BRIBERY AND CORRUPTION: CAUGHT BETWEEN
THREE REGIMES
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An article examining how corporations can navigate a safe path between the US Foreign Corrupt Practices
Act of 1977 (FCPA), the UK’s Bribery Act 2010 (UKBA), and China’s domestic law. This article looks at the
interpretation of “foreign official”, gifts and entertainment; and how to work with partners and agents, as
well as the implications for due diligence and contract provisions. It also covers how to build a compliance
culture internally. The article sets out the key elements of the UKBA, FCPA and Chinese anti-bribery and
corruption laws and a case study of how compliance and culture can collide to create an enforcement issue.
RESOURCE INFORMATION
Alice Gartland, Journalist and Business Consultant
Article
Violations of ethical business practices in China can cost global corporations into the hundreds of
millions of dollars annually to clean up, instantly wiping out decades of investment. This article
looks at the principal regimes that apply to multinationals operating in China: the US Foreign
Corrupt Practices Act of 1977, the UK’s Bribery Act 2010, and China’s domestic law. It examines how
corporations can navigate a safe path between all three. The article includes comparison of applicable
law and a case study of how compliance and culture can collide to create an enforcement issue.
“WHAT HAPPENS IN CHINA DOESN’T STAY IN CHINA”
The impact of violations of ethical business behaviour in China can be felt worldwide. For example:
•
This April, global corporation Wal-Mart announced that it had spent $439 million (an amount that
included legal and other expenses) during the preceding two fiscal years on handling “alleged violations
of the Foreign Corrupt Practices Act” (that is the Foreign Corrupt Practices Act of 1977 (FCPA)) in overseas
jurisdictions, prominently including China.
•
This May, Chinese police announced that they had charged numerous employees of GlaxoSmithKline (GSK)
with offences under China’s Anti-bribery and corruption (ABC) laws for the alleged payment of up to RMB3
billion (approximately $480 million) in bribes to encourage doctors to prescribe its medicines.
In September 2013, at the American Bar Associations’ National Institute on the Foreign Corrupt Practices
Act, the then Head of the FCPA Unit at the Department of Justice (who is now a Partner at Morrison
Forester), Charles Duross, was quoted as having said “what happens in China doesn’t stay in China.”
Businesses in China stand at the intersection of three sets of anti-bribery laws: local Chinese anti-bribery
laws and the two international enforcement regimes. For a multinational corporation, an offence in China
that triggers sanctions under one regime may lead, in turn, to punishment under the others.
The result of this legislative triangle is that action taken against a company under any one regime
could trigger consequences under the others. An effective compliance strategy in China therefore
needs to meet the requirements of all three regimes.
Reproduced from Practical Law China with the permission of the publishers. For further information visit practicallaw.com
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RESOURCE ID
3-580-2606
RESOURCE TYPE
STATUS
Published on 24-Oct-2014
JURISDICTIONS
China
BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
“EVERYONE NOW NEEDS A CHINA
EXPERT ON THEIR GLOBAL BOARD”:
HOW INTERNATIONAL COMPANIES ARE
DEALING WITH BRIBERY AND CORRUPTION
ISSUES IN CHINA-RELATED MATTERS
The Chinese proverb, “Kill the chicken to scare
the monkey”, has been cited regularly in relation
to GSK’s experience under PRC legislation, but it
resonates globally. The application of ABC legislation
is evolving, at times causing it to look more like a
political football than supportive framework for an
emerging global compliance culture.
No one wants to be the chicken, but despite
guidance and some precedent, many companies
still lack awareness, and/or feel uncertain about
the application, of ABC legislation. That is a
particular challenge for small and medium-sized
enterprises. In addition, while some international
companies have rigorous and well-established
compliance programmes, the financial crisis
has put pressure on others to cut down their
compliance teams, while at the same time, their
national governments are pushing for more trade
and investment with China.
Finding practical solutions and best practice
across different cultures at the point at which the
corporate, commercial and criminal law worlds
collide is not easy; but it is essential. It is also a
very sensitive topic.
