Header graphic for print
China Law Blog China Law for Business

FCPA And China. Important Ruling Coming Soon.

By Dan Harris on Posted in Legal News

The FCPA Professor Blog is out with a blog post entitled ”‘Foreign Official’” First” on what constitutes a foreign official for purposes of the United States’ Foreign Corrupt Practices Act (FCPA). According to the FCPA Professor Blog, “for the first time in FCPA history, a [United States] federal court judge, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element, is being asked to rule on the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA. 

This is a big deal.

To grossly pversimplify what this means, this means that if the court says employees of Chinese state owned entities (SOEs) are foreign officials then “gifts” given to those employees could subject you to criminal prosecution under the FCPA. And if the court holds the other way, then the opposite will be true. Of course this is but one Federal Court in California and an issue this big is going to need to be decided by multiple Federal Courts, including courts of appeal and maybe even the Supreme Court, before U.S. law on this becomes clear. But this is certainly a start.

The FCPA Professor blog links over to the defendant’s motion to dismiss the government’s case (U.S. v. Stuart Carson, et al.) and that motion can be found here. The FCPA Professor (Michael Koehler) did a declaration supporting defendants” motion and that declaration and that declaration can be found here.

  • William

    I hope the court is careful in its ruling. For example, I would not consider a mid-level manager at a big Chinese SOE to be a “foreign official,” but a Party-appointed CEO could probably be considered an official.

  • Aaron

    A rational outcoming would be a rule on determination of “foreign official” status based upon a totality of circumstances and an intent/knowledge(would have/should have known) test of an accused.
    That would be much better than any rigid rule about which level of managers are “foreign official” cutoffs.
    However, I would not underestimate the Supreme Court’s ability to come up with strange rulings. I frankly don’t know if the Supreme Court justices know Chinese political system (and other political systems) well enough to make a sane ruling on nature of “foreign officials”.
    If they are going by Legislative records, it’s going to be rather full of inuendos. (They might even declare Buddhist Monks in a Chinese affiliated temple in SF as “foreign officials”. Afterall, they were attributed as funneling foreign money to Clinton, right?)

  • Twofish

    It would be a very big deal if he rules that SOE officials are *not* state officials under the meaning of the FCPA. If he rules that SOE officials are state officials then it would be what USDOJ practice has been and things would be the same as before.
    Aaron: A rational outcoming would be a rule on determination of “foreign official” status based upon a totality of circumstances and an intent/knowledge(would have/should have known) test of an accused.
    That would be the worst outcome for someone doing business. For someone that is doing business, *any* clear rule would be better than something that was vague and subject to interpretation. “Totality of circumstance” is horrible for someone doing business because they you need to pay some expensive lawyers to figure out what you can and can’t do. A clear “don’t do this” would be a lot better, because you just put that on a powerpoint, and you don’t need a lawyer to figure it out.
    The other thing is that if the rule is vague, then what will happen in practice is that the USDOJ will push the definition to its limits, and most companies do not have the ability to fight the USDOJ.
    Also the FCPA isn’t specifically tailored to China so that any ruling has to work with any sort of political system.

  • http://www.minttwist.com/portfolio/ibb-solicitors.aspx IBB Solicitor

    This is obviously a very complicated issue and will have a big impact on the US and for many national delegates etc. It will be difficult for the FCPA to ensure only the most relevant people are foreign officials. There is obviously a difference between a foreign official and someone who is employed at a state-owned/controlled enterprise.

  • Aaron

    Twofish,
    While I agree that clear cut rules are easy for businesses to follow, I think such rules would be very easy to “game” around, and the government would not likely accept them, (and the courts are not likely to find such clear cut rules in legislative background).
    A major point of FCPA was to prevent foreign governments from “gaming” the law to sneak bribe in as legitimate business transactions.
    If for example, a clear cut rule to say mid-level managers at SOE’s are not “foreign officials” is made, then you might see some kind of funneling of bribes through those mid-level managers.
    No, I don’t think that will work out effectively in the long run.
    To be fair to all parties, FCPA has to be strict enough to prevent even low-level managers (or bottomlevel employees) at SOE’s from becoming bribe funnels, and yet clear enough for business to be held accountable for specific actions.
    It calls for some flexibility in determination based upon many factors, as well as what the US defendant’s knowledge/intent were.
    The concern here should be for the overall fairness of the rules, and not so much clear cut-ness, because fundamentally, foreign SOE’s are very diverse in their structures and their natures are generally secretive and not easily discoverable.
    Clear cut rules in this case may make the FCPA so draconian in enforcement or it would defeat the purpose of it. (I mean, it might be so draconian that it prevents a lot of legitimate business transactions, merely because of possibility of liability, and then what would be the point of FCPA?)

