I was talking with Kevin O’Keefe the other day about law blogs. Kevin is the founder of LexBlog, which dominates the market for setting law firms up on blogs. Despite originally being from Wisconsin (he now lives in Seattle), Kevin knows more about law blogging than any guy alive. Despite the recession, his business is still growing by leaps and bounds, which caused me to ask him if he had any plans to expand beyond legal blogging. His response to that was that legal blogging has barely just begun and there are still a huge number of legal arenas that are under-served or not being served at all. I agreed with him and then we started talking about how certain blogs are so good and so comprehensive they just fill “the space.”
One of the things I love about being an international lawyer is that I get to remain somewhat of a generalist. Yeah sure, there are certain things (OEM contracts, for example) that I have done hundreds of times, but there are other things of which I need to remain very much aware even though I, at least to a certain extent, never do. For example, my firm does not handle patent work, and yet I always try to stay up on China’s patent laws so that I am well positioned to know when to advice a client to contact a patent lawyer and even who to contact. The same is true with respect to the Foreign Corrupt Practices Act (FCPA). I am never going to be a leading authority on the FCPA, yet because it is of such paramount importance to our clients doing business in China, it is imperative we stay current on what is happening on the FCPA front so we can help our clients set up preventative measures. One of my primary ways of doing that is to regularly read the FCPA Blog. It fills “the blog space” on the FCPA.
I was reading an FCPA Blog post today, entitled, Getting Loud for Justice, on how “Respondeat superior as currently used should be drop-kicked out of the American criminal justice system.” The post is based on an article, entitled, “One Rogue Worker Can Take an Entire Company Down: The courts are taking an uncompromising approach to respondent superior.
My first thought was not to agree or disagree with the post’s thesis, but to wonder how many CLB readers even know what respondeat superior is or have any clue as to why it may be incredibly relevant to them. I am going to let the FCPA Blog explain what respondeat superior is and why it really really matters:

Nothing magnifies the impact of the Foreign Corrupt Practices Act on corporations more than respondeat superior. Latin for “let the master answer,” it’s the legal doctrine holding companies vicariously liable for crimes committed by employees acting within the scope of their employment. Once an employee — even a low-level worker acting against the company’s orders — admits to an offense or is found guilty, the company is automatically guilty too. Case closed.

Get that? Case closed. What that means for you as a company doing business in China is that if you have a rogue employee out there paying bribes or otherwise violating the Foreign Corrupt Practices Act, your company is at real risk of being hit so hard as to be shut down.
So what’s a company that does business internationally to do?
The first thing you should do is familiarize yourself with the FCPA. At this point, you will just have to trust me when I tell you that if you are doing business with China, your time spent reviewing the FCPA will be well worth it. The United States Department of Justice (DOJ) has an excellent FCPA guide, appropriately entitled, the “Lay-Person’s Guide to FCPA.” [link no longer exists]
The second thing you should do is to formulate written FCPA guidelines and make sure all of your employees involved in overseas business have read and understand them. This means you get them to sign off (literally) on them and you test them in writing on it. Designate someone to monitor. By this point, no company with employees in China (be they Chinese citizens or not) should be without an employee manual. The employee manual is a good place to put in your basic FCPA compliance guidelines, though it is usually advisable to provide independent FCPA materials as well. And if you have Chinese employees, you absolutely must do all of this in Chinese.
The third thing you should do is to maintain accurate books and records such that you have a good explanation for where your money has gone and why and so that you are in compliance with the FCPA’s records provisions.
Even companies that work hard to prevent FCPA violations may be found criminally liable for violations incurred by even rogue employees, but the US Department of Justice and the courts do credit those companies that make a real effort to prevent violations when it comes time to assess penalties.
For more on the ramifications of engaging in bribery in China, check out the following:
— “U.S. Company Bribery In China: Violate The Law, Go To Jail.
— “Are Some US Firms Violating US Law In China?
— “China’s Anti-Bribery Laws Rising.
— “China And The Foreign Corrupt Practices Act (FCPA) — Not Just For Americans Any More.
— “China Bribes And Transparency…. Or Why The FCPA Matters.
— “Avoiding Chinese Jails. I’m Talkin’ To You.
— “China And The Foreign Corrupt Practices Act (FCPA). Sometimes You Just Have To Step Away….
What are you doing about the FCPA?
Update: Just came across this interesting and informative blog post consisting of an interview with someone who interviews potential employees and agents (before retention) as part of a company’s FCPA due diligence.

