SHANGHAI – Authorities are reportedly set on charging London-based Glaxosmithkline plc’s (GSK) Chinese executives on charges of bribery and corruption following initial claims by the Chinese police in July. This would leave the beleaguered GSK free from corporate criminal prosecution, but still facing potential administrative fines, investigations from anti bribery authorities in the U.S. and the UK and a sharp decline in revenues in China.

Quoting an unnamed industry insider close to the investigation, Reuters reported this week that “the most likely legal scenario was that they would charge Chinese GSK executives.”

Since the investigation began four Chinese-born senior executives have been detained. Liang Hong, vice president and operations manager, confessed on national TV to making illegal payments. GSK’s in house legal counsel, Zhao Hongyan, is another executive who has been held by authorities.

This group could be facing a maximum sanction of life imprisonment plus confiscation of property for offering bribes to state functionaries. The next step would be for formal charges to be placed and a trial to be held. Typically such a trial would be not made public, but this remains to be seen if the government wishes to make a public example of the executives.

But it is difficult to predict what authorities might do in the end, Daniel Roules, China legal expert and partner at Squire Sanders LLP, told BioWorld Asia.

“It is not uncommon for leaks to occur. Though one must always wait for confirmation, in this case, the information is neither surprising nor unexpected,” Roules said.

Mark Reilly, GSK’s China general manager, has reportedly returned to China and is helping the authorities with the investigation. There have been no reports of any foreign-born pharmaceutical executives coming under investigation.

It is most likely GSK’s cooperation that will help put the drugmaker back into the authorities favor and reduce the severity of punishments the company may face, according to Roules.

Last week in its third quarter investor earnings call, CEO Andrew Witty reported a 61 percent decline in China revenues for the quarter. (See BioWorld Today, Oct. 25, 2013.)

GSK sales teams are not the only ones having a hard time earning their commission. Sanofi SA also reported lower-than-expected sales in China (and Brazil) and expects earnings per share to be reduced by about 10 percent from 2012.

Both companies have said that sales numbers are gradually rising since July, with each month an improvement on the last.

Many industry insiders have been close-lipped about the scandal given the sensitivity of the issue. There is a sense of anticipation about how the far the government may go, given the current leadership’s drive to attack corruption.

In the background to the GSK scandal, senior government leaders have been felled for corruption, such as the powerful politician, Bo Xilai, whose trial was made open to public scrutiny. Last week, Reuters reported that a court in eastern China rejected his appeal and upheld his life sentence on charges of bribery, corruption and abuse of power.

To date China’s pharmaceutical industry has received the most sustained negative attention, namely from whistleblowers who have made a beeline to a local well-respected newspaper, 21st Century Business Herald.

Given the government’s priorities to root out corruption, the GSK case is seen to have implications beyond the healthcare sector.

According to Roules, “In my experience, prior anti-bribery cases have tended to be viewed as misconduct by that particular company, generally not raising concerns for all players in the sector, but that has not been the reaction to GSK. The difference here is that the case seems to have ignited concern over misconduct in China business practices throughout the pharmaceutical industry and beyond.”

GSK has been charged with improperly funneling 3 billion yuan (US$490 million), namely through travel agencies, to doctors and officials to increase sales. This is considered a widely adopted practice by many in the industry and an unfortunate cost of doing business in China. (See BioWorld Today, July 16, 23, 25, 2013, and Aug. 30, 2013.)

Doctors’ monthly salaries in China are low, often around $300, and can be less than half that of an administrative assistant. There are numerous perverse incentives built into a system that is reforming gradually.

In a public statement about the China scandal, GSK has said “These allegations are shameful and we regret this has occurred.” Some question whether it will take jail time for big pharmaceutical companies to change unethical behavior.

In 2012, GSK paid $3 billion in what was the biggest corporate fine in U.S. history at the time for U.S. FDA violations. No executives or employees were charged with wrongdoing. CEO Andrew Witty made it a priority to clean up GSK’s act and put in place more thorough standard operating procedures to mitigate against corruption and fraud.

Roules concurs that is unlikely GSKs foreign executives in China need to be overly concerned about any jail time. There are several barriers for the Chinese authorities in convicting foreign born executives such as the costly and difficult evidence collection process across international borders coupled with China’s “absence of any formal treaty for the recognition of foreign court awards or an established practice of reciprocity between China and the UK or U.S.”