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GlaxoSmithKline's China network caught in massive bribery scandal

By Ramy Inocencio, for CNN
July 25, 2013 -- Updated 1142 GMT (1942 HKT)
STORY HIGHLIGHTS
  • China accuses GlaxoSmithKline of funneling $500bn to bribe gov't, medical officials
  • Money allegedly used to encourage use of GSK products, artificially boost prices
  • Chinese authorities have detained four Chinese GSK executives, one UK national
  • GSK is one of the world's largest pharmaceutical firms, with 97,000 employees

Hong Kong (CNN) -- An investigation by Chinese authorities into the activities of GlaxoSmithKline has allegedly turned up a bribery network that involves government officials, doctors, hospitals and at least 700 travel agencies.

The U.K.-based GlaxoSmithKline, one of the world's largest vaccine makers, is now attempting to distance itself from its China arm -- which has been accused of using hundreds of millions of dollars in bribes to encourage the use of GSK products and artificially boost prices.

As Chinese authorities and GlaxoSmithKline reveal new information, here is an overview of the probe, the parties involved and the potential penalties.

What is GlaxoSmithKline?

Pharmaceutical giant accused of bribery
GlaxoSmithKline probe could widen
Pharmaceutical giant accused of bribery

GlaxoSmithKline, headquartered in London, is one of the largest pharmaceutical companies in the world. The firm is known for its wide range of over-the-counter and prescription medicines and vaccines including its popular anti-depressant Paxil and diabetes drug Avandia.

GSK, as the company is also known, says it employs some 97,000 people in more than 100 countries.

In the last fiscal year, GSK reported more than $11.5 billion in pre-tax profits and ranked #231 on the Fortune Global 500.

What are the accusations?

On July 11, China's national police agency accused GlaxoSmithKline of bribing government and medical officials in some of China's biggest cities -- including the country's financial hub of Shanghai and Hunan's provincial capital Changsha -- to encourage the use of GSK medicines and to push prices higher.

The bribes totaled nearly half a billion dollars, according to media reports.

On July 22, GSK executive Abbas Hussain admitted that some of the company's senior executives in China appeared to have violated the law. Hussain, the company's president of Europe, Japan, emerging markets and Asia-Pacific, had been dispatched to China to contain fallout from the alleged scandal.

On July 24, China's state media reported that 39 hospital workers were being punished for taking more than $450,000 in kickbacks from pharmaceutical firms over a three-year period.

Nine of the doctors involved had been suspended or had their licenses revoked, and a case involving a trade union official was referred to the judicial system.

Who has been caught up in the scandal?

Chinese authorities have barred GSK China's Vice President for Finance, British national Steve Nechelput, from leaving the country since late June. At least four Chinese executives have also been detained.

Chinese state media have identified these executives as Vice-President of GSK China's investment company Liang Hong, Vice-President and human resources director Zhang Guowei, GSK China's legal affairs director Zhao Hongyan and the company's business development manager Huang Hong.

Chinese state television also broadcast an apparent confession by Liang Hong. It is unclear whether his statement was made under force or duress.

Liang explained how conferences were faked in order for travel agencies to create receipts for services never performed. Funds were then used to pay off bribes encouraging the use of GSK products.

How have drug prices been affected in China?

In Liang Hong's alleged confession aired on Chinese state television, the executive explained that the bribes could have encouraged corrupt government and medical officials to raise prices 20-30%.

Liang added the cost for medication would be substantially inflated by the time it reached patients.

How important is China to GSK?

In the company's just-released second quarter earnings statement, GSK revealed net losses in Europe and Japan, with flat turnover in the United States in the first half of the year.

The only regional growth occurred in emerging markets and the Asia Pacific -- of which China is core.

As China's investigation into GSK expands, the firm's profits from the crucial emerging growth market are expected to take a hit.

"Clearly, we are likely to see some impact to our performance in China as a result of the current investigation," said GSK CEO Sir Andrew Witty, "but it is too early to quantify the extent of this."

Sine the bribery allegations first surfaced, GSK's share price has slumped 3.5% in London and 2.4% on the New York Stock Exchange.

What are the penalties if GSK is found guilty?

China's investigation could expose the company to legal action in the U.K., and possibly the United States, under laws relating to the bribery of foreign public officials.

GlaxoSmithKline says it has informed the U.K.'s Serious Fraud Office about the bribery allegations but had not yet been asked to provide any further information. The agency, which investigates and prosecutes corruption cases, said last week that it could neither confirm nor deny an interest in the claims against GSK at this stage.

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