• Uncategorized

FCPA Compliance in China: An Oxymoron?

If your company does business in China, you need to conduct an anti-corruption audit.  No ifs, ands or buts — and I am not one who would easily make this recommendation.  But the picture in China is growing worse by the day.

 If you follow the mounting number of disclosures, the pattern is unmistakable.  Companies that operate in China are reporting more and more FCPA compliance concerns.  Last year, at least one-third of all FCPA settlements involved violations in China.  That percentage is growing and I would not be surprised to see the percentage reach fifty percent of all FCPA enforcement actions.

Some industries understand the risk and are taking precautionary steps — especially in the retail industry.  Other industries, like high tech, are blindly assuming the enforcement bus will never hit them.  The pharmaceutical and medical device industries are being hammered, one-by-one, with FCPA enforcement actions, and that trend is likely to continue.

Compliance in China is difficult but not impossible.  Too often, I see companies entering the China market and either ignoring the issue or putting in place very weak compliance controls.  If your company is already in China, you need to take immediate actions — in some cases, initiating an internal audit, an overall compliance review, or some affirmative action.  If a company waits, or ignores these risks, you can bet they will find themselves behind the investigation and settlement eight ball.

China poses significant anti-corruption risks.  These include:

1.  State-owned enterprises: seventy percent of China’s wealth is owned by the government.  I have experienced a number of situations where company employees learn for the first time when trained that the customers they were dealing with are affiliated with state-owned enterprises.  In other cases, it is difficult for non-Chinese partners to determine whether or not a Chinese partner is state-owned or privately owned.  In one case, three consulting firms hired to conduct due diligence were never able to determine whether or not an entity was a state-owned enterprise.  State-owned enterprises typically are organized and operate with a business culture which reflects past practices in which gifts, bribes and other compensation was part of the day-to-day operations.  The old “black” market of bribery continues to exist in many industries in which state-owned enterprises are now operating.

2.  Gift-giving: FCPA practitioners have written reams of paper on the difficulties raised by China’s gift-giving culture.  One specific area of risk that arises in every case is the use of “gift cards.”  These are not your typical “Barnes & Noble” $25 gift cards which we give our kids for birthdays or holidays.  Instead, these are gift cards which can range from $50 to $5,000, and even higher.  It is a standard practice for sales staffs in China to provide gifts to clients, not just “moon cakes (which can cost a few hundred dollars) but expensive and lavish gift cards.  In many cases, companies have no controls in place to address this issue.

3.  Joint Ventures:  Most companies enter the Chinese market either by acquiring a Chinese company and establishing it as a Chinese subsidiary, or joint venturing with a Chinese partner which is often a state-owned enterprise.  The acquisition of a Chinese company which has no anti-corruption controls, and frequently has engaged in bribery raises serious risks of successor liability and requires that the acquiring company conduct a thorough due diligence and put in place aggressive anti-corruption compliance programs.  If entering the market as a joint venture partner of a state-owned enterprise, controls are needed for interactions between the company and the state-owned enterprise as an internal matter, and a whole set of controls need to be implemented as part of the joint venture entity’s operations in the marketplace.

4.  Third Party Agents: The FCPA enforcement actions against the pharmaceutical and medical device industries have painted an incredible picture of corruption risks involving the use of third party agents in China.  Agents connect to sub-agents and due diligence reviews and controls can create massive compliance challenges.  Some companies never are able to get their arms around the network of sub-agents, and doing so may bring the business operations to a halt.  Often there are trade offs which have to be made between business realities and corruption compliance.  This reality raises the risks of operating in China. 

While the picture is bleak, companies in China need to act and need to do so immediately.  A proactive audit does not necessarily mean a voluntary disclosure.  To the contrary, a proactive audit can help to target compliance focus, result in compliance modifications, and in the long run protect the company from a serious enforcement action.

You may also like...