GSK’s China arm may have to pay fines and give up profits totalling billions of renminbi if state allegations of mass graft by its executives are proven.
Exacerbating the matter, a Chinese state-run newspaper has also accused the British drug maker of evading around $16m in tax in China, while fresh accusations have surfaced that a British GlaxoSmithKline executive bribed hospital officials to use its medical products in Beijing and Shanghai.
The initial accusation that mass fraud was perpetrated by rogue Chinese executives at GSK have quickly moved into an altogether wider territory of corporate liability, with far wider ramifications for Western businesses operating in China.
It was previously rare for China to accuse entire legal entities of fraud or graft before President Xi Jinping’s launched the country's anti-corruption drive after he took office in March 2013. It has since seen Chinese authorities launch a swathe of prosecutions against individuals within businesses there, however, foreign businesses themselves have largely been unchallenged.
The witch-hunt also tended to overlook foreign citizens in China working for Western businesses, with only a couple of notable exceptions over the last few years, such as sentencing of Australian Stern Hu, Rio Tinto’s former iron ore salesman in China to 10 years in 2010, for bribery.
Experts suggest the sea change over prosecuting Western businesses in China is attributable in this case to a shift in regulatory priorities just over a year ago, that saw the National Development and Reform Commission focus on the pharmaceutical sector, where it suspected Chinese consumers were being charged more for drugs than customers in other countries.
This offensive against Western cross border businesses in China has since seemingly extended broadly to wherever prices seem artificially high to Chinese authorities, compared to what they charge consumers in international markets.
A year ago, China fined five brand-name multinationals $110m for anti-competitive pricing policies when selling baby in the country. Around the same time, an investigation was launched into Swiss food-packaging firm Tetra Pak over allegation it was abusing its market dominance in China.
Chinese police have accused GSK's medicines of being seven times more expensive in China than elsewhere, with prices inflated to help fund bribes to doctors, hospital staff and regulators.
While China accounted for only about three per cent of Glaxo's global revenues in 2012, and less in 2013 - when news of the initial investigation broke - the pharmaceutical giant's operations in its key markets of the UK and US could also now be probed.
Detractors of state intervention in foreign business operations in China accuse authorities there of launching an 'open season' on foreign firms who are more commercially successful than its state-run, domestic stalwarts and accuse China of trying to limit the business of foreign companies there, where regulators have been given a green light to pursue them by government.
