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Welcome to the latest edition of the Anti-Fraud Network newsletter.
Anti-Corruption Laws in China: Finding the Right Way in the Middle Kingdom
Authors: John Bray and Dane Chamorro
Some years ago, China’s state-owned People’s Daily published a revealing news headline: “Commercial bribery - foreign companies adapt to local market in wrong way.” The “wrong way”, according to the subsequent article, included illicit donations to officials and commercial partners in the mistaken belief that these are the essential requirements for business success in China. Such practices undermined the country’s anti-graft efforts, and jeopardized the companies’ own commercial objectives.
Finding the “right way” requires a combination of knowledge, skill and hard work: you need to be able to identify potential allies from fraudsters; you need to understand both Chinese and international law; and you need to understand how the system actually functions.
The Current Crackdown
China has a long tradition of corruption. It also has a long tradition of anti-corruption crackdowns, and we are in the middle of one right now.
The need to be seen to combat bribery is a strategic requirement for the Chinese government. Complaints about corruption—for example in fraudulent land deals—have been a leitmotif of anti-government protests nationwide. Similarly, the Sichuan earthquake in early 2008 highlighted the social impact of corruption: the buildings most vulnerable to collapse included schools where contractors had bribed officials to circumvent building regulations.
The main priority of the ruling Chinese Communist Party (CCP) concerns corruption involving officials and party cadres. In January this year, the government announced that it had penalised more than 106,000 officials for corruption between January and November 2009, an increase of 2.5% over the previous year.
At the same time, the Ministry of Supervision—the lead government agency in the campaign against corruption—has launched a series of initiatives to address the private sector “supply side” of bribery. Among other areas, there had been a particular focus on corruption cases involving the procurement and sales of medical supplies. Current priority areas include construction, land transfer and the financial sector.
Many of the recent cases involve senior political and business figures. For example, in August 2009, Li Peiying, the former president of the Capital Airports Holding Company, was executed after he had been found guilty of bribery charges. In China, the saying that “heads will roll” is more than figurative.
The Very Long Road to Reform
Crackdowns are all very well, but lasting success will require long-term legal and structural reforms to remove—or at least reduce—the incentives for graft.
Current planned initiatives include a series of measures to streamline government approval processes and to continue the process of legal reform. The laws under review include the Anti-Unfair Competition Law, the Environmental Protection Law, and Regulations for the Supervision and Administration of Medical Devices.
The Ministry of Supervision is also devoting more resources to prevention. For example, it has set up a National Bureau of Corruption Prevention which, among other services, runs a website where citizens can post complaints about suspected official corruption.
These reforms have started to bring positive results for international companies. For example, it is now possible to win court cases on intellectual property infringements. However, actually implementing the judgements—for instance, securing the financial compensation decreed by the courts—remains extremely difficult. China may be on the right road, but it has a long, long way to go.
Against this background, businesses operating in China need to be alert constantly to the hazards of fraud and corruption at three different levels.
The First Law
The first law that they need to be aware of—not yet on the statute book—is the law of unintended or ill thought-out consequences. In our experience, most of the frauds that affect international companies in China are the result of lack of vigilance among middle and senior management. Examples include hasty decisions to form joint venture partnerships without proper due diligence, the appointment of commercial agents with large budgets and no questions asked, and uncritical delegation to local management (“after all, they understand the culture”) without instituting proper controls.
In most cases, the frauds that result from this lack of vigilance are dealt with internally. They do not reach the courts and therefore the legal consequences (narrowly defined) are minimal. However, the commercial consequences can be immense.
The Second Law: Chinese Anti-Corruption Regulations
The second set of laws—China’s growing corpus of anti-graft regulations—are now available in nicely printed editions, but their application remains uneven.
China’s main anti-bribery law (Articles 385 and 389 of the PRC Criminal Code) is a stand-alone criminal statute applicable solely to government officers. The regulations applying to commercial corruption are part of the Anti-Unfair Competition Law, which is designed to create a level playing field for business. Technically, a party that has lost out on a commercial transaction because of corrupt practices can invoke the law to sue for monetary damages. However, in practice, this is extremely rare.
For business, the most common corruption-related hazard—sometimes self-inflicted and sometimes not—is the risk of an investigation and fine by the Administration of Industry and Commerce (AIC). The AIC is China’s commercial regulator, and functions at the national, provincial and local levels. It exercises broad powers to investigate alleged commercial malfeasance, seize evidence and impose financial penalties without warrant. It also has the authority to order the disgorgement of profits earned through unfair commercial practices.
The AIC may use those powers in a manner that seems extremely arbitrary. We know of one case where the local AIC officials appeared at the offices of a multinational company with a demand for a fine of some RMB 800,000 (approximately US$100,000). The demand was not supported by any evidence of misconduct. In fact, company representatives were ordered to prepare the internal records needed to justify the fine. Fines of more than RMB 1m must be reported to higher authority and regional AIC officials therefore prefer to keep financial penalties below this ceiling so that the revenues are retained at the local level.
If a company engages in bribery offences that are “large” or “very large” bribery (in the words of the Anti-Unfair Competition Law), it could face criminal prosecution from the Public Security Bureau (PSB). However, the PSB is reluctant generally to enter into commercial bribery cases because they are hard to prove. In our experience, PSB prosecutions of foreign company employees most often arise because the companies have themselves sought official assistance to pursue offenders. Recent cases in the soft drinks industry may be examples.
The Third Law: International Anti-Bribery Laws
The third set of laws is in many ways the most dramatic. The enforcement of international laws against foreign is becoming much tighter—albeit unevenly—and there have been a series of cases involving China.
