China: China's Focus On Combatting Commercial Bribery Is A Wake-Up Call

Last Updated: 22 July 2015
Article by Ryan Bonistalli and Alex J. Brackett

Earlier this month, six former employees of Tencent Holdings (Tencent), including Liu Chunning, a now high-level executive of Alibaba Group, were detained by Chinese authorities as part of a bribery investigation relating to payments made by online video content providers to employees of Tencent, including Liu. In addition to showcasing the continued fight against graft in China, this case should remind companies that anticorruption compliance involves more than just mitigating the risk of official bribery. That includes in particular U.S. companies with international operations, who often focus anticorruption compliance efforts primarily on interactions with government officials, while neglecting that commercial bribery can result in liability under the accounting provisions of the Foreign Corrupt Practices Act (FCPA).

According to one report, Tencent recently performed a routine internal audit during which it identified the payments at issue. Despite company policies and procedures that prohibited such payments and other "improper commercial competition with the company," the employees involved allegedly conspired to circumvent internal controls in order to accept the kickbacks. Tencent decided to voluntarily disclose the wrongdoing to and cooperate with China's Public Security Bureau. Liu, who previously worked for Tencent in high-level positions, currently serves as Alibaba's vice president in charge of its digital entertainment business and its affiliate, Alibaba Pictures. Alibaba publicly expressed its surprise over the news, but stated that it supported Tencent's anticorruption efforts.

The Tencent matter continues a steady trend of Chinese companies demonstrating a commitment to proactive compliance programs in the face of an aggressive multifaceted anticorruption enforcement push by Beijing. The Chinese government's effort to combat graft among "tigers and flies" includes a focus on enforcing China's Anti-Unfair Competition Law, which prohibits bribery between private entities or individuals. Without a compliance program designed to detect and mitigate commercial bribery issues, Tencent would not have been able to voluntarily disclose the issue to the Chinese government (and potentially take advantage of any leniency available for doing so). Other companies have showcased similarly proactive compliance programs, including Baidu and Qihoo 360 Technology, which operate in the same industry as Tencent. They both previously disclosed instances of employee misconduct to and are cooperating with Chinese authorities in separate investigations.

This begs the question of whether U.S. companies with operations in China (and other high-risk markets) are sufficiently focused on commercial bribery. Many companies have appropriately implemented compliance programs that deal with risks associated with government official interactions, especially in high-risk countries such as China. Many companies also prohibit any and all kinds of bribery in their codes of conduct and policies and procedures. However, companies often lose sight of the risks associated with commercial bribery when it comes to their compliance programs and associated activities like training, audits and red flag reviews. That blind spot could cause a collision with U.S. enforcement authorities under the FCPA.

As we previously highlighted for you on this blog, U.S. authorities are eager to use the FCPA's accounting provisions to penalize companies for acts of commercial bribery if those acts result in maintenance of inaccurate books and records or otherwise undermine a company's system of internal controls. Notwithstanding the threat of foreign laws prohibiting commercial bribery − as is increasingly the norm for non-U.S. anticorruption enforcement regimes − the prospect of U.S. authorities scrutinizing private transactions in search of FCPA violations should incentivize companies to enhance internal controls to adequately account for commercial bribery risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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