U.S. FCPA to Target Corruption at China Subsidiaries

June 28, 2010 Posted by China Briefing Reading Time: 3 minutes

Jun. 28 – The Foreign Corrupt Practices Act unit of the U.S. Securities and Exchange Commission in San Francisco has stated that it will target Silicon Valley-based companies with operations in China in a bid to prompt multinational companies to stay in line with anti-corruption laws.

The FCPA was enacted in 1977 to criminalize the bribery of foreign government officials. With recent reforms of the act bringing a stricter approach to what can and cannot be acceptable, Asia and China in particular are being seen as targets for clampdowns. FCPA regulators are following the paths taken by multinationals overseas where a high percentage of businesses in California have Asian subsidiaries. Fines have been levied on U.S. businesses paying for trips by Chinese government officials to go on “factory inspection tours” of U.S. companies, only for these to turn out to be sightseeing trips and essentially free holidays. Other companies have been convicted of paying bribes to win lucrative contracts.

China has a reputation for graft, being placed 79th out of 180 nations on the Transparency International Corruption Perception Index, and has the forth lowest ranking of the G20 nations. Special problems remain in China due to the involvement of government in business, but the Chinese government themselves are becoming stricter on the issue with officials being punished or preemptively sent overseas for additional education to wean officials off the temptation for giving or accepting bribes. Additionally, more corporations are establishing internal controls to better evaluate the behavior of executives. Often, overseas Chinese employees in senior positions within MNCs are targeted due to the cultural and linguistic nuances of being offered opportunities for participation in graft. These extend even to the giving of gifts on trade missions.

“Several top Chamber of Commerce representatives now only give inexpensive, yet interesting gifts such as a set of Commemorative Postage Stamps at even prestigious and important delegation meetings,” says Chris Devonshire-Ellis, principal of Dezan Shira & Associates and Business Advisory Council Congress Member of the Regional UNDP body. “There is no reason why gifts can’t be given as long as they are appropriate. Executives can use imagination rather than rely on expensive bottles of whisky or cognac.”

The FCPA has long arms. Executives can face prosecution even if they were not aware of the bribe and even if it was given by a subordinate.

“Ignorance is not a defense. International executives need to get used to screening what is going on in China and putting internal mechanisms in place,” says Devonshire-Ellis. In terms of damage, both U.S. and European businesses have been fined hundreds of millions of dollars under FCPA regulations and corruption in China. Twenty seven major investigations involving bribes in the tens of millions have been successfully prosecuted in the past seven years, and the situation is about to get stricter.

“All MNCs need to get prepared for this,” says Devonshire-Ellis. “Both China and the U.S. agree on this issue and U.S. subsidiaries need to start looking at their operations. The California SEC has a point to prove and it is better to root out any nonsense and show a willingness to put internal controls in place rather than stick your head in the sand and pretend it doesn’t happen. Corruption is endemic in China and the reach of the authorities is getting longer.”

Dezan Shira & Associates provides due diligence services and site visits to examine the likelihood of graft within China based subsidiary companies. Please contact the firm’s national tax partner, Sabrina Zhang at tax@dezshira.com