Companies need to ask themselves “Where do you
want to set your risk? What kind of company do
you want to be?” says Elizabeth Robertson, Head
of Corporate Crime and Regulation in the London
office of K&L Gates LLP.
More guidance and support is needed. In-house
counsel and business managers have to be aware
not only of how the UKBA and FCPA interact with
one another and apply to their businesses, but also
how that intersects, or not, with local PRC law. As
one lawyer put it, to do that effectively, “Everyone
now needs a China expert on their global board.”
It is not just a company’s reputation that is at risk. In
China, an individual’s neck can be on the line. In May
2014, the former British head of GSK’s China business
was charged with corruption in China, bringing a
renewed focus on the importance of effective China
compliance strategies for the long-term success
of international business operations in China (see
Chinese police charge British former head of GSK in
China with bribery, Reuters, 14 May 2014).
2 Practical Law • China
“BACKGROUND CHECKS ON BUSINESS
PARTNERS ARE ESSENTIAL”: THE CHINA
BUSINESS ENVIRONMENT
China’s leadership acknowledge corruption as the
biggest threat to China’s future, and Premier Xi
Jinping’s drive to clean up corruption within the
communist party has led Chinese authorities to be
increasingly active in their application of PRC antibribery legislation, with potentially wide-ranging
consequences. Globally too, corruption is under the
spotlight, leading the provisions of the UKBA and
FCPA to be enforced with increasing vigour by
increasingly vigorous and well-resourced agencies.
China’s most recent anti-corruption drive was
launched in 2013 and although the primary focus
has been close scrutiny of the behaviour of Chinese
government officials, the drive has involved
investigations of a number of international
companies. The Chinese media is increasingly
active in outing companies thought to be in breach
of the country’s ABC legislation.
We have spoken to leading practitioners and business
people to identify the key challenges that China
presents and to find out how international companies
are meeting them. Rebecca Palser, who heads The
Risk Advisory Group’s Asia office in Hong Kong,
describes how one of the most important aspects of
being able to meet the requirements of UKBA and
FCPA legislation is “understanding the environment
in which [you] are working and the people [you] are
doing business with. The PRC is not transparent and so
good advisers are key to help navigate the conflicting
advice of what is required.”
When it comes to business custom and practice in
China, although the law is clear, the practice and
reality of doing business does not necessarily facilitate
compliance with the law. Despite market reforms, the
PRC government retains strong oversight of economic
activity. Layers of approvals from government officials
leave the system open to abuse and where people may
be cognisant that the system is changing, power can be
something to exploit, before it becomes useless.
The use of consultants, agents and middlemen
is commonplace and while that can be helpful in
navigating the China business landscape, it carries
inherent risks. “You need to know who you are
working with and communicate your compliance
expectations. Background checks on business
partners are essential”, says Peter Corne, Managing
Partner of Dorsey & Whitney LLP Shanghai.
However, the individuals carrying out these checks
can themselves be at risk of falling foul of Chinese
personal data protection laws.
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BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
The concept of “guanxi” places great emphasis
on the importance of personal networks in doing
business. It can be a difficult road to go down.
Having a contact in the local administration who
can smooth the way to obtaining a business
license or expedite the process, may be attractive
in the short term, but what happens if they move
on or they start making demands for a return on
that assistance?
Gifts and entertainment traditionally help build
relationships. Luxury watches have become symbolic
of that gift-giving culture and since China’s anticorruption drive started, there have been reports of
a significant drop in the sales of such watches in the
China market. The blurred lines of entertainment
and travel expenses are open to abuse and for
international companies is a regular compliance
focus. Gifts and entertainment are looked at more
closely in Gifts and entertainment, below.
The concept of guanxi can manifest itself in
other ways. As one lawyer explained, “Chinese
business people will prefer to work with people
they know they can trust. They can’t rely on the
rule of law for recourse if something goes wrong.
It’s often more efficient and safer to work with their
university contacts or family relations.” This can
sometimes create tensions around transparency
and compliance.
