Dealing With Chinese Law Firms and Customs Penalties

November 30, 2010 Posted by China Briefing Reading Time: 2 minutes

Nov. 30 – One of the issues that can crop up with foreign-owned factories in China are the occasional raids by customs. These can be sparked by a number of issues; from downright bad operational practice over the itemizing of goods for export and domestic sales, to disgruntled employees causing some grief, to specific suspicions over VAT fraud and the pricing of imported goods.

Factories can be shut down and goods confiscated until investigations are completed. Employees can also be detained in custody for up to a month. Usually, customs will find something amiss, the issue we are discussing here however relates to the aspect of hiring a local law firm to assist with the situation and getting it corrected.

On too many occasions we are seeing local firms being brought in to handle such matters, but demanding to be paid on a contingency only basis. While this may appear to be reasonable, the actual reality behind it can place the factory and the foreign managers in it in even hotter water, and in particular with FCPA regulations. Under such rules, the bribing of foreign officials is a criminal offense, even if the U.S. manager was not aware of the situation; the implication is that he should have been. Naivety is not an excuse in the eyes of the U.S. Securities and Exchange Commission.

The problem in China with engaging local law firms on a results only basis is the temptation for the firm to then strike a deal with customs over the fine. A typical scenario is the discussion that takes place that suggests the firm already has an agreed upon budget and sum of money from the factory client to get the issue put right with officials. A simple agreement to split the fee is then made, with neither the firm concerned nor the customs officers actually having to do any more work.

We’ve pointed this out on occasions, and suggested that the firm’s legal fees to handle the situation should instead be based on an hourly rate. We’ve even heard of firms refusing to take on the work under such conditions – almost a sure fire guarantee that the total contingency agreed would in fact be divided up and split with officials. Under such circumstances, the firm should be dismissed.

Legal advice concerning the potential for paying fines in China should always then be dictated on hourly billing rates and not on lump sums. From being in the frying pan with customs, to getting straight into the fire with the FCPA as a result of such practices is an issue businesses involved with disputes with government agencies and the use of local firms to deal with it should be aware of.

For more information on FCPA liabilities and negotiating with customs and other government departments, please contact Dezan Shira & Associates at legal@dezshira.com.