiple simultaneous, parallel enforcement actions in different countries, including China.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.