Of course, ABC legislation does not make
allowances for local custom. The UKBA and FCPA
are foreign laws and getting comfort on how their
provisions translate into the China context can be
difficult. “There’s a balance that’s needed … ensure
compliance with relevant laws and regulations
whilst understanding the local customs and
culture … the challenge is to balance or reconcile
the two” says David Tiang, Partner at King and
Wood Mallesons in Shanghai.
Although adhering to a proactive and rigorous
compliance strategy helps to ensure a company’s
long-term and sustainable development,
commercial incentives in the short to medium term
may mean adherence to such policies is not always
attractive. The drive to increase market share
may result in setting sales targets unrealistically
high. That, in turn, may encourage employees
to act outside of the parameters of a company’s
compliance policy in order to reach them.
Henry Chen, the Asia Pacific Compliance Director
of a Fortune 30 company, explains the general
tension. “Government policies of a host country
can make foreign companies less competitive than
local companies and uneven enforcement of laws
can also contribute to political risk. Home country
laws can also decrease the competitiveness of
companies operating abroad. For example, a US
or UK company, adhering to FCPA and UKBA
requirements may be less competitive in a host
country where local businesses are able to obtain
business by bribing around,” whether that is
official bribery or commercial bribery of the staff of
private businesses as prohibited under the UKBA.
That competition between local and foreign
companies also creates a systemic risk that, unless
balanced out, could put pressure on, for example, US
or UK companies to engage in bribery (perhaps in
more creative ways) to build up their market share.
WHO IS A FOREIGN OFFICIAL?
The Chinese government’s broad control
and involvement in business activities across
the country means it is extremely likely that
international companies will regularly interact with
“foreign officials”.
The US Department of Justice (DOJ) and Securities
and Exchange Commission (SEC) interpret the
definition of “foreign official” under the FCPA
broadly. It includes any officer or employee of
a foreign government (regardless of rank) and
officers of public international organisations.
“In China that includes officials of state-owned
and state-controlled enterprises, even those
engaged in ordinary commercial activity. For
example: officers and employees of state-owned
companies and state-owned design institutes
would be considered “foreign officials” for US law
purposes” says Amy Sommers, Partner and Chief
Representative of K&L Gates Shanghai office.
FCPA enforcement actions demonstrate a liberal
interpretation of who qualifies as a foreign
government official. It can include employees
of state-owned enterprises, physicians at stateowned hospitals and a DOJ procedure opinion also
suggests journalists working for state-run media
outlets will come within the definition.
The UKBA definition of foreign public official is
slightly narrower than that found in the FCPA.
However, if an individual does not fall within the
foreign official definition, they will be picked up by
the UKBA commercial bribery provisions.
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Practical Law • China 3
BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
GIFTS AND ENTERTAINMENT
Most international companies wishing to make
inroads into the vast country or develop supply
chains, often have to build partnerships to facilitate
that. The use of consultants, partners and agents
is commonplace and carries inherent compliance
risks. Due diligence, ongoing communication and
contractual protections all help to limit exposure.
Although there is guidance, the UKBA and FCPA
do not set thresholds for gifts and expenses
for hospitality. Any meals, travel, lodging and
entertainment expenses, can fall within the remit
of UKBA and FCPA provisions. Under the FCPA,
the focus is on the intent with which those items or
services are given. If it is corrupt, that is, to wrongly
influence the official, then it will be caught by the
legislation. “The nature, value and transparency of
hospitality will assist in determining whether it is
corruptly motivated,” explains Sommers.
“You may need to rationalise thresholds in China
compared to other countries. ‘X’ amount in a
region with a lower perception of corruption may
be better halved in China. Thresholds for approval
or pre-approval of gifts and entertainment reflect a
company’s risk tolerance,” says Jason McCullough,
Counsel in Davis Polk’s Hong Kong Office. “For
some companies, the risk tolerance is such that
all gifts or entertainment in China require at least
some form of pre-approval.”
What is acceptable at a local level may also vary
across different cities and provinces within China.
Partner agents and third parties are a common
feature of corruption investigations. For example,
Veraz Networks was caught under the FCPA
when it used a consultant to pay $4,500 in gifts
to officials at a Chinese SOE telecommunications
company to secure business; and the SEC charged
medical device company Biomet with foreign
bribery, including selling medical devices through
a distributor in China who provided publicly
employed doctors with money and travel in
exchange for their purchases of Biomet products
(see SEC: SEC Charges Medical Device Company
Biomet with Foreign Bribery).
