Until recently, the primary risk that China’s culture of business corruption posed to multinationals was that they might run afoul of the FCPA or the UK Bribery Act. However, if one believes the current Chinese government’s stated prioritization of combating corruption, multinationals might now do well to focus on local Chinese anti-bribery enforcement as well. Various recent developments in the Chinese anti-corruption enforcement landscape suggest additional attention to anti-corruption compliance may be warranted. Not the least of these developments is the December 26, 2012 publication of a guidance and interpretation of Chinese criminal bribery law by China’s highest court. This article describes some of these recent developments, including the guidance, in an effort to analyze whether China’s local enforcement of its bribery laws poses a current and real risk for multinational companies doing business there.
China’s Culture of Corruption Spawns FCPA and Other Anti-Bribery Enforcement From Abroad
To set the stage, it is worth noting that enforcement of foreign anti-bribery laws such as the FCPA unquestionably poses a risk for multinationals operating in China. China’s tradition and culture of gift-giving and favor-exchanging, and its reputation for corruption in both the private sector and government-related business, is well-publicized and widely acknowledged. Corruption in China has been described as “baked into the cookies [there]”1 and “pervasive” in nature “with tentacles reaching into every sector of Chinese business, government, and society."2 "Business deals, especially in industries dominated by state-run companies, often succeed or fail based on one’s coziness with government officials.3 In fact, it has been reported that Chinese companies trying to operate in other countries have been surprised to find that bribery is not a common pre-requisite to doing business and are wary of dealings in which their position has not been secured by bribes.4
Add to this the fact that many businesses and industries in China are state-owned or controlled, and it is no surprise that China has been a hotbed of FCPA enforcement activity in recent years. In fact, for the period of 2006 through 2011, activities in China triggered the second-highest number of FCPA enforcement actions in the world.5 Further, The Trace Compendium lists approximately 50 FCPA-related incidents connected in whole or in part to China. These include both FCPA enforcement actions and companies’ public disclosures of internal investigations related to potential FCPA violations.6 And those are just the ones of which we are aware.
To give an example of the kinds of activities that create heightened FCPA risk in China, and the penalties that can result from those activities, some of the more notable FCPA enforcement actions in very recent years include the following:
- Pfizer-Wyeth. In August 2012, the SEC filed separate complaints against Pfizer and Wyeth related to FCPA violations in approximately 10 different countries, including China.7 The allegations specifically related to China involved providing international travel, hospitality, and gifts (including cash) to state-owned hospitals and state-employed health care providers in exchange for prescribing Pfizer products, recommending Wyeth products to their patients, and otherwise using their influence to give Pfizer and Wyeth an unfair advantage in the market.8 For their violative activities in China and the other countries, Pfizer agreed to pay a $15 million penalty to resolve the DOJ’s investigation of FCPA violations, and Pfizer and Wyeth agreed to pay combined disgorgement of more than $45 million to the SEC.9
- Maxwell Technologies. Maxwell Technologies was alleged to have paid more than $2.5 million to its Chinese sales agent from July 2002 through May 2009, which the agent used to bribe officials at Chinese state-owned entities in order to procure and retain supply contracts for Maxwell Technologies.10 In January 2011, Maxwell Technologies entered into a deferred prosecution agreement with the DOJ under which it agreed to pay an $8 million criminal fine in three installments over two years.11 Maxwell Technologies also settled SEC allegations, agreeing to pay disgorgement of $5.65 million and prejudgment interest of $696,314 in two installments over one year.12
- IBM (Asia). In March 2011, the SEC charged IBM with violating FCPA books and internal control provisions by providing improper cash payments, gifts, travel, and entertainment to government officials in South Korea and China.13 The conduct in China was alleged to have occurred from at least 2004 to 2009, and involved more than 100 IBM China employees,14 engaging in a “widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials.”15 On the same day as the charge, without admitting or denying the allegations, IBM agreed to entry of a final judgment enjoining them from violating the FCPA books and records and internal controls provisions, and requiring them to pay $5.3 million in disgorgement, $2.7 million in prejudgment interest, and a civil penalty of $2 million.16