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • Amazing post. Thank you. I had no idea what Respondeat Superior was or its implications. Considering the discussions Rio Tinto has sparked, your timing could not have been better.

  • I think we are getting *way* ahead of ourselves and the sky is not falling. We are taking one case that has nothing to do with FCPA, pointing out that it maybe possibly be used in the FCPA and then maybe possibly you can deal with situation with an effective compliance program.
    Usually you get into arguments about corporate liability when there is money involved. My guess is that the reason that it mattered whether or not the corporation is criminally liable or not is that the corporation has deep pockets, whereas the “rogue employee” does not. This means in practice having some sort of compliance program is not going to save you from money legal headache. If someone is after your money, they aren’t going to care that you had a compliance program.
    The other thing is that haven’t gone through Sabranes-Oxley, I don’t think that mandating compliance programs is going to really do much of anything except make money for highly paid consultants.
    In any case, no one has thus far tried to appeal “respondeat superior” to FCPA, and it’s hard for me to see a situation in which it could practically come up. Presumably if you have an employee that is paying a bribe, he is doing it with corporate funds not out of his own personal salary, and presumably he is doing something that he thinks will benefit the corporation. At which point there is no need to use any sort of fancy legal theory to nail you.
    If you have a situation in which rogue employees can take corporate money without you knowing about it, and then use it for purposes that you haven’t authorized, then you have much, much more serious problems than a DOJ investigation of FCPA.

  • Just to restate why China is a very special case when it comes to FCPA.
    If you go to another country and offer a commercial bribe to a company, this may be wildly illegal under the laws of that country, but it’s not illegal under US law. It’s only illegal if you try to bribe a government or party official. The reason that this matters in China is that almost any non-trivial business in China has some government or party connection which means that commercial practices which are not illegal under US law in other countries become illegal under US law when you are dealing with a Chinese company.
    It’s also a special case because the Chinese government has an interest in cracking down on corruption, and so you run the risk of having both the Chinese and US governments trying to nail your hide to the wall.

  • Very timely post. Cassin’s FCPA Blog is “THE” online authority on global FCPA matters and China coverage is pretty substantial- glad to read that you are also a regular on the site. From my own conversations on FCPA in China, there seems to be two very distinct camps these days: 1) Those companies that take the potential for a corruption charge very seriously and seek more guidance/training on FCPA for their employees and, 2) those who believe that, in China business, the FCPA does not apply. It is quite difficult to convince the latter party that they must, must, must follow the rules when they interpret those rules to negatively effect the bottom line and, let’s face it, having to abide by the FCPA in China is new territory for many foreign entities.
    And, since you fill a very relevant “China Law Blog” space, I hope to read more here on this topic.

  • Speaking from a business perspective rather than a lawyer perspective.
    One thing about lawyers is that they see every way that a law could possibly kill a business, and then they have a habit over-engineering things so that nothing possibly can go wrong. The problem is that if the lawyers run the business, nothing gets done. Something that both the lawyer and the business person has to realize is that they purpose of the lawyer is to advise. They don’t have the expertise to run the business, and often they can make a mess if they try.
    Yes doing certain things exposes you to risk, but everything about business is about risk, and lawyers tend to look at the law and think of a billion ways that the law could be used against you, and there are a billion ways that the law can be used against you.
    There are good business reasons why a business would not worry about FCPA assuming that they aren’t doing anything really bad. The Department of Justice has limited resources and they can’t go after everyone. The cases in which the DOJ has gone after a business for China related FCPA violations are situations in which the business should have known that they were doing something really wrong, and hiring people with common sense and good ethics will work better than any compliance program.
    Also if the DOJ *did* start going after everyone for technical violations then you are likely to see the FCPA very quickly amended.
    If you are a big company with deep pockets, then yes you really do need a compliance program (not just for FCPA but for everything else) because as a big company you have deep pockets, the DOJ may very well use you as a test case, and it’s hard for you to know what is going on anyway.
    If you are a SME, then an FCPA investigation by the DOJ is one of just 500 things that could sink you, and it’s not probably the largest thing. You need to prioritize FCPA as “yet one more thing that could kill us” and if you are keeping your nose clean, it’s probably not a huge issue. (If your nose isn’t clean, then you need to run to your nearest lawyer.)

