In this day and age, most multinationals have implemented thorough ethics and compliance policies at a global level. But as companies expand into new markets, several are finding that ingraining these policies into the firm’s corporate culture is a challenge. The GlaxoSmithKline bribery scandal in China underscores the need for businesses to increase their efforts to stamp out unethical behaviour, and reassess their investments in compliance and due diligence. Kanishk Verghese analyses some of the top regulatory issues faced by many multinationals, and examines the changing role of in-house counsel in response to the rapid pace of regulatory reform and heightened regulatory scrutiny.
at a global level. But as companies expand into new markets, several are finding that ingraining these policies into the firm’s corporate culture is a challenge. The GlaxoSmithKline bribery scandal in China underscores the need for businesses to increase their efforts to stamp out unethical behaviour, and reassess their investments in compliance and due diligence. Kanishk Verghese analyses some of the top regulatory issues faced by many multinationals, and examines the changing role of in-house counsel in response to the rapid pace of regulatory reform and heightened regulatory scrutiny.Additional reporting by Trond Vagen of Compliance Complete
The issue of compliance is not one to be taken lightly, especially in Asia’s emerging markets. Aside from risking criminal liability, companies can also suffer from fines as well as damage to their reputation and business relationships. GlaxoSmithKline (GSK) serves as a recent example – according to Reuters, the pharmaceutical giant’s sales in China has dropped about 30 percent since authorities accused it of corruption. GSK has said some of its senior Chinese executives appeared to have broken the law after police accused it of funnelling up to three billion yuan ($490 million) to travel agencies to facilitate bribes to doctors in the hopes of boosting sales of its medicines. Meanwhile, regulators are rolling out new rules and ramping up enforcement activities – clear signs of a hardening stance against non-compliant behaviour. While most industry experts in Asia see this as a positive step, many point out that challenges remain in the form of excessive regulation and extraterritorial issues, among others.
Extraterritoriality concerns
Corporates are becoming more attuned and knowledgeable about anti-money laundering (AML) and bribery, says Sophia Yap, Asia-Pacific general counsel and chief compliance officer at CBRE. “Previously, companies that were more regulated by these laws – like American businesses – were more attuned to these issues. But now, a lot of non-American companies are prepped and cognisant of the fact that they need to ensure that they have good know-your-customer (KYC) policies to tackle AML issues, and to have good anti-corruption and bribery policies in place,” says Yap.
While AML stands a top priority and concern, anti-corruption is becoming increasingly important globally, says Jiaxing Zhou, head of legal at China International Capital Corporation (CICC). Zhou adds that it is important to keep an eye on legal and regulatory developments on an international level, as many countries’ local laws have extraterritorial effects. “We often find ourselves stuck between the U.S. and the EU. These two groups of countries passed their own domestic laws, mostly as a reaction to the financial crisis in 2008, but there has not been enough coordination between them,” says Zhou. Indeed, the extraterritorial scope of the U.S. Foreign Corrupt Practices Act and the UK Bribery Act, for example, means that businesses and individuals with any connection to the U.S. or the UK could find themselves under the regulatory microscope.
Panelists at the Thomson Reuters 4th Pan-Asian Regulatory Summit, held in Singapore on Sep. 25 and 26, noted that the extraterritoriality of regulation as well as the lack of regional cooperation in implementing regulations were top concerns for financial institutions in Asia. They added that while many international regulations are often discussed at a bilateral level, global institutions operating in Asia often had to bear the brunt of extraterritoriality. Alan Ewins, head of Allen & Overy’s Asia-Pacific regulatory practice in Hong Kong, one of the panellists, said although regulators in Hong Kong and Singapore tailored international regulations to ensure that they benefited their own jurisdictions, they often ended up having to deal with such logistical issues as keeping up with international regulations and harmonising their obligations.
Liam Madden, managing director and head of legal and compliance for Asia at Instinet Pacific, agrees: “Instinet is a global company and we have to be mindful that what we do in one jurisdiction will need to generally be acceptable in another. Whilst it is hard to get a one-size-fits-all-solution to a particular regulatory issue, with the growing prevalence of extraterritorial type regulation we are trying to utilise a thematic approach that sees our process, procedures and controls meeting a high standard that we can implement globally with the required localisation also built in. It is not easy, but that is our goal in most cases.”