The United States has been enforcing its Foreign Corrupt Practices Act (FCPA) with particular vigour. The US Department of Justice (DoJ) and the Securities Exchange Commission (SEC) have a current case load of more than 100 open investigations on foreign bribery, and several of these relate to China.
In the most recent example, the US telecommunications company UTStarcom agreed on 31 December 2009 to pay a total penalty of US$3 million to settle FCPA charges. According to the SEC complaint, the company had paid out nearly US $7 million between 2002 and 2007 for overseas trips taken by Chinese government-controlled telecommunications companies. The trips were ostensibly for customer training but were in reality primarily or entirely for sightseeing and thus amounted to a form of bribery.
In other recent cases, Control Components Inc (CCI) agreed in July 2009 to pay a criminal fine of US$18.2 million in connection with charges that it had paid bribes to employees of the China National Offshore Oil Company (CNOOC) as well as the Korea Hydro and Nuclear Power Company. Also in July, Avery Dennison Corporation paid a penalty of US$518 million to settle charges that it had authorized the payment of kickbacks, sightseeing trips and gifts to Chinese government officials.
The FCPA applies specifically to bribes paid to foreign officials as distinct from employees of private companies. However, the fact that a large number of Chinese corporations are still wholly or partially state-owned means that the FCPA’s net is even wider in China than it would be in other countries.
While the United States has been strictest in enforcing its anti-bribery laws, other Western countries, notably Germany, are beginning to catch up. In 2007 and 2008, the German engineering conglomerate Siemens paid fines totalling US$1.6 billion to the German and US authorities on account of a series of international bribery offences, including in China. Since then, the United Kingdom has introduced a tough new Anti-Bribery Bill. This is expected to be passed into law in the next few months, and the UK’s Serious Fraud Office (SFO) is actively seeking new foreign corruption cases. Singapore likewise has been pursuing a bribery case involving a Singaporean company in China, with the active assistance of Chinese officials.
The Way Forward
The heightened emphasis on anti-corruption laws in China and internationally is good news for well-managed companies because it offers the long-term prospect of fairer competition all round. However, in the immediate, future the uneven application of those laws will continue to mean that China presents special challenges.
Successful business development will require a particular focus on the greatest areas of risk. In our experience, these include sales, distribution and purchasing. In a highly competitive environment, sales representatives are often pressured to provide kickbacks to customers. On the other side of the coin, managers in the purchasing departments of large companies often have enormous budgets at their discretion and are routinely bombarded with gifts and cash in order to sway their decisions.
International companies need the best products and the best services. They also need careful due diligence procedures to assess the integrity records of potential business partners, as well as thorough ethics and compliance programmes for Chinese as well as foreign employees. China has always been a difficult market and it won’t get any easier in the near future.
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John Bray is Control Risks’ lead anti-corruption specialist. He is the author of the Control Risks report on Facing up to corruption. A practical business guide (see www.control-risks.com/businessethics). He is currently based in Japan but spends most of his time on international assignments.
Contact Details:
Tel: + 81 (0) 3 5545 7501 John.Bray@control-risks.com |
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Dane Chamorro is Control Risks’ Managing Director for Greater China based in Hong Kong. He has conducted numerous corruption-related investigations and compliance reviews in Asia.
Contact Details:
Tel: +852 2810 9028 Dane.Chamorro@control-risks.com |
© 2010 Anti-Fraud Network.
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News
BAE Agrees Unprecedented Plea Bargain
The UK’s Serious Fraud Office (SFO) and the US Department of Justice (DoJ), have announced settlements with BAE Systems plc, in a ground breaking global agreement. BAE has agreed to plead guilty in the Crown Court to an offence under Section 221 of the Companies Act 1985 of failing to keep reasonably accurate accounting records in relation to its activities in Tanzania. The company will pay £30 million, comprising a financial order to be determined by an English Crown Court judge. In conjunction with this agreement, the SFO has determined that no further prosecutions will be brought against BAE Systems in relation to the matters that have been under investigation.
Under the terms of the DOJ settlement, BAE has agreed to pay a US$400m (£257m) fine after admitting to “defrauding the US” over the sale of fighter planes to Saudi Arabia and Eastern Europe.
The agreement means that there will now not be a full trial of BAE in relation to bribery or corruption, or an investigation into its agents. As a result, charges against Count Alfons Mensdorff-Pouilly, BAE's key confidential agent in central Europe (reported in last month’s newsletter), have been dropped. The settlements also mean that BAE has not been banned from bidding for government contracts in the US and UK.
UK Bribery Bill
The Bill has completed consideration in the House of Lords and its first reading in the House of Commons. It now appears likely to have completed its Parliamentary process before the general election. Dorsey & Whitney has prepared a summary of the Bill and is offering a workshop on its key points and on related fraud and corruption issues. If you would like a copy of the summary, or would like to discuss whether the workshop might be suitable for your business, please contact Nick Burkill at Burkill.nick@dorsey.com
Australian Securities and Investments Commission Allowed to Expand Iraq Bribery Allegations
Australia’s corporate watchdog, the Australian Securities and Investments Commission (ASIC) has achieved a victory in the Court of Appeal allowing new allegations to be brought in its case against Andrew Lindberg, former chief of the Australian Wheat Board (AWB). ASIC raised the allegations during Mr Lindberg’s civil trial in December relating to secret bribes paid by AWB during Saddam Hussein’s regime. Supreme Court Justice Ross Robson ruled ASIC’s bid was an abuse of process, but the appeals panel decided the move was in the public interest.
Mr Lindberg maintains that he was unaware of the hard currency being paid to Iraq, allegedly disguised as trucking fees, in breach of UN sanctions. The appeal panel stated that allowing the new allegations to be heard alongside the existing case “will undoubtedly work real prejudice to [Mr Lindberg].”
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