Foreign Executives Facing Corruption in China: What to Do

Posted by Reading Time: 7 minutes

Running away and leaving is not the solution.  

Op-Ed Commentary: Chris Devonshire-Ellis

The GSK and ChinaWhys scandals in China have had an impact on foreign executives based in China as regards to how they should react if faced with apparently corrupt behavior within their own companies. In the case of GSK, the situation is extremely complex, as in both the corporate culture and the industry itself, the payment of commissions to Chinese doctors is prevalent—and probably still is. A large proportion of the pharmaceutical distribution in China is corrupt—partly as a mechanism to allow China to pay its doctors properly—but those same doctors abuse the system to the extent many are driving around in Mercedes, which was never the intention. For a comprehensive breakdown of exactly how the Chinese pharmaceutical industry works in this regard, please refer to our piece “Why Corruption is Inevitable in China’s Pharmaceutical Industry.”

GSK’s China CEO, Mark Reilly, has subsequently been placed under house arrest in China while investigations take place into the extent of his culpability, and that of the company. Given the magnitude of the case, this is likely to take some time. In the case of GSK, it should be noted that the company was fined over US$3 billion in the United States for similar offenses just recently. The issue concerning Reilly is to what extent the corporate culture embraced corruption, and the degree of personal culpability he had in this. It may be that Reilly attempted to make things better, in which case the Chinese enquiry may exonerate him, although Reilly has been formally charged.

In the case of ChinaWhys, the British executive Peter Humphrey remains incarcerated following unspecified charges of corruption relating to the payment of bribes to secure what under Chinese law should be secret information. ChinaWhys was in the risk consultancy business, which has always operated in a grey area of Chinese law, and Humphrey would have known the risks. But the specific packaging and sale of private data was a step beyond even the normal risk investigations and sleuthing that goes on. In Humphrey’s case, he would have been fully aware he was breaking the law.

Several commentators have advised China-based foreign executives to leave China if they feel they are about to become ensnared in a corruption probe. However, this is a naive perspective. China has been a member of Interpol since 1923, and the Chinese Ministry of Public Security retains strong links with the organization. This means that in the case of high-profile individuals such as GSK’s Reilly, with allegations of corruption running into the billions of dollars, it was far better for him to return to China (which he did) to assist with the investigation and to allow the Chinese authorities to tease out how much of the issue was corporate culture and how much was the work of specific individuals.

Given that GSK has a track record of this type of offence, it may well prove to be that a huge corporate fine is pending, and that Reilly may receive a sentence that can be “negotiated” to allow him to leave shortly after a trial. It is more likely that GSK’s corporate directors will face investigations and possible punishments from enraged shareholders, than it is for China to mete out punishment on a company whose jurisdiction remains by-and-large beyond its reach.

In the case of Humphrey, this appears to be at once a complex yet more straightforward criminal act. While he did have a board of directors, none remain in China. Most will almost certainly never be returning, and the company is now defunct. China has arrested the two main culprits, and the destruction of any future China-career for the other executives involved is probably deemed to be punishment enough. Those other directors have been deleting the fact they were with ChinaWhys at all from their CVs.

Humphrey, though, is likely to face a prison sentence—with time deducted for his incarceration to date—and possible early release on medical grounds. The difference between the two cases is that Humphrey will have known he was breaking the law. GSK’s Reilly may have become so insured against the corporate practice that he felt it was an “industry standard” rather than corruption per se. Of the two, it is possible Reilly has more mitigating factors in his favor than Humphrey. Time will tell.

As for the question of what foreign executives should do if they uncover fraud or corruption in their ranks, the answer is not as simple as “leave China”—and there could be very serious repercussions for doing so. Firstly, the question is, as in the case of GSK, of whether or not the corruption is considered part of the corporate culture and is “normal business practice,” as well as the extent of your culpability in it. If there is no involvement on your part, then a simple resignation should suffice, leaving you free to depart the country. Should an executive find himself responsible for a department that is corrupt, personal involvement extends only to the length of your incumbent position.

Attempts may be made to clean up such problems, in which case email exchanges and documentation that prove you were attempting to deal with the situation and turn it around should be stored somewhere personal and not just left in company mailboxes. It may also be wise to consult with personally-sourced corporate counsel about your position and seek advice. Should the body corporate be determined to stamp out any errant practices, and an executive is involved in this clean up, again there is a valid job to do and documentation will back up your position. But keep copies and ensure that the corporate culture is devoted to cleaning it up. We have dealt with several such cases in the past in an advisory capacity. Simply “leaving China” is clearly not an option—someone has to clean up the mess, inherited or otherwise.

In my opinion the Chinese authorities, following an investigation, will know full well the extent (or lack thereof) of an individual’s involvement with, and promotion of, corruption. While the experience may not be regarded as a career high, honest executives should have nothing to fear. Running away however, and blandly “leaving China,” sends the entirely wrong signal. And no one wants to be faced with an Interpol notice as an internationally wanted person.

Recommended Steps to Take when in Crisis Management Mode:

  • If you are not directly involved in any corruption, it may be better to just resign your position citing “irreconcilable differences” and move on.
  • If you are in clean-up mode, keep personal copies of all relevant documentation that explains your position, role, responsibilities and actions;
  • If required, engage internal counsel to discuss your position and risks, and if still unsure, discreetly engage external legal counsel in China. A foreign lawyer from your own country engaged with a blue chip China-based firm would be the best person to discuss these issues with. He/she will be very familiar with your personal risk situation and how to deal with it.
  • If your company is raided, do not just run away. This immediately points to suspicion and would make you a prime target. It may also damage any future opportunities to be involved with China in the future.
  • During an investigation, cooperate. It may be unpleasant and on occasions investigations teams can be deliberately intimidating to try and get to the truth. This stage will pass. If you are not involved, they will quickly lose interest in you. If you wish to resign or move on, this would be the time to do so—but it would be wise to ask the investigations team first if they need you in China before just departing.

And finally:

It should be noted that foreign executives in China that have prior experience of dealing with a Chinese fraud or corruption probe have added-value to a new employer. Running away from China totally diminishes that. It is always better to live, learn and be able to fight another day. Foreign executives in China worth large salaries all have war stories to tell. Running away at the first sight of trouble is a sign of weakness and culpability.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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