Many companies are doing business, or contemplating doing business, in the People's Republic of China (the "PRC"). For the past ten or so years, the Chinese markets have been the top emerging markets for foreign direct investment. However, according to many international organizations, including Transparency International, a corruption watchdog worldwide, China represents a high corruption risk and, therefore, doing business in China also presents significant regulatory and legal risks, one of which is the risk of violating the Foreign Corrupt Practices Act of 1977 (the "FCPA").
The FCPA is a cornerstone of anti-bribery legislation in the United States, and increasingly around the world, as prosecutors in the U.S. try to extend the scope of the law. Generally, the FCPA prohibits U.S. citizens and permanent residents, both public and private U.S. companies, and certain non-U.S. individuals and entities from bribing foreign government officials to obtain a business advantage. In addition, portions of the FCPA apply to public companies, such as those that deal with books and records and internal controls.
There are two key aspects to the FCPA: (1) anti-bribery provisions, enforced by the U.S. Department of Justice (the "DOJ") and the Securities and Exchange Commission (the "SEC") and (2) accounting provisions, enforced by the SEC and, if criminal, by the DOJ. The FCPA applies not only to payments made to win business, but also questionable payments in connection with regulatory interactions, such as obtaining licenses, visas, favorable tax treatments, etc., the so-called "grease" payments in foreign jurisdictions.
Affirmative defenses available under the FCPA are: (i) the payment was lawful under the written laws of the applicable foreign country and (ii) the payment was a reasonable and bona fide expenditure related to the promotion of a product or performance of a contractual obligation. An FCPA defendant has the burden of demonstrating that the payment in question meets these affirmative defense requirements, so qualifying expenses should be properly authorized and documented. Violations of the FCPA can be very costly and include criminal sanctions for corporate entities and individuals, civil penalties, other governmental action (e.g., suspension or ineligibility to receive export licenses, etc.), and private causes of action under various federal and state laws. The recent FCPA enforcement actions by the DOJ and the SEC point to the following trends in the overall enforcement process:
- greater international cooperation and increased resources committed by regulators to prosecute these cases;
- higher fines and settlements designed to send a message to the business community; and
- regulators targeting more individual prosecutions.
China is proving to be a particularly challenging part of the world for FCPA compliance. Legal and regulatory compliance issues in China have a direct correlation to, and often are in conflict with, traditional concepts of conducting business. For instance, consider the guanxi concept, a critical element of the Chinese culture in general, and business culture in particular. The term refers to "relationships" and, in practice, boils down to exchanging business and related favors, which are expected to be done regularly and voluntarily. As the realities of doing business in China set in, the interplay of the public and private sectors in the PRC is becoming intensely pronounced. Many large Chinese companies are, in fact, owned by the government, and, consequently, many executive management members are Communist Party members. This, in turn, may well mean that the person with whom you negotiate your next deal might be considered a foreign official under the FCPA. And, although "wining and dining" of business prospects is certainly not objectionable per se, U.S. executives need to make sure that a night out to build a business relationship doesn't start to look more like an attempt to influence the executive with food, drink and entertainment.
Broadly speaking, there are several common "red flag" themes and risks that have emerged over the past several years for U.S. companies engaging in business in the PRC:
- Interaction with government or quasi-government officials. A great deal of companies in China's leading industries are state-controlled or state-owned enterprises. U.S. enforcement agencies consider employees of these companies (regardless of title, rank or position) to be "foreign officials" and interaction with such personnel will be governed by the anti-bribery provisions of the FCPA.
- Cash only payments, abuses of petty cash
- Payments to shell companies, i.e., payments that lack any justifiable business purpose
- Payments to third parties, e.g., relatives of officials or donations to "charities"
- Excessive gifts, entertainment or unrelated travel
A U.S. public company is well advised to put in place an effective FCPA compliance program that contains clearly articulated policies and guidelines for employees to follow and should address the following:
- Due diligence supported by sound recordkeeping and documentation. Regulators and enforcement agencies expect to see good faith efforts to comply with the law and to detect and remedy incidents of non-compliance as they occur.
- Employee training and education, especially, training of the company employees "on the ground." It is critical to explain the rules, the reasons they exist, as well as specific legal consequences for violating such rules.
- For payments to Chinese business partners, a system needs to be created where a third party, such as a compliance officer or a lawyer, reviews and authorizes any spending that could potentially violate the FCPA.
- Include specific coverage of key topics, including, among others, procedures dealing with (i) permissible foreign payments, (ii) foreign officials, (iii) foreign representatives and partners and (iv) investigating alleged violations.
In sum, whether you are soliciting new business or already conducting business in China, you must be particularly alert since China presents a unique set of FCPA compliance risks. This, in turn, requires higher due diligence and compliance costs, especially, in the current, highly charged regulatory and compliance environment.
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.