Excessive regulation
In addition to extraterritoriality, legal and compliance professionals have also voiced concern over the issue of excessive regulation. This has been a particular issue for businesses in Asia that are dealing with the global impact of U.S. and European regulations simultaneously with regulatory developments in domestic markets. Since the financial crisis, regulators have been put under enormous pressure to do something to prevent it from happening again. As a result, they have rushed to make new rules, but in some cases might not have thought about the implementation of the rules, says Zhou. “Rushing to make new rules in unchartered areas can be very tricky because you do not know at that time what the impact of the regulation might be,” he says. “The starting point is good because people know that they need to do something. Of course, in some areas regulators should take very dramatic action. But in others, they should be more philosophical, and they should be forward looking and not act too fast,” adds Zhou.
At the most basic level, regulators seek to minimise threats to the markets over which they preside. In practice, however, this is a very complex task, with unintended consequences being a constant fear, says Madden. “We therefore appreciate it when a regulator takes a pragmatic, analytical approach to the introduction of new rules and provides the industry with the opportunity to provide input on potential effects that the regulator perhaps did not consider,” he says.
Securing support
To help offset the risk of regulatory investigations and enforcement, companies should ensure that they have credible compliance programmes in place. To successfully instil a culture of compliance in a company, it is vital to secure the support of senior management, say compliance professionals. “You definitely need the top-down support. If there is no support at the global and Asia-Pacific senior leadership level, it is very hard to institute an effective compliance policy on a country level. It’s probably almost impossible,” says Yap.
However, securing support from senior managers and being able to demonstrate a culture of compliance can also present challenges to implementing effective compliance programmes. Speaking at the Asia Counsel-to-Counsel Exchange conference in Hong Kong on Oct. 9, panellists said that for foreign firms operating across Asia, the different stages of economic development and priorities of local regulators often made this a harder task than elsewhere. “Asia is very diverse. It is not the ‘United States of Asia’, and there are differences between its territories,” said Stephen Yeo, general counsel at Manulife. “These nuances make us work harder to bring to each territory the core principles that are important to the organisation. At the same time, we have to be flexible to the local environment as well. If you apply principles blindly across territories it may not work as well,” he added.
Another ongoing challenge for compliance departments is getting the business side to look at compliance as not just a cost centre, but as a contributor to the rest of the business, says Angelyn Lim, partner at Dechert in Hong Kong. Speaking at the conference, she also warned that it might only take a small slip-up to have the local regulator begin an investigation and possibly conduct a company audit. To minimise such a risk, cooperation between divisions within the company is essential, says CICC’s Zhou. “We work closely with our compliance department to draw up programmes, and also work together with our internal audit department and we give training to the front office staff. The key is to prevent the problems from happening beforehand rather than dealing with problems after they happen,” says Zhou.
“It is important to get ahead of the game, and be proactive rather than reactive,” agrees Yap. For her part, Yap says that marketing compliance as a product is an effective method to demonstrate the value of a compliance policy to business leaders. This is done through CBRE’s annual risk assessment programme, which identifies key risks and creates mitigation strategies for the region through discussions with its country and business line leaders. The programme is carried out on a global basis, and then at the Asia-Pacific and country levels, says Yap.
Changing roles
As businesses bolster efforts to cope with the fast pace of regulatory change, the role of in-house counsel is also transforming. “In Hong Kong, since October 1, the whole listing regime has been reshuffled - there are a lot of amendments,” says Zhou. “As a result, the regulatory and legal risks that we are facing have increased a lot. Therefore, we are getting more involved in risk management and the deal execution process, and even at the earlier stage when we pitch for a deal. In-house counsel are getting more involved to vet the potential deals,” says Zhou.
For his part, Madden says that in-house counsel have always had to deal with regulatory change, but the pace and complexity of that change has really ramped up in the recent past. “Staying on top of new regulatory issues is taking up more and more of our team’s time. The challenge is then assessing these changes’ likely impact on our business. Enhancing existing and implementing new policies and procedures to deal with the changes is vitally important. In my role I am focusing more on providing the business with a strategic overview of how current regulatory issues and likely changes are going to impact what we do and how we do it,” says Madden.
