Coordinating Anti-Corruption Enforcement in China

Companies who have expanded into China need to be careful.  Call this a profound grasp of the obvious, but the risk of corruption enforcement in China is rapidly increasing, and in the near future could become even more aggressive.

The United States and the Chinese governments are working closely together to coordinate anti-bribery enforcement.  The implications of this are far-reaching. 

US Representatives from the State, Commerce and Justice Departments met in China for two days with their Chinese counterparts as part of the U.S.-China Anticorruption Working Group Meetings and Anti-Bribery Roundtable.  The purpose of the meeting was to continue efforts to improve coordination and sharing needed for joint enforcement programs on corruption and other crimes.  These efforts will initially lead to coordinated efforts and information sharing on denials of safe havens, asset recovery and mutual legal assistance. 

China is already increasing its efforts to prosecute corruption in its government.  Three senior directors of the State FDA were prosecuted for taking in excess of $800,000 from primarily Chinese companies to approve fake or inadequately tested drugs, resulting in the deaths or severe illnesses of many people.  One of the officials was executed for his role in the scheme.

According to Chinese government websites, in the first year, nearly 3,000 government officials have been removed from office and prosecuted for corruption. Nearly 80 bribery cases have been solved. Almost 70 people have been criminally punished and nearly 30 suffered administrative penalties. A province transportation chief was sentenced to life in prison for receiving over $800,000 in bribes beginning in 1994.

Chinese law punishes both giving and taking of bribes, and covers bribery of “state functionaries” or “government organs.”  Commercial bribery criminalizes bribery of “staff of a company or enterprise” and imposes recordkeeping obligations.  Employers are liable for the acts of their employees.

The Chinese have prosecuted foreign employees of foreign companies.  Last year, four Rio Tinto employees including an Australian citizen, were found guilty of accepting millions of dollars in bribes and stealing commercial secrets. They were sentenced to between 7 and 14 years in prison and ordered to pay hundreds of thousands of dollars in fines.  In addition, Toyota Motor Finance allegedly gave 426,352 RMB ($63,493) in rebates to dealers, who in turn steered business toward Toyota financing over other financing options. Toyota was fined.

China believes that it has clearly established its intentions to clean up the Party and is now focusing on corporations. The pharmaceutical companies that were implicated in the drug bribery scheme are now being prosecuted and punished.

China is ranked 78 out of 178 countries on Transparency International's corruption index.  Corruption in China is perceived as “pervasive or quite pervasive.”  Almost 8 percent of government spending is misappropriated, which is approximately 3 percent of China's GDP.

In the United States, FCPA enforcement of companies conducting business in China continues to be a significant portion of the Justice Department's enforcement portfolio.  Since 2002, DOJ/SEC have brought 39 enforcement actions in China (18 percent of all enforcement actions).

Chinese business culture is based on relationships, or guanxi, which are formed in part by giving gifts and doing favors.  This raises very real risks for violating the FCPA.  The Justice Department's broad interpretation of “thing of value” encompasses all manner of gifts, travel, and entertainment.  Some examples of prohibited "favors" or "gifts" in recent prosecutions include:  non-business related travel to company officials (Lucent); internships to Chinese official’s son and girlfriend, letters to obtain visas and use of vehicle (Daimler AG);  payment for college tuition for children of two executives (Control Components); gift certificates and watches (Schnitzer Steel); $4500 in gifts to Chinese telecomm executive (Veraz); watches, cameras and laptop computers (Alliance One); laptop computers, jade, fur coats, kitchen appliances, business suits and expensive liquors (RAE Systems).

Chinese authorities are tracing the bribery from those implicated in earlier investigations back to the bribe payers. As they identify Chinese agents, corporations and individuals involved, those entities will be prosecuted, be they domestic or foreign. The US Department of Justice is interested in learning the identities of the US companies and their agents, joint venture partners, or contracting parties implicated by the Chinese investigations.

As China continues to crack down, primarily on bribe recipients, the US and China will inevitably increase joint prosecutions to hold accountable the bribe payers, bribe takers and US companies or their agents, representatives or partners.