The review of recent US Foreign Corrupt Practice Act (FCPA) cases involving China, in whole or in part, may help multinationals to take careful measure of the FCPA compliance risks in the Chinese context and help them mitigate those risks, in light of the reality of doing business here.
US enforcement authorities settled four cases in 2011 involving conduct related, in whole or in part, to China (Maxwell Technologies, IBM, Rockwell and Watts Water). So far in 2012, three cases concerning China have been disclosed (Tyco, Pfizer and Biomet). With the recent entry into force of the UK Bribery Act and the stepping up of enforcement of the FCPA by the US Department of Justice, the face of the fight against international corruption is slowly changing. Given the increasing economic role played by China, multinational corporations have no choice but to closely monitor practices of their subsidiaries in China.
How can you summarize the most common China related practices in breach of the FCPA?
- State owned enterprises’ (SOEs) staff are foreign officials covered under the FCPA
The FCPA defines “foreign official” to include any officer or employee of a foreign government, public international organization, or “department, agency or instrumentality” of a foreign government. The term “instrumentality” covers state-owned enterprises (SOEs) and their employees, from senior managers to low level employees. As a result, payment made to the lowest level of local SOEs (and SOEs in China have a very widespread reach) may trigger investigations and fines under the FCPA.
In a recent case, Rockwell Automation, the US Department of Justice condemned Rockwell Automation because – among other reasons – its China subsidiary, RAPS-China, had paid USD 615,000 to design institutes, SOEs providing design engineering and technical integration services that can influence contract awards. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the design institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products.
2. Nature of payments
Cash payment is not the only way to bribe foreign officials. People can be influenced in many different ways other than cash payments. Under the FCPA, the wording “anything of value” is used to designate in the most extensive manner all kinds of items given to foreign officials. The risk of breaching such a provision is particularly high in Asian countries in general and China in particular, where gift giving is a common practice between business partners. Such risks are well illustrated by 2 recent cases. Employees of Pfizer’s subsidiary in China provided various non-monetary incentives to bribe government doctors to utilize Pfizer products. “High-prescribing doctors” in the Chinese government were invited to meetings that included extensive recreational and entertainment activities to reward them for past product sales or prescriptions. Pfizer China also created various “point programs” under which government doctors could accumulate points based on the number of Pfizer prescriptions. The points were redeemed for various gifts ranging from medical books to cell phones, tea sets, and reading glasses. In another case, IBM has been condemned for violating the FCPA for gifts, travel expenses, and cash payments made by IBM subsidiaries to Chinese officials. IBM-China’s employees created slush funds at local travel agencies and at its business partners in order to provide travel expenses, cash, and other improper gifts, such as cameras and laptops, to employees of government-owned or -controlled companies. This case highlights the need for close monitoring of financial flows with travel agencies and provision of travel benefits and gifts to employees of state-owned or -controlled companies. It also shows the need for oversight and training of local staff to ensure proper understanding of anti-corruption responsibilities.
3. Use of third-party intermediaries
Doing business through the use of an intermediary is a common practice in China It is general wisdom that it is hard to do business in China without an intermediary to make introductions, provide translations or help to navigate the local maze of regulations and authorities. The FCPA language on this topic is quite broad. The giving of anything of value to a third party with knowledge or reason to know that such third party will pass the payment through to a government official is a forbidden practice. Such provisions have been applied to agents, foreign sales representatives, consultants, distributors, joint-venture partners, contractors, service providers, etc. Even without authorization, explicit or implicit, where the company makes payments to a third-party, the key issue that triggers liability is whether the company has knowledge that the money would be used for bribes on its behalf in connection with the sale of the company’s goods or services. The concept of knowledge is intended broadly. If a company is aware that some kind of bribery is “substantially certain to occur,” then the company is deemed to have sufficient knowledge under the FCPA for liability. If activities are suspicious, a company must not turn a blind eye and pretend that it knows nothing. A recent example illustrating the above is the condemnation of Maxwell Technologies Inc. The company paid more than USD 2.5 million to its Chinese agent, via its Swiss based subsidiary, to secure the sales of products to state-owned manufacturers of electric-utility infrastructure in several Chinese provinces. Maxwell Technologies Inc. was found guilty of bribing Chinese government officials. Maxwell Technologies Inc. agreed to a settlement of more than USD 6.3 million as well as a USD 8 million criminal penalty. It appears from the documentation of the case that Maxwell Technologies Inc. performed some due diligence and even required its third-party consultants to sign an FCPA certification. However, failure in the corporate culture of the company led some of its employees to circumvent internal policy to try to develop their business. In another example, Watts Water Technology was charged with making improper payments disguised as sales commissions by its Chinese subsidiary to employees at state-owned design institutes in order to influence design specifications that favored their valve products for infrastructure products in China.
What should multi-nationals be on the lookout for when working in China?
In practice, multinationals should be aware that a commonly used practice in China, the payment of kickbacks, may very well fall under the scope of infractions described under the FCPA. For example, if the sales agent of a Chinese wholly owned subsidiary of a multinational makes a kickback arrangement with a purchasing agent of a local SOE, the US Department of Justice might consider him to be a foreign official and the payment of the kickback to the purchasing agent to be a bribe for the purpose of obtaining business.
Multinationals should also be aware that the definition of “anything of value” is quite extensive. It is not limited to cash payment, but also includes, for example, the payment of travel, leisure activities or tuition for educational opportunities for Chinese officials, and even providing a paid internship for the daughter of a Chinese official. Finally, multinationals should be aware that problems may arise in very simple situations when, for example, foreign corporations hire private investigation companies to obtain basic corporate records such as business licenses. These payments are then invoiced to multinationals under the wording “miscellaneous expenses”. Such practices fall under the scope of the FCPA and may trigger fines to multinationals.
What are your final thoughts on doing business in China?
As China continues its economic rise, issues under the FCPA involving China have emerged as a major business problem for multinational companies. Multinational companies will have to invest in internal compliance teams or outside investigations, train their staff and make sure that compliance programs establish clearly what acceptable behavior is and what it is not. Consequences for failing to observe these rules will have to be clearly established. Even more importantly, these multinationals will have to make sure that these rules are strictly enforced.
Tags : FCPA, Maxwell Technologies, IBM, Rockwell, Watts Water, state owned entities
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