CBRE’s Yap notes that service providers who may engage in some of these inappropriate activities are getting smarter, and are projecting themselves in a way that would see them pass through the due diligence screening radar. “It is a constant game. You need to constantly improve your game and see how you can raise the bar and find out if they really are doing what they are saying on the ground.”
Indeed, companies will need to stay on their toes to stay on top of the rapid pace of legal and regulatory reform. Regulatory scrutiny and enforcement is on the rise, and 2014 is shaping up to be no different. A credible compliance policy, coupled with support from senior management, will go a long way in helping businesses mitigate risk and avoid regulatory scrutiny. “In-house lawyers, together with the compliance, risk management and other internal departments all have to play a more cooperative and active function in order to protect the firm,” says Zhou.
Bribery scandal slashes GlaxoSmithKline's Chinese drug sales
By Ben Hirschler of Reuters
GlaxoSmithKline's drug sales in China slumped 61 percent in the third quarter, hit by a bribery scandal that damaged its ability to market products in the country and pushed some sales into the hands of rivals.
Chief Executive Andrew Witty said GSK's China business had suffered most where other drug options were available - as with its top-selling lung medicine Advair/Seretide, for which AstraZeneca's Symbicort is an alternative treatment.
The fall in Chinese sales, described by Deutsche Bank analysts as "dire", was steeper than investors expected and Witty told reporters it was too early to say when business might recover from the Chinese-government probe into allegations that GSK had bribed doctors to boost drug sales.
GSK could also end up facing hefty fines, although Witty said he believed existing legal provisions were sufficient - and he stressed there was "absolutely no question" of GSK pulling out of China.
"We are totally committed to China," he told reporters in a conference call last month. "This is a very important business to GSK. China is a critically important country of the future."
Although Britain's biggest drug maker generates less than 4 percent of its sales in China, it has invested heavily in the country, where it employs 7,000 staff and has five factories and a research centre.
Worldwide, GSK's sales were flat at 6.51 billion pounds ($10.6 billion) in the quarter, generating core earnings per share (EPS) of 28.9 pence, 10 percent higher than a year ago.
Analysts, on average, had forecast sales of 6.65 billion pounds and core EPS, which excludes certain items, of 27.2p, according to Thomson Reuters.
The higher-than-expected earnings number reflected lower costs, including reductions in spending on research and development (R&D) as several expensive late-stage clinical trials reached a conclusion. Witty said the trend of lower R&D costs was likely to continue into 2014.
GSK also made savings on post-retirement healthcare benefits for its staff.
The sales shortfall, however, knocked the shares 2 percent lower by 1330 GMT in a flat European sector for healthcare stocks.
The company reiterated that it expected sales growth for the year to be around 1 percent in local currency terms, with EPS rising by between 3 and 4 percent.
Tarnished reputation
GSK's reputation has been tarnished and its management team in China left in disarray by Chinese police allegations in July that it funneled up to three billion yuan ($490 million) to travel agencies to facilitate bribes to doctors and officials.
Industry insiders and analysts had been expecting that the police probe - one of Beijing's biggest into a foreign company - would dent sales significantly in the three months to September, perhaps by around 30 percent.
In the event, Chinese sales of pharmaceuticals and vaccines were down 61 percent in the quarter to 77 million pounds.
Other multinational drug companies are also being investigated, but GSK has suffered the most damage from the scandal as many Chinese doctors have shunned its sales representatives.
Swiss rivals Roche and Novartis, by contrast, both saw continued growth in their Chinese drug sales in the third quarter.
Although China accounted for only 3.6 percent of GSK's global drug sales last year, the company has been investing heavily in the country. Before the scandal, GSK's China sales rose 14 percent year-on-year in the three months to end-June.
Emerging markets are an important plank of Witty's growth strategy as he grapples with slower uptake of GSK's products in the developed world.
GSK has recently seen some encouraging progress with its pipeline of new drugs - including approvals this year for new treatments for lung disease, cancer and HIV - but austerity pressures in Europe remain a drag on sales and profits.
Traditionally, GSK has been particularly strong in respiratory medicine and analysts at Berenberg Bank said the commercial rollout of its new lung drug Breo in the United States last month should reassure investors.
Follow us on Twitter: @ALB_Magazine.