  • J. Davis

    Dan:
    Thanks for helpful and timely post. My assumption is that most US companies doing business in China have at least basic operating knowledge of FCPA. What becomes challenging for many smaller companies, such as my own, is how to implement the right balance of risk mitigation and controllership without smothering the company in bureaucracy and risk paralysis. As we all know, nothing is black and white in China, just varying shades of gray with the occasional red envelope thrown in for good measure. There is a very fine line between facilitating payments and just maintaining good Guanxi with the local government agencies which we rely on to allow our businesses to run smoothly. For many small companies without extensive in house legal resources, we face several challenges:
    – Many of the local laws are confusing, frequently changing, administered inconsistently, and often in conflict with each other. I learned 15 years ago that in China, if they want to get you, they’ll get you for something, even if you’ve done nothing wrong.
    – We know how some of our competitors (domestic and mutlinational) play. We absolutely will not go there but we worry about being at a significant economic disadvantage.
    – Even though we have strong employee handbooks, procedures and ethics training, we always wonder what really goes on during the hours we are back in the US and sleeping.
    I would love to see some kind of cooperative confidential online forum which bridged the gap between a USDOJ layperson’s guide and a retained legal consultancy. Often, people just want to bounce ideas and situations off of each other for opinions.
    Are you aware of any such a venue, on line or real world?

  • It seems to me that ‘Respondeat Superior’ is a convenient tool through which the Chinese government can extract revenge on those foreign interests that are out of favour, for whatever reason.
    How difficult would it be to ‘find’ evidence that an employee had bribed a local official or an industry bigwig for instance?

  • outcast

    @Twofish
    China isn’t alone in having cozy relations between big business and government. South Korean Chaebols might as well be long arms of government, given the large amount of macro control over them.

  • Hilary

    Which US law firms were caught allegedly trying to bribe Ministry of Commerce officials in that anti-trust case in China? Did the DOJ ever follow up?

  • Kim Jong Il

    The FCPA is for the “Little People”:
    http://kunstler.com/blog/2009/07/evil-syndicated.html#more

  • stuart: It seems to me that ‘Respondeat Superior’ is a convenient tool through which the Chinese government can extract revenge on those foreign interests that are out of favour, for whatever reason.
    This is sort of irrelevant because ‘Respondeat Superior’ is a concept under US law and not Chinese law. Anyone in US law, you generally want to focus liability on the corporation rather than the individual because corporations have deep pockets. In China, you want to as much as possible avoid liability against corporations and focus liability on individuals, since you stand a greater chance of winning.
    Also it’s not the “cozy relationship” that is the problem as far as FCPA is concerned. The problem for US companies doing business in China is that the person getting the bribe may be a government official or party official.
    If you give a purely commercial bribe to a South Korean chaebol or an Indonesian corporation, then there is no basis on which the USDOJ can charge you with FCPA violations. Bribes to commercial companies are not illegal under FCPA.
    If you give the same bribe to a Chinese business executive, then that bribe may be illegal under US law because that person may be a party member and that person may be considered a government official because they either have a government office or because the DOJ considers state-owned enterprises to be government agencies for the purpose of FCPA. There have been two cases that I know where the DOJ has used this theory to go after US corporations doing business in China.

  • Alex

    Dan,
    Given lots of companies in China establish through a HK based entity, does HK law have anything similar to the FCPA which may impact Chinese or other operations?

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