More recently, GSK was accused of channelling bribes
to Chinese officials and doctors through travel agents
to boost sales (see Glaxo used travel agencies for
China bribes - police, Reuters, 15 July 2013).
Sommers gives some examples of red flags:
“Meals, lodging, transportation and entertainment,
which are excessive or ‘lavish’ by local standards;
Where a recipient of a gift or hospitality (or
recipient’s relative) has decision making authority
respecting the donor’s current or upcoming
business bid or contract; or a reluctance by
recipient to obtain approval of his/her supervisor to
receive a gift.”
DUE DILIGENCE
Looking at local law can be a helpful reference.
“The PRC Criminal law prohibits giving property
to state employees to obtain unjustified benefits
and some companies use a 200RMB limit per
person for gifts and meals, a figure derived from
the Regulations Regarding Offer and Acceptance
of Gifts in Foreign-Related Activities issued by the
State Council in 1993,” explains Sommers.
Conduct FCPA and UKBA-focused due diligence
and use a variety of sources. “References can be
helpful … If a potential partner claims to have done
work in a particular industry in the past, can they
provide references?” says McCullough. To remove any
potential ambiguity, it is also essential to understand
how the target’s business operations work and to be
clear about the rationale for their involvement in your
company’s China business strategy.
PARTNERS AND AGENTS
Similarly Palser says, “Conducting thorough
background checks on your counterparties to make
sure that they are who they say they are and have
a reputation to match is essential, as is getting to
know them and the market to build a relationship
that will allow you to ask tough questions and
build the trust you need to operate successfully.”
In China there is strong state oversight of business
activities, and as there can be a degree of opacity
in decision making. Government relations are an
important part of a company’s China business
strategy. That “needs to be addressed consciously,
pro-actively and integrated into a company’s
overall business approach,” says Sommers.
“Leaving government relations to one’s Chinese
partner, third-party consultants or agents without
participation by your own company can be risky.”
4 Practical Law • China
“Conducting thorough due diligence is critical,” says
McCullough. While due diligence in China can have
its challenges (for further detail, see Article, Due
diligence in China) and it can be difficult to verify
information, a practical approach can help you
understand how the target operates and to make a
realistic assessment of the compliance risks.
Palser gives an example of how effective this
can be in practice. “One company we worked
with wanted to form a business relationship with
a US technology company with long-standing
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BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
operations in China. However the company
had been found guilty of FCPA violations and
fined by the SEC and DOJ. According to publicly
available information, the tech company’s internal
investigation found that salespeople in two of its
joint ventures had paid bribes and given lavish
gifts to government officials and then claimed the
money back as expenses. After, the company sold
one joint venture and apparently acted decisively
to rid the other of corruption.
However, our enquiries on-the-ground in China
unearthed allegations that rather than cleaning
house, the company had simply restructured its
operations in such a way so as to allow bribery to
continue via its distributors, rather than through
its own salespeople. There were allegations that
the company’s senior managers who had been in
charge of the response to the FCPA prosecution
were aware of the on-going bribery. In our
analysis of the ownership of the company, we also
discovered an individual shareholder who owned
one percent of one of the joint venture companies.
Further research revealed that he is linked to a
state-owned enterprise and could be classified as
a government official.
Our client decided to walk away from the deal shortly
after we relayed the above information to them.”
CONTRACTUAL PROVISIONS
“Provide for termination rights where you identify
violations of law” and “where appropriate provide for
audit rights of the third party, but if you have them,
you should exercise them in the event that red flags
arise. If things go wrong you will be asked if you
exercised your power to audit,” says McCullough.
Of course, it can feel uncomfortable to discuss
“divorce” before you are even married, but it is
essential and business partners are increasingly
used to expectations around compliance.
“From the outset, educate your partners about
your compliance policy and expectations and also
consider annual certification from them that they
have complied.” Where appropriate (for example
in a Joint Venture context) you can back that all
up with ongoing training of employees to help
reinforce relevant expectations of conduct.