  • Twofish

    Aaron: While I agree that clear cut rules are easy for businesses to follow, I think such rules would be very easy to “game” around, and the government would not likely accept them.
    You can make the rules very strict as long as they are clear. If the rule is that janitors in state-owned enterprises are government functionaries, that’s fine. If that makes it impossible to do business in China, well then we just won’t do business in China.
    You can game around clear rules, but unclear rules are even easier to game around.
    Aaron: A major point of FCPA was to prevent foreign governments from “gaming” the law to sneak bribe in as legitimate business transactions.
    In fact, the FCPA explicitly says that any transaction which is legal according to the written law of the foreign country is permissible. If China wants to make bribery legal, they can change Chinese law to go around FCPA. Except that China doesn’t want to make bribery legal.
    Aaron: If for example, a clear cut rule to say mid-level managers at SOE’s are not “foreign officials” is made, then you might see some kind of funneling of bribes through those mid-level managers.
    So make a clear cut rule that mid-level managers are foreign officials. You can even make a clear cut rule that low-level managers are foreign officials. Just because the rule is clear doesn’t make that it can’t be strict.
    The good thing about clear and strict rules is that if it’s clear that you can’t do something, then you figure out that you can or can’t do something, and then that’s if. If you have unclear rules then you end up with a lot of meetings with lawyers trying to figure out what the law is.
    Aaron: It calls for some flexibility in determination based upon many factors, as well as what the US defendant’s knowledge/intent were.
    Why? If we are trying to prevent bribery, they make at least civil charges independent of the defendant’s state of mind. If you make things dependent on the defendant’s state of mind, then you encourage “Sargent Schulz” behavior. If you let it know that if you do X, you will be in big trouble regardless of your state of mind, then that makes it easy.
    Flexibility here is a bad thing. I want to know quickly whether I can do X or Y. If I can, fine. If I can’t, fine. If it’s not clear, then there is a huge risk that I’ll do it and get into trouble later, or I don’t do it, and then lose money that I otherwise could make.
    Aaron: Clear cut rules in this case may make the FCPA so draconian in enforcement or it would defeat the purpose of it. (I mean, it might be so draconian that it prevents a lot of legitimate business transactions, merely because of possibility of liability, and then what would be the point of FCPA?)
    Because in that case the decision is that the benefit in ending bribery is better than the cost in the transactions it prevents. Alternatively, we could make a decision that allowing some bribery is the cost of legitimate business. It’s one of those things where you want people to work things out and come up with some rule.
    If the US government creates rules that makes it impossible to do business in China in certain areas, *this is a good thing* because it means that you know that it’s impossible so that you don’t even waste your time and money trying.

  • Twofish

    IBB: There is obviously a difference between a foreign official and someone who is employed at a state-owned/controlled enterprise.
    Not to the US DOJ.
    The US Department of Justice has an official procedure for determining if someone is a foreign official or not. It is the position of the US DOJ that employees of Chinese SOE’s are foreign officials.
    http://www.virginialawbusrev.org/VLBR5-1pdfs/FCPA.pdf
    That position is being challenged in federal court. It’s unusual because most businesses that hit by the USDOJ settle rather than fight. However, in this case someone is looking at jail time so he really has nothing to lose except for attorney’s fees.
    If I had to put a bet, I’d bet that the judge will uphold the USDOJ’s opinion, and we go back to business as usual.
    Also even if they get this motion, they aren’t off scott-free. There is still the issue of the Travel Act.

  • Twofish
  • New York Lawyer

    No matter how the court rules, this area is going to remain very confusing and that, unfortunately, is just how the American government likes it. I swear their goal is to prevent U.S. companies from doing business in emerging markets and thereby keep our jobs at home.