Beijing’s Shot Across the Bow on Corruption: By Chris Priddy in The Wall St Journal, May 22, 2014 The writer is a Washington, D.C.-based attorney at Harris Moure law firm. China’s police last week accused GlaxoSmithKline’s GSK.LN +0.93% former head of China operations, Briton Mark Reilly, of orchestrating a significant bribery operation of illegal payments to Chinese doctors to boost sales. Last fall witnessed the high-profile trial, conviction and life sentence of Bo Xilai, former head of the Chongqing Communist Party, on bribery charges. Two cases aren’t precisely a trend, but they are a warning: Beijing may be starting to crack down on corruption. GSK says it will cooperate with the current investigation; Mr. Reilly hasn’t commented. In both the GSK and Bo matters, Beijing’s motivation isn’t especially clear. The most common view is that both cases are political. Under this theory, Bo Xilai was prosecuted to eliminate a political adversary to new President Xi Jinping while simultaneously demonstrating the Chinese government’s intolerance for flagrant corruption among the country’s wealthy and powerful elite. The GSK case shows that China will not tolerate corrupt activities by foreigners in sensitive industries, especially when such activities result in higher prices for Chinese consumers. Any future bribery cases, the thinking goes, must be viewed against the backdrop of a particular political agenda in Beijing. But don’t gainsay the alternative view: that Beijing is genuinely serious about rooting out corruption. Leaders in Beijing are aware that widespread graft undermines the legitimacy of Communist Party rule, and are looking for ways to combat it. Under this interpretation, the Bo and GSK cases are strategic in that they involve two different types of defendant—a political elite and a foreign entity—certain to cause widespread discussion and send a strong signal to others that no one is safe from prosecution. The real test will come in future cases, and the issue to watch is how close Beijing will allow anticorruption investigations to approach party leaders. Meanwhile, companies need to respond to these developments. First, companies should resist the temptation to assume a corruption crackdown is a bad thing. Efforts to require companies to follow China’s laws and regulations should be applauded by everyone doing business in China. Strict enforcement of anti-corruption laws would result in a level playing field, eliminating uncertainty about the costs and risks of competing in industries in which bribery and corruption are perceived norms. Similarly, it makes little sense to complain about Chinese authorities enforcing black-letter Chinese rules and regulations. Arguments that GSK or other foreign companies are victims of politically motivated selective enforcement sidestep the fact that all companies operating in China are required to comply with China’s laws. American and British companies also are required to obey their own countries’ laws—the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act—that prohibit corruption globally, including in China. But that’s not to say it won’t be a difficult period. Companies that may have benefitted commercially from either actively or passively condoning and engaging in corrupt activities must be capable of quickly transitioning to legally compliant businesses. An important lesson of the Bo and GSK cases is that penalties under China’s anti-corruption regime will be severe and swift. At the very least, foreign companies must review their operations and ensure appropriate compliance with Chinese regulations. All companies should carefully evaluate the means by which they ensure compliance with China’s laws and should factor such compliance efforts into corporate processes, strategies and resource allocations. The consequences of willful or blind non-compliance are too severe, ranging from corporate fines to prison sentences for company officials. A foreign company may try to justify regulatory violations under arguments that the Chinese laws are vague or unclear in their application to the company’s industry. Some foreign companies in China may think that because other companies in their industries engage in proscribed activities and have not faced legal repercussions, so they can too. Both arguments may once have been true. But as Beijing’s corruption crackdown intensifies, any commercial gains from corruption are now outweighed by the legal and business risks. Foreign companies cannot ignore Chinese laws and regulations by failing to fully understand the requirements of operating in a particular industry. Given its recent actions in the GSK matter, China appears to be issuing companies a clear directive that they bear responsibility for ascertaining, understanding and complying with applicable legal requirements. Ensuring that comprehensive compliance procedures have been implemented will likely be the new business norm in China—and this is a good development that can lead to predictability in Chinese transactions. China may issue new policy directives about legal compliance, but even