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Are Some US Firms Violating US Law In China?

China Lawyers

Of course they are, if you ask it like that.

The Foreign Confidential Blog asked that question in its title to a recent post on the corruption scandals engulfing Shanghai.

I e-mailed the blogger behind Foreign Confidential to see if he was aware of anything specific regarding US companies and he told me he is not. The post asks if “US bankers and investors and executives of US public companies look the other way and fail to report their suspicions, or evidence of wrongdoing, in violation of US federal law — specifically, the Foreign Corrupt Practices Act and Sarbanes-Oxley?”  It then goes on to ask if the “current, widening and intensifying crackdown on high-level official corruption in China [might] implicate foreign investors–particularly in the real estate sector?” Are US companies doing business in China systemically violating US law?

There must be US companies involved with the Shanghai scandals, but I doubt we will ever hear of any. I say “of course” because our China lawyers sometimes deal with American companies that brag about paying off government officials to gain influence. I still doubt that any US companies will get caught up in this corruption scandal because I do not see this “purge” as having much to do with corruption; I see it as having everything to do with politics, China-style. The Washington Post sees it all as just a turf war over patronage and influence and I agree. Beijing is simply flexing its muscles and showing the “Shanghai people” who is really is in charge.

If Beijing were truly interested in rooting out corruption, it would be focusing first on Shanghai (where things actually operate quite nicely) rather than on some region where corruption is causing poverty, environmental catastrophe, and political uprisings.

What are you seeing out there?

18 responses to “Are Some US Firms Violating US Law In China?”

  1. The FCPA is actually much more subtle than the article suggests. The law allows for “facilitation payments” which involves paying an official to do the job that they are supposed to do. Also, there are all sorts of ways of getting around FCPA. You can donate to a non-profit that the official controls, or pay all of the required fees to the right accounts and have the official steal the money once it is paid.
    It’s a very bad idea to pay a bribe in China to get business for another reason. There are all sorts of ways for a corrupt or ethically questionable official to get at the money without involving the company. The company can put money into the government account, and a corrupt official could steal theoretically it from that account.
    If the corrupt official is approaching the company *directly* for a bribe, it means that they can’t get to the money any other way, and at that point one really has to wonder if that official is going to have any real power to do anything or if that official is going to be there for very long once people find out what is going on.

  2. Also I don’t agree with useless tree. There are democratic systems are very corrupt (Philiphines, late 19th century New York City) and authoritarian systems that aren’t corrupt (Singapore and the Khmer Rouge). (The Khmer Rouge were horrible and evil but they weren’t corrupt, and I include them to make the point that there are worse things than corruption.)

  3. Mr. Wang —
    Thanks for checking in.
    Of course the FCPA is more subtle than my post suggests. It is also far more complex. The bottom line is that U.S. companies must be extremely careful in doing anything that might cause FCPA problems.
    I completely agree with you that the official who approaches a foreign company for a bribe is likely not to have any real power and/or be on the way out.

  4. Mr. Wang (II) —
    Thanks for checking back in. I agree there is not a direct correlation between authoritarianism and corruption. Indeed, in the case of the Soviet Union/Russia, one might even be able to argue there was a reverse correlation. As Russia became more democratic, it became more corrupt. Of course, one could argue that to the extent a regime is corrupt, it is not democratic. I agree with you on all of the examples you give, but I also think that the most stable democracies (Denmark, the United States, Sweden, England, Finland) do tend to me the most corruption free countries in the world. I wonder if the book, The J Curve: A New Way to Understand Why Nations Rise and Fall, addresses this issue? I say this becuase it does seem there is more of a correlation between stability and lack of corruption than anything else.

  5. Thanks for the link.
    In my experience with MNC in China,
    1) they usually will keep themselves clean from corruption and even check with lawyers on what can be done and what cannot — simply because it just does not worth to risk of its brand image outside PRC, which is much larger.
    2) there are a few industries where corruption is wide-spread, eg pharmaceuticals. MNC would try to keep itself clean by using the intermediates (distributors) to do the dirty jobs.
    3) as you may expect, the discipline is much loose for smaller companies and esp individual (ethnic asian) businessmen. again the rule of thumb is: the less business interests one has in US, the more likely it will be willing to comprise ethical standard in developing countries — China is just one of the many developing countries.
    p.s. of course that confidential blog won’t give you any facts 🙂 as most of the so called ‘evidence’ are rumour or even ‘fabricated’. in my view, it is not too different from FarLG.

  6. This scandal as some call it, is politically and economically driven.
    Beijing has made consistent statements that the real estate market has been a source of concern in that the prices were too high, but more so, that there was a lot of corruption in China could be found in the real estate industry.
    This is not a scandal that started 2 weeks ago, but a process that has been underway for several years.
    It started with hundreds of unofficial special economic zones being closed down two years ago, it has involved cases of farmers losing their land to mayoral pet projects, and a month ago it involved high profile Beijing politicos.
    while Shanghai involved the misuse of a pension fund, the medium by which these funds were misused were in real estate.
    As I reported on All Roads, this is in reality china’s first China-wide corruption investigation (not scandal). Investigators are now in cities all over China, and many believe that while Shanghai’s party Chief may be the most notable, there are still many politicians and developers who will fall.
    Whether or not any American companies are involved in these will depend on the development finance side of it and whether or not one of the illustrious banks courted government officials to bail them out of defaulted projects. Of course, investors who failed to properly account with the tax bureau (even on a small scale) may be found through this process.
    My guess is that if any foreigners are going to be investigated, it will be investors from HK, Taiwan, and Singapore who were the early investors.
    for my take on it, feel free to visit http://www.allroadsleadtochina.com/?p=70

  7. Sun Bin —
    Thanks for checking in.
    I agree with you regarding how multinationals usually comport themselves in China and in other emerging market countries.
    I did not necessarily expect specific facts from China Confidential, but he and I have shared posts (I gave him the scoop on the Shanghai Bar Memo), been on BBC Radio together, and communicate all the time via e-mail. I just wanted him to say whether he had anything specific or not and he said he did not.
    What is FarLG?