- Biomet. In March 2012, the SEC and the DOJ filed actions against Biomet based on allegations of paying bribes to public doctors in China, Brazil, and Argentina between 2000 and 2008.17 The benefits conferred on Chinese government doctors included personal travel and conference sponsorships given in quid pro quo arrangements for becoming Biomet customers.18 Biomet agreed to disgorge more than $4.4 million and pay more than $1.1 million in prejudgment interest to settle the SEC complaint.19 Biomet also entered into a three-year deferred prosecution agreement with the DOJ under which it agreed to pay a $17.28 million criminal penalty and implement rigorous internal controls.20
- Watts Water Technologies. The SEC alleged that Watts Water Technologies (Watts) violated the FCPA books and records and internal controls provisions between April 2006 and July 2009 in connection with its Chinese subsidiary (CWV) making improper payments to employees of Chinese state-owned design institutes that, in turn, recommend CWV’s infrastructure-related valve products to state-owned entities, and also drafted specifications that favored the CWV’s products.21 Watts agreed to pay $2.75 million in disgorgement, $820,791 in prejudgment interest, and a $200,000 civil penalty.22
- Nordam Group, Inc. Nordam was alleged to have paid bribes to Chinese state-owned airlines23 in order to secure maintenance contracts with those airlines. In July 2012, Nordam signed a non-prosecution agreement with the DOJ under which it agreed to pay a $2 million penalty, cooperate with the DOJ for the term of the agreement, and submit period compliance efforts reports to the DOJ.24
Also of note, in early 2012 the British Serious Fraud Office (SFO) launched an investigation of Rolls-Royce’s activities in China.25 The allegations under investigation involve Rolls-Royce making improper payments to an executive working for two state-owned Chinese airlines to facilitate the sale of $2 billion in aircraft engines to those airlines.26 The SFO’s investigation of Rolls-Royce is ongoing.27
Brief Overview of Chinese Anti-Bribery Law and the Guidance
China has two different anti-corruption statutes, the People’s Republic of China (PRC) Criminal Code, which is a criminal law, and PRC Anti-Unfair Competition Law (AUCL), which is a commercial law.28 Both of these statutes prohibit bribery.29 Among other things, the PRC Criminal Code prohibits Chinese government functionaries from soliciting bribes, and also prohibits the offering or payment of bribes to government functionaries.30 Additionally, effective May 1, 2011, the PRC Criminal Code was amended to prohibit bribery of foreign government officials and of international public organizations, where the briber’s object is to secure an illegitimate commercial advantage.31 The intent of the May 2011 amendment was to create legislation similar to the FCPA and UK Bribery Act, and in fact that amendment has been referred to as “China’s FCPA.”32
Generally, Chinese anti-bribery legislation tends to lack specificity as to the elements that constitute a violation.33 This has allowed Chinese authorities broad latitude in pursuing and prosecuting potential violations, and also has complicated businesses’ and individuals’ efforts to structure their activities in a way that does not violate Chinese anti-bribery legislation.34 The May 2011 amendment to the PRC Criminal Code is no different, with observers noting that “elements of the law are vague, and questions remain about whether or not it will be used to prosecute state-owned companies.”35
On December 26, 2012, China’s Supreme People’s Court and Supreme People’s Procuratorate, respectively China’s highest court and highest prosecutorial body, issued a guidance to interpret existing criminal bribery laws and guide their enforcement (Guidance).36 The Guidance carries the force of law in China, and became effective on January 1, 2013.37 As stated in its introduction, the Guidance is specifically directed at criminal bribe-giving cases.38 Among other things, it fills in some details with respect to criminal bribery laws, including setting the monetary threshold for a bribe to a state functionary that will generate a criminal investigation (RMB 10,000 or approximately $1,600), and also the monetary thresholds and other factors that will trigger categorization as a “serious case” or a “very serious case,” among other designations.39 However, the practical difference among the various designations remains unclear.40 Among other additional provisions, the Guidance also provides potential value, including penalty reduction, for self-reporting or otherwise confessing wrongdoing.41
China’s Recent Domestic Anti-Corruption Enforcement Activity
China has been notoriously inconsistent in the enforcement of its anti-bribery laws. As observers have noted, “[t]here is no rule of law when it comes to enforcement. Courts are biased in favor of local defendants, and something you have been doing for years without a problem can suddenly turn into trouble.”42 China’s vague laws also allow for inconsistent and sometimes politically motivated enforcement.43 Some observers have noted that foreign companies, as well as companies in sensitive industries, such as pharmaceuticals and health care, come under disproportionate scrutiny.44 It has been estimated that of the 500,000 corruption investigations in China between 2000 and 2009, 64 percent involved foreign companies.45
- In June 2010, Chinese authorities investigated Johnson & Johnson’s Shanghai operation in connection with alleged bribes paid to a former functionary of the Chinese state Food and Drug Administration.46
