When doing business internationally, U.S. companies are reminded time and again that they need to comply to the fullest with all provisions of the Foreign Corrupt Practices Act (FCPA). At its core, it is illegal under the FCPA to pay or offer bribes to "foreign officials" to get business. A foreign official is anyone in government employ, including at state-owned enterprises. When doing business in countries like China and similar jurisdictions where the state controls a sizeable portion of the economy, U.S. companies are urged to proceed with the greatest caution. (As an additional note, the FCPA also imposes strict recordkeeping requirements, which are outside the scope of this article. Contact us for more information.)
Enforcement of the FCPA has increased significantly since 2009, when the Obama administration took office. Given the potential for sizeable penalties, U.S. companies must continue to give proper attention to full compliance with the act.
However, it is equally important to understand what the FCPA does not cover, but which may be covered by other laws. The FCPA does not address dealings with "non-officials," i.e., dealings with private third parties. In discussions with clients, I term those private third party dealings as "suspect payments." Here are a couple of examples:
- A U.S. manufacturer works with a sales agent in China to expand its market opportunities. At some point, the Chinese sales agent requests that his commission be paid into a bank account in Hong Kong.
- The Thai subsidiary of a U.S. manufacturer is about to land a sizeable order from a customer in Thailand. Before the purchase order is signed, the procurement director of the Thai customer requests that 5 percent of the purchase order be paid into his bank account.
As neither of the above scenarios is covered under the FCPA, the question is whether there would be any violation under applicable local law (in the first instance, Chinese law; in the second instance, Thai law). In particular, the second scenario, commonly referred to as a "kickback," is a situation regularly encountered by U.S. companies involved in international transactions.
Let us examine this in further detail using the following hypothetical: Does the fact that a portion of the purchase price paid by a foreign customer was redirected to one or more of the customer’s employees (in the form of money or a gift) constitute a violation of local law? The answer depends on the country. If we apply the laws in Thailand, South Korea or China, we see the following results:
- South Korea: It is illegal, whether the customer is a private party or a government-owned or -controlled entity, but penalties are higher when public officials are involved.
- Thailand: It is illegal if the customer is a government-owned or -controlled entity, except if (i) the amount is below THB 3,000 (approximately US$100) or (ii) the amount is paid to the state agency itself. But such payment is legal if the customer is a non-government-owned or - controlled entity, except if it is paid to a "person responsible for the business operation of a company."
- China: It is legal, whether or not the customer is a government-owned or - controlled entity, assuming (i) the purpose of the payment is "proper," and (ii) the amount of the payment is "reasonable."
In other words: three countries, three different outcomes.
How can U.S. companies doing business globally navigate this issue when the laws vary widely from country to country? There are two basic options to consider:
- Comply with all applicable laws on a country-by-country basis; or
- Develop one set of standards that meets the requirements of all countries with which the company many have dealings.
From a risk mitigation perspective, it may be preferable to develop a global standard that is promulgated throughout the organization and from which exceptions would require particular scrutiny. However, there is no "right" or "wrong" solution here. The main thing is that companies give proper consideration to these issues, make a decision and implement it throughout the organization.
A more detailed panel discussion on these issues will take place in Washington, D.C. on October 11 at the American University’s International Legal Studies Conference, during which practitioners from the United States, China, the UK, Brazil, Russia, Vietnam and Mexico will provide an overview of their respective regulatory environments and how companies doing business internationally can cope from a practical perspective. For more information, please visit http://www.wcl.american.edu/ilsp/anniversary/.