Let’s add a new industry to the list of FCPA industry sweeps.  Is anyone surprised? 

 If I worked at DOJ or the SEC, I would simply take a look at those significant industries entering China and launch an industry-wide inquiry by issuing letters to major companies in that sector.  The predicate for an inquiry is satisfied by corruption conditions in China. 

As I have said before on many occasions, if your company is operating in China, you need to conduct an audit now?  The sooner the better, and make sure you beat DOJ and the SEC to the punch.

The film industry appears to have crossed the line.  The allegations surround their respective dealings between the major studios and the China Film Group, a state-run business, which controls China’s film market.  The film industry in China is a lucrative market for entry — box office revenue is expected to hit $3 billion in the next year or two.  All the elements are there for a disaster under the FCPA. 

China’s Film Group recently opened up China for foreign films.  Studios are chomping at the bit.  In the last few years, studios have released films in China, and earned substantial revenues.  Movies are now being produced in China.  Joint ventures are being inked right and left with Chinese companies.  As US studios enter the film market in China, they need to examine every step of the chain from production to distribution (movie theaters, DVDs, etc) to make sure that they identify potential risks.

The two primary risks are interactions with state-owned enterprises.  Chinese movie companies which assist in the production and distribution of movies may have significant state-owned ownership interests.  In addition, every aspect of the commercial movie business will require government approvals and supervision, raising the risk of improper payments at every step of the distributions process. 

The question will quickly boil down to what efforts did the studios take to prevent bribery?  If they had no compliance program in place, what steps are they taking to remedy the problem?  

It should be noted that the letters of inquiry were sent by the SEC without the Justice Department, which suggests that the inquiry is in a preliminary stage.  This industry sweep has a long way to go before it matches the sweep of the pharmaceutical and medical device industries for corrupt actions in China and other countries.  But the elements for a wide-ranging inquiry are present, and this could lead to DOJ prosecutions, settlements, and individual criminal prosecutions.

International movie studios and other market participants need to re-examine their compliance  programs.  The SEC and the Justice Department are no strangers to the film industry.  Gerald and Patricia Green, two Hollywood veterans,  were convicted for paying bribes to the Thailand government. 

The Justice Department is very familiar with the movie industry and the players.  The SEC’s inquiry is likely to uncover further leads and evidence to justify additional investigation.  Where it will ultimately lead is hard to tell, but when you are in China, it is very likely that corrupt payments have been, and will be made in the future.  Only vigilant compliance, a top-down commitment to compliance, and real follow through can protect the companies now. 

It may sound corny but stay-tuned for more.