- Also in 2010, Nike China’s marketing director was arrested in connection with allegedly procuring a contract to sponsor a Chinese soccer league by making improper payments to the former head of the league.47 The former head of the league and his deputy also were arrested on suspicion of taking bribes.48 Nike itself does not appear to be a target of the prosecution.49
- In 2010, media reports indicated that Chinese authorities had detained certain persons, and were questioning others, including an Ericsson representative, in connection with alleged bribes paid to China Mobile executives.50
- In 2011, Chinese authorities arrested the airline executive involved in the Rolls-Royce matter noted above in connection with the allegations that he had taken bribes from intermediaries working for Western companies.51
Some Chinese enforcement actions also have resulted in imprisonment for foreigners, albeit sometimes under murky circumstances. For example, in 2009, Chinese authorities investigated global mining company Rio Tinto’s alleged bribery of Chinese officials to obtain steel industry information, accepting bribes from Chinese steel mills, and theft of state secrets related to the steel industry.52 In 2010, Chinese officials arrested four Rio Tinto employees, including an Australian citizen.53 All were found guilty of accepting bribes and stealing trade secrets, and received prison sentences varying between seven and 14 years.54 According to The New York Times, the Rio Tinto case “[drew] international attention because of concerns that the four employees were arrested on trumped-up charges as well as worries about whether the employees could get a fair trial.”55 Among other cited ulterior motives for the prosecution were Rio Tinto’s declining a $19.5 million investment from one of China’s biggest mining companies the year before, and China’s “tough negotiations with foreign suppliers over iron ore prices” due to rising ore prices and a concern that foreign ore producers could fix ore prices and harm China’s large steel industry.56
In a separate instance in 2010, Chinese officials detained Australian businessman Matthew Ng, the chief executive of a successful Chinese company called Et-China, as well as Et-China’s chairman and CFO, based on various accusations, including bribing Chinese officials and embezzlement.57 In December 2011, all received prison sentences. Ng received a sentence of 14.5 years, of which two years were related to the bribery charge.58 Ng argued in court, but to no avail, that the accusations were fraudulent, orchestrated by a third party that wanted to acquire his company cheaply.59 Specifically, Ng claimed that he and his colleagues were offered release if they would allow Guangzhou Lingnan, Et-China’s local joint venture partner and the largest company owned by the local municipal government, to take control of Et-China at a discounted price — an offer that Ng said he and his colleagues refused.60 In March 2012, Ng effectively lost his appeal, achieving only a two-year reduction in his sentence.61
China’s New Anti-Corruption Focus
By most outward appearances, Xi Jinping, the Chinese communist party’s new general secretary, seems to have made fighting corruption his regime’s top priority since he entered office in November 2012.62 In fact, one observer referred to the month of December 2012 as “a month-long anti-corruption campaign.”63 This new anti-corruption focus is bolstered by Xi Jinping’s own bold public statements, such as that China must combat corruption in government at all levels, from the “tigers” (high-ranking officials) to the “flies” (lower-level officials),64 and that “[China] must have the resolve to fight every corrupt phenomenon, punish every corrupt official and constantly eliminate the soil which breeds corruption … .”65 Further, Xi Jinping has urged Chinese officials to “build a clean government, show self-discipline and restrain their relatives and associates.”66
Despite considerable skepticism over the sincerity of this new anti-corruption focus, it might be more than just words. For instance, the Chinese government has chosen Wang Oishan, who has made a career of cleaning up political and fiscal problems throughout China, to lead the corruption clean-up.67 Additionally, there has been a recent spate of investigations and enforcement actions against government officials. As washingtonpost.com described,
The most colorful cases have combined vast sums of ill-gotten wealth with a whiff of debauchery: a police chief who kept a pair of sisters as his mistresses, giving them police jobs and a city-funded apartment; an official taped having sex with an 18-year-old as part of an alleged blackmail scheme by a construction company; and an official given a suspended death sentence after accepting $7.5 million in bribes and keeping diaries chronicling his sexual encounters with 136 women, including the following “disgraced officials.” 68
CNN.com also recently provided several enforcement examples as follows:
- A lowly bureaucrat who, despite a modest salary, has been found to be wearing expensive-looking watches on various occasions; Internet watchdogs have dubbed him "Brother Watch"
- A senior official now known as “Uncle House,” who was found by government officials to own 21 houses despite being on a meager income
