FCPA & China: Navigating the Traps

Corruption is a persistent problem in China. One often reads of corruption scandals embroiling public officials, such as recent execution of the head of the State Food and Drugs Administration for corruption charges. This all represents a significant challenge for US companies as they do business in China in terms of compliance with the Foreign Corrupt Practices Act ("FCPA"). The FCPA prohibits U.S. persons and U.S. companies from making payments to foreign officials for the purpose obtaining or retaining business from that person. However, it is not just deliberate acts of corruptions that are a concern for U.S. companies, but also seemingly innocuous low, value gifts that an integral part of Chinese business culture. This is compounded by the prevalence of State Owned Enterprises ("S.O.E") in China. A foreign official" is defined under the FCPA to include any officer or employee of a non-U.S. government or any instrumentality of the government, or any person acting in an official capacity for or on behalf of the non-U.S. government or its instrumentality. Accordingly, it is highly likely that an employee of an SOE would be regarded as a foreign official for the purposes of the FCPA. The problem that arises is that nearly all foreign companies in China would need to transact with an SOE at some time ¨C it should be remembered that SOE's include organizations such as the Bank of China, the China Investment Corporation and Sinopec.

The problem that many clients have asked us about is whether giving a gift (such as for Chinese New Year), which is an acceptable business practice in respect of private organizations in the U.S., to employees of S.O.E¡¯s would be a breach of the anti-bribery provisions of the FCPA. The giving of small gifts is a standard business practice in China and it is very common for government employees and doctors to receive "red envelopes" (Hong Bao) in exchange for favorable service. These red envelopes usually contain small amounts, in the vicinity of US$10. However, the giving of such red envelopes to employees of SOE's or other foreign officials may be regarded as a bribe under the FCPA.

Our tips for complying with the FCPA whilst doing business in China are as follows:

1. CFOs should guarantee that books, records, and accounts reflect transactions accurately and give a true picture of the state of the company's assets. The CFO must set up a system that shows that employees' spending of company money has direct management approval.

2. Ensure that employees have someone they can speak to whenever they have an FCPA compliance dilemma. A compliance team member should always be on call to enable employees to vet any decisions.

3. Establish a compliance culture within the organization. It should be made clear that any business which requires the giving of bribes is not business that the company wants.

4. Be aware of the areas of the organizations which are vulnerable to such conduct and keep a vigilant eye on those areas of your organization.

5. Employees should be required to undertake regular FCPA compliance training programmes. It is our suggestion that such training programmes be run on an annual basis.

If you have any specific FCPA questions, or would like to arrange a FCPA compliance training programme for your employees, do not hesitate to contact Lehman, Lee and Xu's Corporate Governance/FCPA team:
Edward E. Lehman: elehman@lehmanlaw.com
Matthew McKee: mmckee@lehmanlaw.com

Matthew McKee
Lehman, Lee & Xu