GlaxoSmithKline recently announced a new policy to end the practice of making payments to doctors to promote its products. The United Kingdom drugmaker will cease paying speaking fees to healthcare professionals that present on its behalf in seminars designed to educate other doctors on drug brands. The move marks the most recent effort by GSK to mend its reputation after a hugely damaging corruption scandal in China and the subsequent US$3 billion financial penalty incurred in the United States for illegal marketing.
GSK confirmed that it will still use doctors to promote its products, but these will now always be in-house company teams. It hopes that this will help to increase transparency and reduce conflicts of interests. The drugmaker will also stop linking sales volumes and pay for its drug representatives as an additional means of minimising illicit behaviour to boost sales.
Doctors have traditionally been able to supplement their incomes by expensing the costs associated with speaking engagements and attending medical conferences. There was however concern that these also represented an opportunity for bribes and other questionable expenses to be funnelled to medical professionals. Nowhere more so was this the case than in China, where many United States companies – particularly in the pharmaceutical sector – have in recent times been prosecuted for FCPA violations.
Despite concluding in July 2013 that there was “no evidence of corruption or bribery in our China business”, following a four-month internal investigation, GSK appeared to be all too aware of the risk of corruption in China, according to reports by Reuters. For example, the drugmaker:
- had more compliance officers in China than in any country other than the United States
- conducted up to 20 internal audits in China a year; and
- retained PricewaterhouseCoopers as its external auditor in China
However, despite the precautions, senior management at GSK China were clearly stunned to learn that a probe into practices in Changsha, Shanghai and Zhengzhou, by China’s Public Security Ministry, found that GSK staff had tried to generate sales and raise drug prices by bribing government officials, pharmaceutical industry associations and foundations, doctors and hospitals.
Upon learning of the issuance of an almost US$500 million fine for bribery by the Changsha Intermediate People’s Court in Hunan Province in September 2014, together with the suspended prison sentences for five of the company’s managers, GSK issued the following statement:
“The illegal activities of GSK China are a clear breach of GSK’s governance and compliance procedures, and are wholly contrary to the values and standards expected from GSK employees … GSK has cooperated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSK China. This includes fundamentally changing the incentive programme for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments.”
But while the above measures are welcome and commendable, they are also indicative of the classic ‘take an aspirin’ approach to compliance. To continue with the medical analogy … just as the medical world worked out years ago that it has to look not only at immediate relief (aspirin) but also more holistically at the health of a patient, so too must companies use their time and resources to prevent, detect and stop misconduct before it happens – or at least become aware of issues as soon as possible.
Companies need to analyse historical issues in order to predict future issues – in the same way that the medical world has to look at why a patient feels poorly by analysing their daily routine, their culture, their home life and the environment they are in. And just as genetic testing has changed the way that the healthcare industry looks at patients and their propensity to acquire a disease or sickness, predictive analytics can help companies predict certain compliance issues.
Following the verdict of the Changsha Intermediate People’s Court, GSK published an apology to the Chinese Government and the Chinese people on its website. Chief executive officer Sir Andrew Witty also issued the following statement: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this.”
The extent to which GSK learns any lessons remains to be seen. It was, for example, common knowledge for many years that travel agents, public relations companies and event organisers are often conduits for bribery, and particularly in China. And the fact that GSK shared concerns around compliance in China is confirmed by the aforementioned precautions it had in place prior to news of the scandal breaking.
And yet, despite the seemingly clear red flags, GSK China sales staff were able to generate sales and raise drug prices in Changsha, Shanghai and Zhengzhou by bribing government officials, pharmaceutical industry associations and foundations, hospitals and doctors.
According to reports, some of the bribery techniques used included the issuance of fake VAT receipts, with GSK also using travel agents to issue fake documents to gain cash. In addition, some executives allegedly took kickbacks from organising conferences and projects.
GSK China vice president and operations manager Liang Hong confirmed in a televised interview that some staff would organise conferences that never happened, before diverting the money to bribe government officials, hospitals and medical personnel to get them to use GSK products. In the same interview, Liang explained how executives at the drugmaker would also pass bribes to drug regulators and pricing officials at the National Development and Reform Commission (NDRC).
In an effort to rectify the issues identified at its Chinese operations, GSK said it would – among other things – expand its processes for reviewing and monitoring invoices and payments. While the precise nature of this expansion is not known, the company’s previous track-record in these areas has gone a long way towards informing regulators of the best definition of ‘best practice’ moving forward. And it is against this barometer that all companies in the pharmaceutical sector in China will now be judged.
The value of predictive analytics
Conducting a review of a company’s invoices and payments is more akin to an audit, which is often more limited in scope and seeks to uncover a specific risk in a particular business component during a defined period of time. The ongoing monitoring of invoices and payments, meanwhile, is a commitment to identify and remediate quickly gaps in the compliance programme – and GSK China was facing enough red flags to have benefited from both ‘relationship monitoring’ and ‘transaction monitoring’.
On the former, publication of the details of internal GSK emails has revealed that sales staff in China were under clear instructions by their superiors to discuss ‘marketing strategies’ [a euphemism for bribery] through the use of their own personal email addresses – rather than the company email system. However, GSK China is now able to avail itself of software solutions that can import and analyse communications data from various systems to detect relationship patterns (such as between employees and travel agents).