- A district Communist Party chief in Chongqing, who was fired after being caught on video having sex with a young woman who was alleged to be a prostitute
- The former chief of China Railway Container Transport, who was sacked and accused of receiving bribes of 47 million yuan ($7.5 million) between 2005 and 2010
- The Sichuan provincial deputy secretary who was removed for alleged “serious discipline violations,” the most senior official to have fallen since the new leaders took over in November 201269
Moreover, on January 27, 2013, The New York Times reported that a senior Chinese official, the vice chairman of what the article referred to as the “national rubber-stamp legislature” was under investigation by the Chinese government.70 The article suggests this incident “could represent the first time a national political figure has been netted in China’s anti-corruption drive.”71 The article did not describe the details of the investigation or what kind of alleged activity was involved, and noted that no charges had been filed against the senior official.72
Additionally, on the corporate end, in January 2013, Chinese authorities detained a Foxconn manager in Shenzhen, China, on allegations that the manager had solicited and accepted bribes from suppliers in exchange for purchasing their products for Foxconn.73 Foxconn, also known as Hon Hai, is a Taiwanese company that assembles products for the likes of Apple, Sony, and Nokia.74 This may be an instance of enforcement of commercial bribery laws as it is unclear whether Chinese government functionaries were involved in giving or accepting the bribes.
The Guidance also appears to be part of this movement. Historically, Chinese authorities have prosecuted the bribe recipient, not the briber giver.75 However, the Guidance’s clear focus, as stated in its introduction and apparent throughout, is on the bribe giver.76 The Guidance, therefore, seems to mark a broadening shift in how China intends to enforce its anti-bribery legislation, at least in the criminal context.
The Chinese government also seems to be taking action on the cultural side. For instance, in February 2013, the Chinese government banned the airing of advertisements suggesting gift-giving before the lunar new year.77 The rationale is that encouraging people give expensive gifts to bosses sends the wrong message to a society that is battling widespread corruption.78 The Chinese jewelry industry estimates that one-third of all luxury goods in China are purchased as gifts, and one-tenth of them are used as bribes.79
Critics point out that the government’s efforts so far have focused primarily on cases that are high-profile because of their scandalous and salacious nature, but in fact primarily involve low- to middle-level officials.80 It seems they are catching more “flies,” albeit flashy ones, than they are “tigers,” which may indicate a form over substance approach to enforcement, and that the current efforts are really more for show.
Moreover, many of the government officials under current scrutiny or prosecution were identified through individual whistleblowers using an anonymous microblogging system called Weibo.81 However, a relatively new Chinese law, presented and passed in a matter of days, now requires Internet users to register under their real names.82 Although the law’s apparent purposes are to reduce Internet scams and spam email, and to “protect the public from baseless and libelous accusations,” it also has the effect of blunting the effectiveness of Weibo by forcing users to reveal their identities.83
What This All Means for Multinationals in China
Layered on top of the already aggressive enforcement efforts by the U.S. government against corrupt conduct taking place in China, ample evidence now exists to conclude that there is a strong, new domestic focus on anti-corruption in China as well. This new focus has manifested in new legislation, new legal guidance, multiple declarations from the current regime of intent to combat corruption, multiple current investigations and prosecutions of Chinese government officials, and even an attack on the culture of bribery through the banning of lunar new year gift advertising. Criticism and skepticism of the sincerity and motivation of this new anti-corruption directive appear to be well-founded, but that might not create much comfort for multinationals facing the current Chinese anti-corruption environment — nor should the apparent general lack of current enforcement activity directed at multinationals.
In fact, the apparent new zeal for corruption prosecution — especially for high-profile cases that provide an element of scandal or intrigue — combined with an uneven enforcement history and the lingering culture of corruption itself, would seem to make for a particularly high-risk environment. A prosecution motivated by corruption or a desire to make a show can be even more dangerous and carry harsher penalties than a legitimately motivated prosecution. If Matthew Ng’s side of the story is true, his circumstances provide a prime example of that. Indeed, the anti-bribery climate in China seems particularly perilous at the moment, and although multinationals do not currently seem to be principal targets, it would be wise to avoid being the first.