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Business Analysis & Features

GlaxoSmithKline: the plot thickens

As a sex video smears the pharmaceutical giant's China boss, Jim Armitage reports on how its private investigator voiced concerns about new secrecy rules weeks before his arrest

As covertly-filmed sex tapes go, the one that sent the GlaxoSmithKline Chinese bribery story back into the stratosphere had a pretty tame subject matter.

A graphic video of a 52-year-old businessman – GSK's then-China chief Mark Reilly – in a two-in-a-bed romp with, er, his girlfriend, was never going to set the tabloids on fire. But it detonated a bizarre series of events that culminated in the monogamist's arrest and the biggest corruption scandal to hit China for years.

The bizarreness factor is truly something else. As reports at the weekend revealed, the sex tape was sent to Mr Reilly's chief executive in London, Andrew Witty, and other senior executives last March in what appears to be some kind of smear or blackmail attempt – despite the fact that Mr Reilly was separated from his wife at the time.

However, it was not the first attack: Glaxo executives had already received detailed allegations of bribery and corruption in China from an anonymous emailer in January.

Mr Reilly was authorised to hire a private detective to investigate. He hired Peter Humphrey, one of the most highly regarded investigators in the country, to find who the leaker might be. Perhaps curiously, despite hiring at some expense a man seen as highly trustworthy in his field, GSK did not reveal to Mr Humphrey anything of the serious allegations until two months after his investigation into the origin of the sex tapes started. He was, GSK sources said, instructed solely to investigate the source of the sex tape emails.

According to fellow investigators who spoke to The Independent, Mr Humphrey is a long-term veteran of Chinese corporate investigations.

One who worked with him on a previous investigation says: "He's the best. He was always a very careful guy, extremely cautious about staying on the right side of the law. He made it very clear all the way that he could not do anything that overstepped the mark and took great pains to make that clear to clients."

Friends described him as "more of a diplomat than a James Bond type", adding: "He just really knows the ground out there: who the top people are, how to access officials, how to have conversations with officials without putting their backs up."

The trouble is that performing due diligence on companies and people in China is full of grey areas.

Mr Humphrey himself described the problem last year in an article about how changes to Chinese laws were making it harder to investigate fraud. He wrote about a "sudden government action to suppress certain data" such as company accounts, shareholder registers and information on directors which are used every day by forensic accountants.

The article highlighted how the new rules came after investigations by the Bloomberg news agency, using forensic accounting techniques on public documents, revealed unsavoury details about Chinese Politburo member Bo Xilai and his wife and then the family of President-to-be Xi Jinping. These were investigations, Mr Humphrey wrote, that "were making China's ruling elite wobble". The clampdown also followed a series of powerful attacks on prestigious Chinese companies listed on the US Nasdaq stock market.

In light of the new restrictions on access to company filings, fraud investigators had to resort more than ever to "human source" inquiries – interviews with people, in other words.

It is a widely-held view in the due diligence community, as Jonathan Russell, senior associate at business intelligence company Alaco says: "China's attitude to corporate governance and the public disclosure of corporate and legal data can be seen as schizophrenic. They're not making it easy to get hold of what would generally be considered standard public documents such as corporate records. However, the crackdown on bribery and corruption should be welcomed."

A few weeks after Mr Humphrey's article appeared, he and his wife were arrested for illegally buying and selling private information – perhaps precisely the kind of information that now occupies that grey area between legal and illegal. Five days later, GSK was accused of funnelling up to 3bn yuan through travel agencies to bribe doctors and officials in China.

Today, it emerged that Mr Humphrey's report for GSK did not reach a conclusion on who was behind the sex tape or the "whistleblowing" allegations. He and his American wife Yu Yingzeng are expected to go on trial late next month.

Why did GSK not tell its investigator to look into the allegations of wrongdoing, allegations which, it is claimed, he immediately said were "totally credible" when he saw them? GSK says it had already investigated them internally and with external legal experts and ascertained that there was no substance to them. All they discovered was some evidence of staff padding out their expenses on travel allowances and the like.

Which begs the question: how come the Chinese investigators found enough evidence to lay proposed criminal charges on Mr Reilly and others that the firm made billions of yuan from elaborate schemes to bribe doctors while Glaxo found nothing? Mr Reilly, currently in Shanghai but not in detention, could face decades in jail.

Glaxo sources respond that some of the whistleblower allegations, such as claims that it used bribery to push more sales of Botox in the country, do not appear on the police's proposed charge sheet. They also argue that Glaxo's investigators did not have the same investigatory powers as the Chinese police. Sources at the drug giant also point out that it took the police nearly a year to get to the situation where, in May, they finally lodged proposed charges.

In the meantime, Glaxo a year ago retained the services of another law firm, Ropes & Gray, which is carrying out its own investigation into the allegations. This investigation is still ongoing. Their lawyers must tread carefully in their probing. Otherwise they, too, might end up facing trials like Mr Humphrey and his wife.