CREATING A COMPLIANCE DNA
Building a compliance culture takes time,
especially given the dynamics of the China
business environment. But it is essential and can
potentially help support an “adequate procedures”
defence under the UKBA if an issue arises.
“It all starts from the top. Only when the top tone
is clear and solid will there be solid management
accountability and committed engagement by all
employees,” says Wendy Wang, Chief Legal Officer
at Mary Kay (China) Cosmetics Co Ltd.
Similarly, David Tiang advises clients to, “Walk the
talk” and to “build a culture of compliance, meaning
having the right policies and procedures, a robust
process, communicating it and taking prompt
and decisive actions.” If you do not, then you may
find employees or clients using different channels,
especially social media, to vent their frustrations. Key
to that is to “buy in at the top,” and ensuring that
senior managers “lead by example” and are “seen to
investigate and act promptly.”
When it comes to ABC compliance policies, it is
also not a case of “one-size-fits-all”. Instead, “they
need to be tailored to each company’s business
and risk environment,” says John Zadkovich, Senior
Associate at Vinson & Elkins in Hong Kong.
ENGAGE
A common theme among the experiences of the
lawyers we spoke to was the case of the disgruntled
employee who alleges corrupt behaviour through
social media after leaving a company, with potentially
damaging consequences. Identifying issues early and
taking pre-emptive action before they leave is key.
Exit interviews can be invaluable.
“Compliance training [also] needs to be ongoing and
happen wherever any risk exists, and you need trusted
advisers on the ground, that speak the language to
facilitate that. Distance, language and time zones
mean that despite technology, there is no replacement
for face-to-face communication,” says Brian Burke,
Counsel a t Shearman & Sterling in Hong Kong.
Training needs to be tailored to the company.
“Speak to the departments that are most at
risk. Find out what their challenges are and
determine how to create tools for oversight and
monitoring, such as between finance and sales,”
says Sommers. Training should not be a witch
hunt. A number of lawyers found using role play
and quizzes to enable employees to discover
for themselves what falls within and outside the
legislative requirements was most effective.
Having open communication channels is also
important. Companies often refer to having
hotlines that employees can report through.
While you have to have a hotline, a number of
interviewees felt face-to-face interaction is more
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Practical Law • China 5
BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
likely to elicit information and commented that it is
often following compliance training or workshops
that employees are empowered to speak to them
or to management.
It is also worth keeping in mind that US legislation
provides for financial rewards to be given to
genuine whistleblowers. Although there is a strict
criteria and procedure for this, it adds another
layer to the compliance dynamic.
Overall, you need a system of checks and balances.
As one lawyer put it, “Don’t give one individual
too much power and make sure that you oversee
your operations in China effectively on an ongoing
basis.” A recurring theme is that foreign companies
hire a local business manager, “release the reigns”
of their China business operations to them, only
to discover a year or so later that they have been
involved in fraudulent activities.
Business culture is almost always playing catch
up with compliance and that is another reason
that visits from international headquarters and
exchanges are important. “Employees need to be
reminded that they are part of an international
organisation on a regular basis,” says Burke.
And finally, have the right people in place. “If you
are to operate with China savvy at China speed you
need a reliable manager on the ground all year
round to provide hands-on management before
issues escalate,” said one lawyer.
THE REALITIES OF RISK IN CHINA
Compliance can be a sensitive topic and a number
of people we spoke to expressed concern that
many companies are yet to fully acknowledge the
potential consequences of the UKBA, FCPA and
PRC legislation. International companies, large
and small, need to be clear that it is an area where
the corporate law and criminal law worlds collide
and its reach extends from the factory floor to the
refinement of the boardroom and beyond. What
happens if one of your senior executives in China
is arrested? “Put a disaster preparedness plan in
place today,” says one lawyer.
ABC legislation also raises questions about how and
to what extent countries should be able to share
information, particularly when that is being managed
across very different political and legal systems.
