US Companies in China Feel the Heat from Anticorruption Push

By Kyle Sullivan

US and PRC government officials have been paying closer attention to US companies’ business activities in China, as regulators in both countries have stepped up anticorruption measures in recent years. Officials from the US departments of Justice and State and the Securities and Exchange Commission (SEC) traveled to China this summer to meet with their counterparts from the PRC Ministry of Supervision to strengthen bilateral cooperation in the battle against corruption. The discussions focused on how the United States has implemented and enforced the US Foreign Corrupt Practices Act (FCPA) and encouraged the PRC government to improve enforcement of its own rules and regulations that govern corruption.

China strengthens rules against corruption

Amid these bilateral discussions, the PRC government has been improving China’s anticorruption rules. In February, the Standing Committee of the National People’s Congress revised the PRC Criminal Law to prohibit PRC-based companies and individuals from bribing foreign government officials. Loosely modeled after Article 16 of the United Nations Convention against Corruption and the antibribery provisions of the FCPA and UK Antibribery Law, the amendment forbids the act of giving “money or property” to any foreign government or public international organization official in exchange for receiving an improper commercial benefit. PRC judicial opinions—including the 2008 Opinions on Application of the Law in Commercial Bribery Cases—have defined “property” as any tangible or intangible good that can be quantified with a monetary value, such as gift cards, travel expenses, and meals. Penalties for violating the PRC Criminal Law’s antibribery provisions can include imprisonment or detention of up to three years, depending on the amount paid in bribes, as well as financial penalties.

Investigations result in significant fines

The US Department of Justice (DOJ) and the SEC, the regulatory bodies that enforce the FCPA, have initiated more investigations of US companies in China in recent years. Though it is difficult to quantify the increase in cases levied against US companies in China, DOJ and SEC have charged 25 companies and more than 50 individuals worldwide since 2009, according to statistics compiled by law firm Paul, Hastings, Janofsky and Walker LLP. Those figures starkly contrast with the number of convictions during the first 20 years after FCPA’s enactment in 1977. During that time, only 17 companies and 33 individuals were prosecuted for FCPA violations. Investigations increased in China because of several factors, including greater interaction between US and PRC law enforcement agencies, increased use of reporting hotlines by Chinese citizens, and more voluntary disclosures from US companies.

US agencies recently concluded several cases involving US-based or US-listed companies in China. For example, DOJ and SEC closed a case this year against a subsidiary of US-based Maxwell Technologies, Inc. for violating the FCPA’s antibribery provisions. DOJ and SEC collectively levied fines against Maxwell that amounted to roughly $15 million.

Best practices to prevent corruption

To avoid PRC legal action against China-based entities, their employees, suppliers, or downstream vendors, US companies that operate in or sell to China should familiarize themselves with the FCPA as well as China’s Criminal Law and PRC anticorruption legislation. Greater understanding of these measures will allow companies to educate their employees about China’s efforts to prevent corruption and bribery and to better inform internal compliance staff. Companies should conduct pre-emptive due diligence on potential business partners, suppliers, or agents prior to entering any contractual agreement with such parties. Finally, companies should be cognizant of red flags such as unusual payment patterns and whether a government official strongly encourages a potential partnership.

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Background on the US Foreign Corrupt Practices Act (FCPA)

The FCPA prohibits US-based companies, US-listed companies, and US citizens from offering, or promising to offer, unlawful payments to foreign, non-US government officials in exchange for new business opportunities or retaining existing business contracts. Government officials are defined as any officer or employee of a foreign government, a foreign-controlled international organization, or any department or entity acting in an official capacity. In China, employees of state-owned enterprises, which play a significant role in the PRC economy, are considered foreign government officials under FCPA rules.[/box]

Kyle Sullivan is a manager of Business Advisory Services for the US-China Business Council (USCBC) in Shanghai. This article is adapted from a report that first appeared in China Market Intelligence, USCBC’s members-only newsletter.