GSK China can also now use software solutions for the latter, meanwhile, to compare transactional data against either its own established norm or the accepted industry standard. For example, if a particular transaction – such as a fake VAT payment – falls outside of the established norm, it would create a red flag that can then be subsequently investigated.
Predictive analytics monitoring software could scour multiple GSK China data systems – from a variety of sources (such as Salesforce, HR tools, accounting software and third-party management databases) – to identify suspicious transactions in real time. It could do this by using sophisticated algorithms that would enable GSK China to analyse millions of transactions automatically, only highlighting the most suspicious.
Rather than GSK China employing a large team of compliance specialists to identify and remediate quickly any compliance concerns, which would take a lot of time, money and effort, predictive analytics software could analyse each transaction immediately and ‘risk score’ them. This would be based on known ‘risk factors’ in the data, a combination of which would create a scenario that might suggest there was a hidden compliance problem.
Looking at each ‘risk factor’ by itself might not cause any alarm bells to go off. But when all of these are combined in a single transaction and tied together in analytics software, GSK China would need to stop the transaction and do an examination.
For example, a set of risk factors for GSK’s sales channel might look something like this:
- Use of a new travel agent in China
(China is a high risk country for compliance issues)
- GSK’s sales and marketing teams insisting on use of a local travel agency
(Unlike many basic travel agencies outside of China, local Chinese agencies generally perform all sorts of services that are not disclosed when they are originally employed – such as managing events. As part of these events, the travel agent arranges domestic travel and hotels but also arranges associated services, such as invitations, press management, restaurant bookings and photography. It is these ancillary services that are at the biggest risk for misuse of funds. Often the invoices for these events intentionally do not disclose all the ancillary services. In some cases, the invoices simply list ‘service fees’ (often up to 25 percent). It is these service fees that are often used for bribery and offering participants additional services. The most likely use of these funds goes towards the participants, often in the form of sexual favours (charged to a central account at the hotel), excessive bar bills or gift-shop purchases)
- The deal contract is for services of more than US$200,000 and is submitted at the end of the quarter
(US$200,000 is a huge deal for a new (and unproven) Chinese travel agent, while salespeople are more likely to do something non-compliant at the end of a quarter to meet their sales quotas)
A review of the above scenario shows that the possibility for bribery, corruption or some other misconduct is relatively high with a new local travel agent, in a part of the world – and industry sector – where bribery is common, and with a large deal and/or large profit margin. The transaction could be all above board and completely legitimate, but GSK would be wise to double-check this before such a deal is completed.
The GSK case changed the ballpark on China compliance as it highlighted how deep bribery can go in a country operation. With bribery, compliance officers need look deeper for illegal payments. They are most likely not going to be made by the company directly. They are likely to be made by a third party, disguised as something legitimate. In the GSK case, it was travel agents. In other cases, it is done by PR companies, by visa agents, by marketing companies and by research firms. In some cases, it has even been done by law firms.
One key lesson from GSK’s corruption scandal in China is that the use of predictive analytics monitoring software in transaction monitoring could have added significant value by cutting down the timeline for identifying and remedying a suspicious transaction. Just like genetics changed the scope of treating disease, transaction monitoring and predictive analytics can change the way that GSK and others focus on compliance.
Facts of the case
What do we know about the case?
GSK was accused of using a network of 700 middlemen and travel agencies to bribe doctors with £320 million (US$466 million) cash and sexual favours in return for prescribing GSK drugs.
GSK admitted only that certain senior executives who knew their systems well appear to have acted outside of the company’s processes and controls, which breached Chinese law.
How long had the bribery been going on for?
Gao Feng, head of China’s fraud unit, said police had evidence that bribery was a “core part” of GSK China’s business model since 2007.
Did GSK China’s bribes inflate the price of its drugs for patients?
One of GSK China’s arrested executives, Liang Hong, told Chinese state TV that the £320 million (US$466 million) spent on bribes raised drug prices for Chinese consumers by up to 30 percent.
When did GSK China first become aware of the allegations?
Chinese police announced the charges and arrested four GSK executives on 15 July 2013.
One week earlier, GSK concluded a four-month internal investigation that found “no evidence of corruption or bribery in our China business”. The four-month internal investigation was prompted by whistleblower allegations that Chinese sales staff had been engaged in “widespread bribery of doctors to prescribe drugs”. However, GSK sacked 56 employees in China in 2012 for violating its rules. The New York Times has claimed that an internal audit proved that GSK was warned about serious problems in its Chinese R&D facilities as early as November 2011.
Who specifically was involved in the bribery?
GSK claimed that the misconduct was restricted to the four executives detained by police. However, Chinese police also prevented GSK China’s British finance director Steve Nechelput from leaving the country, and wanted GSK China boss Mark Reilly to immediately return to Shanghai.
Ultimately, the following five GSK China executives pleaded guilty and were given suspended sentences rather than jail terms – Mark Reilly, Liang Hong (China vice president and operations manager), Zhang Guowei (HR director), Zhao Hongyan (legal affairs director) and Huang Hong (business development manager).