U.S. company doing business in China, or anywhere else in the world, needs to be aware of the Foreign Corrupt Practices Act (“FCPA”). The FCPA prohibits a company from giving anything of value as a bribe to foreign officials for the purpose of obtaining or retaining business.
There are three issues a company must understand under the FCPA:
- What is the meaning of “foreign officials”?
- What is the meaning of “anything of value”?
- What if the company is using a third party as a pass-through entity to bribe the foreign official?
The Department of Justice (“DOJ”) defines the term “foreign officials” broadly as “any officer or employee of a foreign government or instrumentality thereof.” Therefore, Chinese State Owned Enterprises (“SOEs”) are considered an instrument of the Chinese government; any employee of an SOE can qualify as a foreign official under the DOJ’s interpretation of FCPA. The DOJ’s expansive interpretation of “foreign officials” is not limited to high-level power players. Low-level clerks or purchasing agents for an SOE may be considered as foreign officials for the purpose of enforcing the FCPA. So the next time your company is asked to kickback a small sum of money to a purchasing agent who introduced your business to a SOE, you may want to think twice about what you are going to do.
The DOJ also interprets “anything of value” liberally. It could encompass paying tuition for educational opportunities for Chinese officials, providing an internship for the official’s son or daughter, or paying for the Chinese official’s travel to vacation destinations. This puts a U.S. company doing business in China in a bind. If a U.S. company is seeking a permit and the Chinese official is requesting either a close relative to conduct an assessment of the company or the official asks for a tour of the company’s home office located in New York (to make sure the company actually exists), the company is treading dangerous waters. If the company complies with the Chinese official and contracts the close relative of the official to do the assessment, then the company may have provided something of value to the Chinese official; if the company pays for the Chinese official to visit New York and the official takes one day to tour the city, then the company may have provided something of value to the Chinese official. The DOJ may just come knocking on the door.
The FCPA also forbids a U.S. company giving anything of value to a third-party with the knowledge that the third-party will pass the value on to a Chinese official. The company is also on the hook if it has reason to suspect or know the something of value passed to a third-party is intended for the Chinese official. Companies doing business in China will often hire consultants, lawyers, or other go-betweens; these professionals will often make payments to Chinese officials to make good on their “GuanXi” (colloquially used in China to mean building relationships). These professionals will often charge these payments to a U.S. company as a miscellaneous expense or as some other creative line item. If the company does not take the time and attention to make inquiries before making payment, then the company may be on the hook with the DOJ for violating the FCPA.
Doing business in China is difficult. Set aside the many cultural differences and language barriers, the Chinese are accustomed to concepts such as GuanXi and gift-giving, which are not something Americans understand well. These rituals and formalities come from thousands of years of Confucian practices and are simply so entrenched in the Chinese psyche that it may be impossible to circumvent in mitigating the practices deemed illegal by the DOJ under FCPA. The best option for a U.S. company seems to be proactive education for its employees in China on what FCPA means and how it is interpreted by the DOJ. An aggressive compliance program is a must and strict enforcements of the company’s internal controls are indispensable. What is more important, any U.S. company doing business in China needs to pay special attention to its many interactions with entities, individuals, and other functionaries in its business deals. Close scrutiny is necessary and everything must be questioned twice and explained clearly to the Chinese so all involved parties understand what is the right thing to do and how to do it so everyone benefits from the deal.
For a more detailed discussion on the FCPA, see Daniel Chow, China Under the Foreign Corrupt Practices Act, 2012 Wis. L. Rev. 573 (2012).