Our Beijing-based entertainment lawyer, Mathew Alderson, has been attending (and speaking at) the Beijing International Film Festival. Not surprisingly, Mathew reports that the talk of the town is the recent news regarding a United States Securities and Exchange Commission (SEC) investigation into whether some of Hollywood’s biggest movie studios made illegal payments to officials in China to gain the right to film and show movies there.

In an article entitled, “Did Hollywood dirty its hands in China? Reaction to SEC inquiry,” the Los Angeles Times extensively quotes Mathew regarding how it is that Hollywood might have gotten into this problem:

Mathew Alderson, a Beijing-based entertainment lawyer and Asia Pacific partner at Seattle-based international law firm Harris Bricken, called the timing of the SEC inquiry story “instructional.”

“The news broke during the second Beijing International Film Festival, when media attention was focused on the biggest foreign box-office market in the world. Mixing with U.S. delegates here during the festival I’ve been struck by how many still regard China as the Wild West. There is now something of a gold rush mentality,” Alderson said.

“Those in the film business who regarded China as the Wild West are now in for a shock because the sheriff just rode in,” Alderson added. “The less obvious message is that interests more powerful than entertainment may be prepared to sacrifice Hollywood in order to embarrass the Chinese about allegedly corrupt practices.”

Alderson drew a comparison to the case of Chinese-Australian iron ore trader Stern Hu, who in 2010 began a 10-year jail sentence in China for corruption after his employer, Australian mining giant Rio Tinto, appeared to some to get the better of a Chinese state-run mining competitor on prices for the commodity used to make steel.

“Certain factions in China may well be tempted to respond [to the new SEC allegations] by conducting their own investigations and using allegations of impropriety to stifle a worrisome cultural influence and punish the U.S. for casting the first stone,” Alderson said.

The article goes on to hint at how China and Hollywood are a potentially toxic mix:

Among those unsurprised by the inquiry was Michael Peyser, a producer of several of Woody Allen’s films and a professor of film at USC, who is in Beijing this week exploring Chinese co-production opportunities.

“China favors a culture of favors. I’m not saying that there aren’t dirty dealings, but my sense is that the Hollywood studios are aware of how things work and understand the difference between influence and corruption,” Peyser said.

On a small scale, Chinese film companies regularly pay local reporters a “red envelope” with a “transportation fee” of about $30 for attending press conferences. The companies have learned not to try to pay overseas journalists flustered by the practice, and Hollywood studios don’t typically fall prey to this practice at all, offering gift bags with DVDs and branded trinkets instead.

We have written how software and gaming companies seem particularly prone to have legal problems in China.  We attribute that to a tech culture that glorifies starting up in a garage and then back-filling any needed legal niceties.  We get the sense movie industry culture is somewhat similar as we are finding a disproportionate amount of our work is helping movie companies get out of trouble, rather than avoid it. I want to make clear, however, that we have absolutely no idea whether there is any validity at all to the SEC investigation.

It cannot be coincidence that the SEC announced its investigation during the Beijing Film Festival. We must assume that its timing was intended to maximize the impact of its message, which is that US laws will be enforced.  It remains to be seen what impact all of this will have on U.S. direct investment in the film business in China, whether it be through co-productions, production facility joint ventures or movie theater joint ventures. Though the investigation appears to be focused only on some of the major studios, the numerous other industry players involved with China will no doubt be watching closely.

For more on the Foreign Corrupt Practices Act (FCPA) aspects of this check out China Hearsay’s post, “Comparative Corruption: SEC Goes After Movie Studios Over China Deals.” And if you want even more on the FCPA and China, check out the following: