The end of 2014 brought several reminders of the importance of strengthening your company’s anti-corruption compliance in China. The DOJ and SEC closed December with a flurry of Foreign Corrupt Practices Act (FCPA) activity that dealt with greater China, capping a year in which 10 companies paid $1.56 billion to resolve FCPA investigations. Chinese President Xi Jinping referred to China’s own anti-corruption drive several times in his New Year’s address, a reminder that China’s domestic enforcement is growing stronger.
China’s ongoing anti-corruption drive provides both opportunities and peril for companies with China operations. U.S. companies with strong existing anti-corruption policies are well-positioned to succeed against Chinese competitors who have no such policies and may have previously relied on bribery or connections to compete. But companies should not be complacent about their existing FCPA compliance in China. For example, Chinese law prohibits all commercial bribery. So if your compliance team has only focused on dealings with government officials, there may be other potential liabilities. Also, Chinese lawyers are aware of U.S. whistleblower awards and are eager to identify disgruntled ex-employees or other potential whistleblowers. Therefore, every company needs to be confident that internal controls are preventing any local malfeasance and that any issues that surface are promptly addressed. Companies may have skated by in China in the past, but that will not be the case in the future.
In the most publicized China-related FCPA action, Avon paid $135 million in SEC and DOJ penalties. Avon admitted to paying millions of dollars in gifts, cash and non-business travel and entertainment to Chinese officials to obtain business benefits and government approvals between 2004 and 2008. Avon’s fine was enhanced due to the fact that Avon’s U.S. headquarters knew of the illegal activity as early as 2005 but failed to take corrective action and continued to falsify records. Avon also paid hundreds of millions in professional fees related to the investigation and will be under an independent compliance monitor for at least three years. Avon’s case was a perfect storm of local malfeasance, falsified bookkeeping, bad auditing, and inaction and falsification of records by Avon executives. The DOJ and SEC have repeatedly used their discretion in applying fines to make it clear that prompt disclosure and cooperation will result in lower penalties.
The smallest FCPA fine in December — $1.2 million paid by life science company Bruker Corporation for books and records and internal controls violations — also provided important lessons. First, FCPA violations may include even small actions that seem benign, such as tacking on sightseeing days to a business trip for employees of a state-owned enterprise (SOE). The action was based in part on gifts to SOE employees, including paying for their leisure travel in addition to legitimate business-related travel paid for by Bruker. One subsidiary also paid SOE and government officials for “research cooperation,” but no research was actually performed, according to the SEC cease-and-desist order. Second, it isn’t always obvious when you are dealing with a government official. Since the U.S. Supreme Court let stand a lower court decision in October, it appears U.S. courts will continue to allow the term “foreign officials” to be very broadly defined for FCPA purposes so as to include employees of state-owned and state-controlled enterprises. Since many business entities in China are not obviously state-owned but may in fact be SOEs, due diligence on suppliers and customers in China is particularly important.
Three Lessons Learned:
China’s anti-corruption campaign is sustained and requires review of your China relationships. China’s government is working furiously to strengthen its enforcement agencies to apply anti-corruption, anti-monopoly and related laws and regulations. While much of the attention has been on the crackdown on Communist Party cadres and officials at prominent SOEs, foreign companies may be drawn into investigations based on previous business dealings. As just one example, officials at the Chinese joint ventures of Volkswagen and Nissan are reportedly under investigation. Companies with previous China dealings should review past and present partners and agencies to check whether any are under investigation and carefully review their own dealings with such entities.
If you don’t have a cross-cultural compliance policy, you don’t have a compliance policy.Bruker’s cease-and-desist order specifically noted that Bruker didn’t translate its FCPA, ethics or compliance training materials into local languages, including Mandarin. It distributed a code of conduct, but in English. It relied on China-based managers to ensure that local staff understood its policies. One of the hardest parts of compliance is communicating across cultural and linguistic divides — don’t assume that local staff understand a memo from the head office and your compliance work ends there.
You may be dealing with government officials and not know it.The definition of whether you are working with a Chinese “state-owned enterprise” is a complicated one, as even experts sometimes disagree on the definition of that term. But for FCPA purposes, an SOE employee is a government official. Therefore, it is critically important that you include experts on China in your internal compliance strategy, including, when necessary, good local counsel. Even if you have a blanket prohibition on gifts to any outside party, you should know who is receiving legitimate payments (such as for business-related travel) for record-keeping purposes.