Legal advisers can find themselves in pretty
interesting situations too. One lawyer with many
years of experience of working in China described
how on two occasions in as many years they have
encountered serious unethical behaviour by inhouse counsel working in target companies, which
they have been investigating.
“The in house counsel at one international
company was a Chinese national and US law
school educated, although they had never
worked at a US law firm. We were investigating
the business activities of the company and he
threatened me saying ‘our Chinese partner has
guanxi in that town and if you sue us, our Chinese
partner will make sure your client loses’.”
At times like that, it is finding practical and
street smart solutions to problems that counts.
This lawyer sent an email to the international
headquarters of the company, explaining there
was a “cancer growing in their company in China”
and swift and appropriate action was taken.
The business, social and political landscape of
China is experiencing significant change and
challenging dynamics that could once be ignored,
but are now very much above the surface. As
one lawyer described, “Sometimes it can be the
companies who have been in China the longest
that are the slowest to respond. They got used to
how things were done in the early days of China’s
opening up, and didn’t realise that new changes
in their environment would impact on them.”
Alongside greater scrutiny under local and foreign
ABC legislation, international companies need
to realise that in China it can often be the case
that previously accepted (or overlooked) practices
suddenly fall outside of official plans, taking
businesses by surprise.
“Risk managers need to keep up to date
with developments in Chinese courts and
administrative law enforcement, and anticipate
policy changes. Many companies didn’t foresee
that the Chinese government were serious about
the enforcement of the Anti-Unfair Competition
law and ABC legislation. They were wrong,” says
Henry Chen.
You need to “be like Michael Jordan. You don’t
just need to know where the ball is; you need to
anticipate where it’s going to go.”
And it is not just about reputational risk or the
potentially severe penalties under the law. One
lawyer mentioned that personal safety can
sometimes be a concern for business managers in
the event that a business project goes sour.
6 Practical Law • China
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BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
LEGISLATION
UK Bribery Act 2010
The UKBA came into force in 2011. There are
four offences under the UKBA:
• Bribing. Also referred to as “active” bribery: the
giving, promising and receiving of a bribe.
• Being bribed. Also referred to as “passive
bribery”: requesting, agreeing to receive or
accepting a bribe.
• Bribery of a foreign public official.
• Failure [by a company] to prevent bribery. This
may apply to a company or partnership that fails
to prevent those performing services on their
behalf from paying bribes.
There are also implications for senior officers
of companies involved in bribery. If any of the
first three offences are committed with the
“consent or connivance” of a senior officer of
a company, that senior officer may be held to
have committed a criminal offence.
The UKBA has a broad reach. The “bribing”,
“being bribed” and “bribery of a foreign public
official” can apply to anyone where any part of
the offence occurs in the UK and to an offence
committed outside the UK where a person has
a “close connection” to the UK. That includes
companies incorporated in the UK, UK nationals
and individuals ordinarily resident in the UK.
Elizabeth Robertson describes the key elements
of the concept of bribing and being bribed as
being, “Where ‘P’ offers, promises or gives,
or ‘R’ requests, agrees to receive or accepts a
financial or other advantage intending to bring
about, or as a reward for, performance of a
relevant function or activity, i.e almost anything
not wholly personal; and which is expected to
be performed in good faith or impartially or in
a position of trust, improperly, i.e., in breach of
that expectation or trust.”
It is the “intention” of the person offering or
causing the inducement that is pivotal to the
concept, explains Robertson. “It doesn’t matter
whether a bribe offered is actually paid, or
whether the ‘bribee’ can influence a decision or
not. It doesn’t matter whether the ‘bribee’ acts
or fails to act on the inducement, or whether
the intended result comes about. It also doesn’t
matter whether the inducement is made directly
or indirectly (e.g., through a third party agent).
And it doesn’t matter if it’s the local ‘custom’.”
The UKBA also includes a separate offence of
bribery of a foreign public official. “‘‘P’ bribes a
foreign public official ‘F’ if directly or through
a third party he offers, promises or gives any
financial or other advantage to F or someone
else at F’s request, or with F’s assent or
acquiescence, and F is not permitted or required
to be influenced by P’s gift et cetera by local
written law.”
