The WSJ China Journal (a really good blog we just added to our blogroll) has a post, entitled, “China’s Tricky Terrain on the Foreign Corrupt Practices Act,” interviewing Richard Grime, an attorney with LA based mega-firm, O’Melveny & Myers. Both the interview and Grime’s practice focus on the Foreign Corrupt Practices Act (FCPA).
The interview starts with Grime noting the “dramatically increasing” number of FCPA cases being pursued by the U.S. Department of Justice, “attributable in part to the recent increase in resources dedicated to FCPA enforcement.”
Grime then describes the FCPA’s coverage and why it is of such critical import in dealing with China:
The FCPA covers corrupt payments to what you think of as government officials. But in fact it applies to any employees of government departments, government agencies and instrumentalities. So because the Chinese economy is so heavily influenced by and impacted by government ownership of various enterprises, you are dealing with many more so-called government officials and foreign officials under the FCPA than in the U.S., for example.
Then there are two other parts that apply to public companies. Those deal with books and records and internal controls. The issue for many public companies is that the books and records provisions are very easy to violate because there’s no intent required, unlike the anti-bribery provision where you have to have a corrupt intent. And it’s not difficult to misdescribe a payment. Also, books and records [aren't] just the financial statements. It goes down all the way to local books, it goes down all the way to receipts and invoices and etc. So it has a broad scope, and as a result, relatively small payments that don’t satisfy all of the requirements for a bribe often are misrecorded.
So in China it’s the broad definition of foreign officials, it’s the influence of gifts and entertainment and it’s also the use of intermediaries, agents, consultants, business facilitators, whatever you want to call it. Those really impact cases in China.
Grime sees China as even more prickly than either India or Russia because China has more state owned enterprises, because of the Chinese “notion of building business based upon relationships and who you know,” and because “everyone wants to be entertained to some extent” and “that can run afoul of the FCPA if it’s lavish entertainment.” Making things even more difficult is that there is not “bright line” rule for a Chinese business to be considered state owned, for FCPA purposes:
The U.S. government has said that it focuses on control, and it’s tough to figure out. They look at share ownership, they look at who appoints management, who controls which business lines. They’re going to look at whether there’s a golden share and other strategic aspects of how the company is run.
Most companies have separate tracks for the expenses for government and non-government officials, so you spend a lot of time trying to understand, whether, if there’s a Chinese bank that has 30% or 40% of its shares listed in Hong Kong, are employees of that bank government officials? The conservative view taken by people working with China is to start with the assumption that you are dealing with government officials and then work back and to find the reasons why this particular enterprise is not government-controlled. If you do it the other way, I think that’s where you get into trouble.
To avoid China FCPA problems, Grime urges companies put in place a compliance program “tailored” to China, engage in constant training of employees on the law, and regularly test your own company for compliance.
Grime ends the interview by discussing how even Chinese companies could potentially run afoul of the FCPA:
The statute prohibits any bribes that originate in the territory of the U.S., so foreign companies are caught if they are listed in the U.S. Even if they are not listed, if they do anything that violates the FCPA in the United States, they are going to be prosecuted. Basically, that covers anything happening in the United States. So if a Chinese company makes a decision from its U.S. operations, or uses U.S. bank accounts, or U.S. phones or wires or mails to bribe someone in a foreign country then they’re going to be caught by the FCPA. Same with any foreign national as well, if a foreign national does anything in the United States, they could end up running afoul of the statute. But if it’s purely outside of the U.S. and they’re not touching any U.S. company then they’re not going to be affected by the FCPA.
And lest you think this idea of foreign companies and personnel being pursued for FCPA violations is a purely hypothetical one, I suggest you also check out this post, entitled, “Europe Discovers the FCPA,” which lists the following European companies “currently under FCPA investigation by US authorities:”
ABB (Switzerland, energy)
Alcatel Lucent (France, communications)
AstraZeneca (UK-Sweden, pharmaceuticals)
BAE Systems (UK, defense)
Daimler (Germany, automotive)
Innospec (UK, chemicals)
Magyar Telekom (Hungary, telecoms)
Norsk Hydro (Norway, energy)
Novo Nordisk (Denmark, health, pharmaceuticals)
Panalpina (Switzerland, transport)
Siemens (Germany, engineering, electronics)
Smith & Nephew (UK, medical devices)
Total (France, energy)
China also has its own anti-bribery laws.
UPDATE: In a post entitled, “Anti-Corruption Best Practices for Beijing Olympics,” Trade Lawyers Blog just came out with a very interesting post on how to handle the Olympics within the confines of the FCPA and on how other countries’ anti-corruption acts might come into play in China.