How Many Foreign Companies in China Violated Anti-Bribery Laws Last Month?

October 6, 2010

Potentially a very large number, given the holidays and gift giving traditions (mooncakes anyone?). Here’s the issue: corruption is a big problem in China and a lot of emerging market countries. The governments of China, the US, UK etc. are aware of this and have put together tough anti-bribery laws.

China’s enforcement of anti-bribery statutes is variable, but US enforcement of the Foreign Corrupt Practices Act (FCPA) is no joke and has been ramped up considerably over the past few years. US foreign-invested enterprises in China have been tagged on FCPA charges on many occasions, and it’s just going to get worse.

It’s tough when you are doing business in a country with a gift-giving culture. Sure, the most important thing is to keep track of the big stuff, the kinds of payoffs that have led to high profile criminal cases of folks like Huang Guangyu of Gome and Stern Hu of Rio Tinto. This is priority number one.

However, enterprises that do not have an endemic corruption problem sometimes think they are safe and do not set up formal internal policies. When there is no internal policy and no employee training, what happens? Business as usual happens, which unfortunately sometimes means small gifts to government officials to maintain good relations.

Last month, hundreds of thousands of government officials nationwide received gifts of mooncakes for the Mid-Autumn Festival. Some of these no doubt came from multinational corporations.

Does every gift of a mooncake violate the US FCPA? No, the law is a bit more flexible than that, and each situation must be analyzed within its specific context. My point is that even small gifts made by staff with the best of intentions must still be checked out, and probably avoided in the future. Trust me, you really don’t want to put your CFO or HR Manager in the position of judging whether that cheap red bean-filled mooncake is an acceptable gift as opposed to that gold foil covered mooncake purchased from Godiva.1

It’s possible something like that occurred with CB Richard Ellis, whose anti-corruption revelations were reported by the Wall Street Journal yesterday:

Commercial-property broker CB Richard Ellis Group Inc. said Tuesday that employees in China made payments to local government officials in violation of company policy and possibly U.S. foreign bribery laws.

An internal investigation in the first quarter of 2010 yielded evidence that employees made improper payments to Chinese officials for non-business entertainment and in the form of gifts, the company said.

CB Richard Ellis described the payments as minor but nevertheless disclosed them to the U.S. Department of Justice and the Securities and Exchange Commission in February.

One wonders what they consider to be “minor” of course. Was this a RMB 500 dinner, a gift of a new mobile phone, a KTV night on the town with female companionship?

Just for the sake of argument, let’s say that the gifts were small and merely gestures of friendship, which is standard operating procedure in this market. You might be wondering why a big firm that has operated overseas for a long time would not be aware of FCPA rules and set up an internal program accordingly.

Good question. The likely answer is that it wasn’t until recently that the US started enforcing anti-corruption rules with a vengeance. Many foreign investors paid very little attention to this sort of thing, figuring that as long as they were not guilty of large-scale corruption, everything would be fine. Others paid lip service to the rules by throwing in boilerplate anti-corruption language into their labor contracts, hoping that this would push some liability onto their staff.

Not so fast. Much more is required these days, and even firms that have done nothing except make small holiday gifts to officials are now faced with potential violations.

I’ve had several clients over the past five years or so come to me after the fact (i.e. after the gift giving) asking for advice on self-reporting, creation of a new internal company policy, how to deal with staff training, etc. Why is it always after the fact? {melodramatic sigh}

Just for the record, I am not an FCPA expert and usually only deal with the China law side of this, such as revising labor contracts, assisting with local staff training, and harmonizing internal anti-corruption policy for China. Questions about whether a company should self-report violations to the US government is a bit beyond my comfort zone. For that, get thee to an attorney in the US who is an expert in this area of the law.

Since the next holiday period essentially lasts from December to February over here, with lots of gift giving opportunities lurking within those three months, now would be a good time to sit down with your HR manager or your sales guys and find out what company policy is (and then what it should be).
________________________________

  1. FYI: the identity of the government official and your company’s relationship with him/her is even more important than the specific dollar value of a small gift, but I went for the simple example.[]

________________________________