In this case, “P is guilty of the offence if P
intends to influence F in F’s capacity as a
foreign public official; and P intends to obtain or
retain business or an advantage in the conduct
of business.”
The offence of corporate failure to prevent
bribery occurs where a person who performs
services on behalf of a company for example, an
employee, agent or subsidiary, bribes another
person (anywhere in the world) intending to
obtain or retain business/a business advantage
for the company. That applies even if the
company knows nothing about it and applies to
any company with any business in the UK.
The UKBA does provide a defence against
corporate failure to prevent bribery where
although an instance of bribery has occurred,
the company has “adequate procedures” to
prevent bribery in place.
Penalties under the UKBA include up to ten
years imprisonment, an unlimited fine and
debarment from EU government contracts.
US Foreign Corrupt Practices Act 1977
The FCPA has been around since 1977 and it
generally seems that people are more used
to it than to the UKBA. The FCPA can apply
to any action, anywhere, by US national and
permanent residents, US companies and
companies with US listed securities, regardless
of whether they otherwise operate in the US,
and to any action in the US territory, including
even single use of US telecommunications or
financial networks. So it has a broad reach.
The key elements of the FCPA anti-bribery
provisions prohibit “Any ‘knowing’ act in support
of a payment, an offer to pay or an authorization
to pay ‘corruptly’ money or ‘anything of value’
directly or indirectly to a non US official,” where
a corrupt offer of payment is made “to obtain
or retain business, or to secure ‘improper
advantage’. That requires an element of ‘quid
pro quo’,” as Sommers says.
Reproduced from Practical Law China with the permission of the publishers. For further information visit practicallaw.com
or call +44 20 7542 6664. Copyright ©Thomson Reuters 2014 . All Rights Reserved.
Practical Law • China 7
BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
The legislation prohibits paying a third
person while “knowing” it will be passed
on to a foreign official. “Knowing” does not
require actual knowledge. A person has the
requisite knowledge when he or she “is aware
of a high probability of the existence of such
circumstance, unless the person actually
believes that such circumstance does not
exist. Liability can also be imposed on those
who purposefully avoid actual knowledge.
This includes a ‘conscious disregard’, ‘willful
blindness’ or ‘deliberate ignorance’.” So, US
persons and companies may be liable for
actions by their agents or other intermediaries
if they are deemed to have had ‘knowledge’
and even if those actions were unauthorised or
unknown, explains Sommers.
Civil penalties include injunction against future
violations, $16,000 fine per violation and
disgorgement of profits.
Criminal penalties include up to $2million per
violation for issuers and other business entities,
up to $100,000 fine per violation and/or five years
in prison for individuals and/or disgorgement of
profits resulting from illegal conduct.
In addition, “collateral consequences” include
suspension or debarment, for example, from doing
business with the federal government, crossdebarment by multilateral development banks
and suspension or revocation or export privileges.
Chinese law
In China, the two main pieces of legislation that
deal with anti-corruption are the Criminal Law
and the Anti-unfair Competition Law.
Before 2011, Chinese law did not specifically
address cross-border bribery. Article 164 of
the Criminal Law dealt with bribes paid to
enterprises who are not government officials
(that is, bribes paid in a commercial context).
Now amended, Article 164 now covers the
“crime of Offering Bribes to Officials of
Foreign Countries and International Public
Organizations”. The amendment is part of
China’s effort to comply with the United Nations
Convention Against Corruption, to which China
is a signatory.
The law prohibits entities and individuals from
offering bribes to officials of foreign countries
and international public organisations to secure
illegitimate business benefits. Punishment for
an individual is up to three years’ imprisonment
or detention in normal cases, and three years’
8 Practical Law • China
to ten years imprisonment as well as criminal
fines in some extreme cases. For an entity it is
a criminal fine and imprisonment or detention
of the directly responsible persons (for up to ten
years) and fines.
“State employees include government officials,
communist party leaders, state-owned
enterprise employees (appointed by the state)
and retired state officials,” says Sommers. That
is similar to the FCPA, but the focus is on senior
level policy makers. Chinese law will not treat
all persons who are foreign officials for FCPA
purposes as “state employees”.
