The following is a guest post by Daniel Chow, Professor of International Law at Ohio State University. Professor Chow wrote an excellent and in-depth law review article on the FCPA in China and we thought a shorter version would be helpful for our readers. Fortunately, Professor Chow agreed and the following is that shorter version.
As China continues its ascent as a global economic power, issues involving China under the Foreign Corrupt Practices Act, (FCPA) have emerged as major business problems for multinational companies (MNCs). In a recent Wisconsin Law Review article, China under the Foreign Corrupt Practices Act, I discuss several major issues under the FCPA that concern MNCs doing business in China. I summarize the findings here. Those who wish a more in-depth look should consult the article, which offers many more examples than there is room to discuss here.
The FCPA prohibits the giving of anything of value, e.g. the payment of bribes, to foreign officials for the purpose of obtaining or retaining business. The U.S. Department of Justice (DOJ) has adopted aggressive interpretations of the statute that apply with particular force to China. There are three significant issues: (1) the meaning of “foreign official”; (2) the meaning of “anything of value”; and (3) the use of third parties that make pass through payments to Chinese officials. The most significant issue under the FCPA is the expansive definition of “foreign official.” The DOJ defines this term broadly as any officer or employee of a foreign government or instrumentality thereof. The most important consequence of this definition is that state-owned enterprises (SOEs) are considered to be instrumentalities of the PRC government so that any employee of an SOE, from senior managers to low level clerical employees, can qualify as a foreign official. For example, suppose that a U.S.-based MNC establishes a joint venture or wholly foreign-owned enterprise (WFOE) in China. The WFOE is engaged in the manufacture of chemicals that are commonly used in all kinds of consumer daily-use products such as laundry detergent and household cleansers. A sales agent in the WFOE makes a secret kickback or payment to a purchasing agent of a potential customer, an SOE engaged in the production of laundry detergent. The sales agent in the WFOE makes the kickback to the personal bank account of the purchasing agent to induce the agent to place a purchase order with the WFOE. Even though the purchasing agent is a low level employee of the SOE, the DOJ might consider him to be a foreign official and the payment of the kickback by the WFOE to the purchasing agent to be a bribe for the purpose of obtaining business. The DOJ may attribute the actions of the WFOE as those of an agent to the MNC and might bring an FCPA enforcement action against both the WFOE and the MNC.
A second issue that arises concerns the DOJ’s interpretation of “anything of value.” Most people would expect giving a suitcase or envelope of cash to be a violation of the FCPA, but the DOJ’s expansive definition of anything of value extends to the payment of tuition for educational opportunities for Chinese officials, payment of tuition for an MBA degree, providing a paid internship for the daughter of a Chinese official, and payment for sightseeing trips for Chinese officials for places such as Disneyworld, the Grand Canyon and Las Vegas. In China, officials often expect and demand non-monetary benefits. For example, an MNC wishes to obtain a government certification that a counterfeit product is of low quality and potentially harmful to consumers. A government official states that before the certificate can be issued it is necessary for the government to receive a report done by a company analyzing the quality of the counterfeit and refers the MNC to a company owned by a relative to perform the service. The MNC knows that if it hires the relative, the certificate will issue quickly but if it does not, then there will be long delays. If the MNC goes ahead and hires the relative, this arrangement might be viewed by the DOJ as providing something of value to the official even though the official does not receive any immediate monetary benefits.
A third issue that arises concerns the use of intermediaries that make pass through payments to foreign officials. The FCPA proscribes the giving of anything of value to a third party with knowledge or reason to know that the third party will pass the payment through to a government official. Many MNCs hire third parties, such as consultants and law firms, which might make pass through payments. For example, in the area of intellectual property enforcement, MNCs will hire private investigation companies to track down counterfeiters.
Many of these private investigation companies will make payments to PRC officials for the purpose of inducing them to bring an enforcement action or to bring criminal prosecutions. These payments are then charged to MNCs as “miscellaneous expenses.” Many MNCs take the position that they do not need to know all of the details of the enforcement action so long as the counterfeiter is caught and the goods are seized. The DOJ might take a dim view of this attitude treating it as a “head in the sand” excuse and find that a pass through payment was made with knowledge imputed to the MNC. This example is in the context of enforcement against counterfeiting but the use of third party contractors in many contexts is common in China and many of the third parties make payments to officials to obtain some business result for the MNC client.
The three examples discussed above arise with great frequency in China. For example, most people in China view kickbacks as a common way of doing business. The kickback scheme described above, and many different variations, occurs countless times every day in China. The two examples also describe common situations.
Given the frequency with which these scenarios arise in China, MNCs need to deal with FCPA risks now by immediately implementing an effective on the ground FCPA compliance program in China. To be clear, the purpose of the program is not to teach the FCPA to employees; most employees in China business entities owned by MNCs would admit, if they were being honest, that they do not really care about the FCPA or that their conduct might cause the MNC to be in violation of the FCPA; what they do care about is being fired. A compliance program must clearly set forth what is acceptable behavior, what is not, with many examples, and the consequences for failing to observe the rules, including termination. Then the rules must be strictly enforced.
China’s rise as a global economic power and its culture, which tolerates many forms of corruption in business, indicate that many more FCPA cases involving China will rise in the future. MNCs need to take forceful measures now to avoid problems that may later arise.