Under the FCPA, it is illegal to "corruptly offer, pay or promise to pay anything of value to any foreign official for the purpose of obtaining or retaining business, including getting or keeping contracts, or gaining any improper advantage".
The FCPA applies not only to U.S. nationals and companies, but also to those foreign nationals with residence and companies carrying on business in the United States. The FCPA also applies to third parties and agents acting on behalf of such persons and companies.
Violations of the FCPA can expose a U.S. company and its personnel to significant criminal and civil penalties.
While no actual payment is required to be proved, mere "offer" or "promise" intended to induce a foreign official to misuse his position to secure an improper advantage is sufficient to subject a U.S. company or individual to FCPA violation.
The term "foreign official" is broadly defined to include officers, employees or persons acting in an official capacity for or on behalf of a foreign government department, agency or instrumentality thereof. So for example, an employee of a state-owned or controlled enterprise ("SOE"), or an outside consultant would also be considered to be a foreign official under the FCPA.
Risks Factors of Doing Business in China
This creates an inherent risk in doing business in China not least because many major businesses in China are SOE and employees of these businesses are therefore considered foreign officials for the purpose of the FCPA.
More importantly, much of the U.S. direct investment in China takes the form of joint ventures with Chinese partners or engages Chinese agents or distributors to navigate the Chinese market. The FCPA prohibits any payment made by U.S. companies or individuals to third parties or agents with the knowledge that all or a portion of the payment will go directly or indirectly to a foreign official for corrupt purposes. Conscious disregard is enough to satisfy the requirement of knowledge. This is important because many businessmen in China, even those not associated with an SOE, have ties to the Communist Party. This may put U.S. companies at risk of FCPA liability as the mere existence of "red flags" can give rise to liability for failure to investigate them.
Furthermore, in addition to payments of money, the FCPA may also apply to gifts and entertainment expenses. Gift giving and business entertainment is a significant part of Chinese business culture. Although business courtesies are not categorically corrupt, entertainment expenditures by U.S. companies or individuals which involve foreign officials must comply with the Chinese written laws that limit gifts to RMB200 and be reasonable and directly related to a bona fide business purpose.
Mitigating FCPA Risks
The FCPA presents enormous impact on U.S. companies seeking to do business in China. On the one hand, U.S. companies must do everything possible to effectively participate in the dynamic Chinese marketplace. On the other hand, U.S. companies must comply with the FCPA, which may seem to conflict with local business practices.
To mitigate FCPA risks when doing business in China, U.S. companies should:
- carefully evaluate the status of their potential business partners with respect to their relationships to the Chinese government;
- put in place an internal compliance programme and ensure that all employees who deal with third parties or foreign public officials are sufficiently trained to understand the anti-bribery provisions;
- set out clear policy on gift giving and provision of client entertainment;
- require employees to keep and produce proper receipts on travel and entertainment expenses; and
- ensure all contracts dealing with third parties demonstrate compliance with the FCPA.
OLN regularly represents clients in cross border transactions or litigation with international dimensions. We also regularly advise on business planning and good practice guidelines for regulatory compliance. We are happy to give you further advice and/or required strategic overview on the above topic as required.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.