In July 2013, the Chinese authorities announced an investigation into the business dealings of a British pharmaceutical giant, GlaxoSmithKline (GSK), and detained four senior executives in connection with the investigation. The crime? GSK allegedly funneled money through travel agencies to bribe government officials and doctors (government officials in the Chinese state-run health system) to provide the company’s products a leg up over competitors. The scandal involved a raft of financial crimes including invoice inflation, money laundering and corrupt payments. GSK’s main worry isn’t wrath from the Chinese, where graft is almost encouraged, but from massive fines as the incident places the company in contravention of the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA), as well.

The FCPA was signed into law in 1977, and subsequently strengthened in 1998, in response to raising awareness of questionable payments from U.S. companies to foreign officials. The law has two main components to counteract corruption: First, it made it illegal for a U.S. person (in the broad sense) to make payments to foreign officials to create an outcome that otherwise would not have been, such as obtaining or retaining business. Note: This only applies to foreign officials, not private individuals. Second, the FCPA requires companies, domestic or foreign with securities listed in the U.S., to keep accurate accounting records. In some instances, payments are allowed to facilitate business that would have occurred regardless as long as they are accurately accounted for. These are called “grease payments”, essentially a legal bribe.

In the world of business, it is standard operating procedure to provide gifts and entertainment to forge strong relationship. In many countries, it is even an insult not to do so. When business is between two private entities, there isn’t a problem, however the threat landscape has evolved with the emergence and growing prominence of sovereign wealth funds (SWFs) since the 2008 financial crisis. SWFs are state-owned investment vehicles used to invest national wealth.  Several financial institutions courted SWFs, particularly from the Middle East and Asia, to prop up their ailing balance sheets. SWFs also have subsidiaries through which they control other entities. These developments have blurred the line between executive and government official and put at risk companies that want to maintain relationships though gifts, entertainment, and travel.

The complex landscape in which companies operate today requires an extra level of due diligence to know your customer/client (KYC). This is now the cost of doing business that companies must pay to protect themselves from a large fine and reputational damage. In the GSK case, the company subsequently hired an investigation agency to vet all of its Chinese contacts (disclosure: your correspondent works for the investigation agency). Additionally, more and more governments around the globe are taking the effects of corruption seriously and acting upon it. In China, bribery pushes up the cost of pharmaceutical 20-30%. We will continue to see a convergence and strengthening of international regulation to counteract corruption, is your company prepared?