Under Chinese law, there is a claim for official
bribery where, for the purpose of receiving
unjustified preferential treatment or other
benefits, one gives property to a state employee
or his/her “specially related persons”.
“Specially related persons” are families, lovers,
relatives or other person directly sharing the
same interest with the state employee.
The gift of property can be direct or indirect,
including, for example, the transfer of property for
a price substantially lower than the market price.
In terms of commercial rather than official
bribery, the PRC Criminal Law and Anti-Unfair
Competition law prohibit kick-backs, the gift of
property in any form or the provision of other
kind of benefit or interests to the employees of
another enterprise in connection with commercial
activities, as “commercial bribery”. Commercial
bribery also involves receiving such benefits.
As Sommers explains, “The requirements
of these laws impacts on pricing and sales
arrangements [in China]”. Commission may only
be paid if:
• Contractor documents disclose the existence/
obligation to make the payment (i.e., there are
no ‘side deals’);
• Payment is recorded in the accounting books
of both payer and payee and the payer receives
official tax receipts (FAPIAO) for such payments;
• The payee is an entity properly licensed to
engage in such business services and the payer
does not have knowledge or the intention
to make improper payments to third parties
through the payee.
Reproduced from Practical Law China with the permission of the publishers. For further information visit practicallaw.com
or call +44 20 7542 6664. Copyright ©Thomson Reuters 2014 . All Rights Reserved.
BRIBERY AND CORRUPTION: CAUGHT BETWEEN THREE REGIMES
CASE STUDY: WHEN CULTURE AND
COMPLIANCE COLLIDE
One lawyer shares a recent experience that
demonstrates the challenges of aligning ABC
expectations at an SME level, with local custom
and business practices in China.
William, a European businessman, recently
came to Beijing from Hong Kong to set up a
company. He hired Xu as his Chinese manager,
paid him a good salary and then returned to
Hong Kong. After one year the business was
going well but William was not happy with the
profit margins and took a closer a look at the
business operations.
William discovered that:
• Xu had been using false receipts to help set off tax.
• When appointing the company’s main supplier,
rather than putting the contract out to
competitive bids like William had requested, Xu
had just engaged his wife’s company.
William believed that Xu was guilty of fraud. Xu
thought what he had done was business savvy.
Following a three hour discussion with a Chinese
mediator, the lawyer realised this was not an
unusual case, as Xu admitted the following:
The business of receipts in China is driven
by tax concerns. If you issue a “Fapiao”, or
business receipt, you become liable to tax. Many
people in China, particularly at an SME level
try to avoid paying tax and one of the most
common ways to do that is to avoid issuing
fapiao. A black market in pre-printed fapiao
replacements has arisen to address this. Again,
Xu thought he was just saving money and not
leaving the company liable to tax by his creative
use of fapiao.
Neither explanation was of interest to William
because it did not fit in with his way of
thinking and did not meet his expectations on
compliance. With the assistance of a Chinese
friend, William got Xu to sign an agreement
saying that he had committed fraud. Xu was
personable while he was there but as soon as
William left, Xu wanted to fight back and took
the case to Chinese arbitration. This means
William will have to fly back to Beijing to go
through a drawn out arbitration case where
anything could happen. Xu’s written declaration
is unlikely to have much weight, and Xu could
turn out to know the judge. It is therefore a loselose situation.
• That he used his wife’s company as the key
supplier.
• That he used replacement receipts from other
companies.
Xu was happy to admit this because both are
common practice in China. China is a vast
country; if business goes sour a business
partners can just disappear and there is little
you can do to find them. Chinese people are
often reluctant to disclose their true business or
home address or even their telephone number;
and a lot of businessmen do not sign contracts.
As a result, it is considered safer to do business
with a family member whom you can at least
locate. Xu felt more than justified in appointing his
wife’s company as the key vendor for that reason.
Reproduced from Practical Law China with the permission of the publishers. For further information visit practicallaw.com
or call +44 20 7542 6664. Copyright ©Thomson Reuters 2014 . All Rights Reserved.
Practical Law • China 9