  8. Rich —
    Thanks for checking in. I agree with you that “this scandal … is politically and economically driven.” What else could it be?
    Gives a lot of credence to doing things by the book in China does it not?

  9. I should clarify that I do not believe that this is solely political in the sense of Hu was out to take down the Shanghai clan. Sure he and his team have been able to solidify political power, however the political tone to this is much more than that.
    The political concern (scandals are media phenomenon) is the stability of the country, not just the solidification of power through the removal of one party chairman in Shanghai.
    For Beijing, real estate related scandals (land grabs, pollution, etc) have resulted in a thousands of protests and riots in China, and the real political gains of these investigations will be in the long term stability of the country, not in the removal of one politician who had a different plan than Beijing’s.

  10. Dan – you are right in that doing things by the book is for many the way to go.
    All of the recent real estate, M&A, and industry specific regulation activity is meant to clarify the rules of the game by which everyone will play.
    The days of operating in the grey area are getting shorter and shorter, and those found to be on the wrong side of the line will be exposed.
    For some it may mean paying some fines, and for others it could be much worse.

  11. Rich —
    Thanks for checking back in. I agree about the protests and the need for Beijing to crack down on the land grabs, but hings are going well in Shanghai and what you are talking about is elsewhere. Why Shanghai? Why now?

  12. Rich —
    I agree with you except your implication that it sometimes makes sense not to follow the law? Am I reading you correctly? At the same time, there are countless regulations/laws in China that are so nonsensical that they are virutally impossible to abide by. Is that what you are saying?

  13. I think we need to have a JV between our blogs to simplify this 🙂
    1) I am not saying that anyone should outright break the law here, and I HIGHLY advise against it. however, as you pointed out, some laws do not match up, and a result of this has been that some have found safety in the gaps and the knowledge of knowing no one was really looking all that closely before. Again, I am not advocating, just point out that there is a lot of grey area here, that companies have been able historically to operate there, and that Beijing through the revision of old regulations and introduction of new ones is reducing the amount of area and increasing black and white.
    Therefore, those companies in the grey are at a risk greater of getting caught more now than ever.
    2) laws in China are not nonsensical… but sometimes they conflict. While you are a better judge of law than I am, I have noticed that first editions are often the most difficult to understand, and this is in part design. Beijing has a lot of legal systems to look to when trying to formulate laws, but just because Singapore and Canada have strong systems doesn’t mean that their particular law should be copied verbatim.
    Often times, outsides will be brought into the process for their opinions so that lawmakers (I do not actually know those people) can understand how a law will affect industry. Then the experiment begins. A law is implemented (usually 3 months before it is released), and a game of wait and see occurs with revisions occurring as needed.
    In the case of recent M&A, medical, and real estate regulations many feel that while there are improvements to be made (and we know where those improvements need to be), the general direction of the regulations is correct and put into place good policy.
    3) Why Shanghai? why Now? As I posted on All Roads and as part of this post, it is not just Shanghai, and it is not just now.
    In terms of real estate, the efforts have been ongoing for 2 years now, however, if oyu are asking why Shanghai was not earlier, I think that is actually a question for Beijing. I think that politics did play in here as Beijing needed to have all the proof before pursuing such a high profile case. Should Shanghai have been the first to fall, or happened without full proof, Hu and Co would have undermined the goal of the entire process…. root out corrupt practices between governemnet officials found in the real estate sector.
    They rooted out many others first, so it is not just Shanghai, and it is not just now… and it is not over.
    One BIG caveat to policy in China is that a real concern and focus of Beijing is getting cities to fully implement policy developed in Beijing. for those in Beijing, this is a real source of concern as policies will simply be set aside when they conflict with local needs. As part of this process, I expect (in the real estate sector at least), cities will begin following the regulations much more closely g

  14. We should do a JV because I am soon going to be posting on your Forbes logistics post. I was going to do something on that, but you did a much better job than I could.
    I concur with what you say, in particular, the part about how the provinces often go their own way against Beijing policy when doing so is in their own economic interest. I know I overuse this expression, but it is such a good one that I cannot help it: The mountain is high and the emperor is far away.

  15. Going back to an earlier comment, it’s not just officials who have no power who claim bribes. Just this year I was speaking to the head of a very large US corporation in China who claimed that a minister had baldly demanded several million to push a deal through.

  16. Duncan —
    Thanks for checking in.
    You are, of course, correct that it is not just officials without power who seek bribes, but I am surprised that a minister would be pushing for a bribe. I say that not because I do not believe ministers do not push for bribes, but that in my experience (in emerging market countries, not just China) they always do so through their underlings. Why would a powerful minister risk things by going direct? Guess this minister really did not want to share at all.

  17. who said Singapore was not corrupt , have you been listening to the government propaganda again . Singapore has one of the most twisted , visious governments I have ever seen in this world . Its uses the population to its own ends , and it is NOT a democracy , and has done almost nothing to help anyone or anything in this world , the only thing the governmment ever talks about is MONEY .
    I am sorry , Singapore is rubbish , and should be ignored.

  18. The Foreign Corrupt Practices Act. Can You Say China Relevant?
    I was talking with Kevin O’Keefe the other day about law blogs. Kevin is the founder of LexBlog, which dominates the market for setting law firms up on blogs. Despite originally being from Wisconsin (he now lives in Seattle), Kevin knows more about law…

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