Staying Off the Radar in China: Avoiding Prosecution Under the U.S. Foreign Corrupt Practices Act

03 August 2009 Publication
Author(s): David W. Simon


By Mike Koehler and David W. Simon, Foley & Lardner LLP

This article is part of our Summer 2009 edition of Legal News: China Quarterly Newsletter, Eye on China.

A common misperception is that the U.S. Foreign Corrupt Practices Act (FCPA) applies only to U.S. companies and U.S. citizens. Under certain circumstances, however, the broad-reaching FCPA — which prohibits improper payments to foreign officials to obtain or retain business — can apply to the conduct of Chinese companies and business executives. For this reason, FCPA compliance matters in China.

There are at least three scenarios in which the FCPA can apply to the conduct of Chinese companies and business executives. These scenarios are derived from the facts and circumstances of recent, actual FCPA enforcement actions against foreign companies and nationals. Before discussing these scenarios, a brief FCPA primer is provided.

FCPA Background
The “anti-bribery” provisions of the FCPA generally prohibit those subject to the act’s prohibitions from offering anything of value to a foreign official in order to obtain or retain business.

Three key elements of an anti-bribery violation are “anything of value,” “foreign official,” and “obtain or retain business.” The term “anything of value” has been broadly construed to include not only cash, but also other tangible and intangible benefits such as the payment of travel and entertainment expenses. The “obtain or retain business” element of an anti-bribery violation also has broad application and can be satisfied not only when something of value leads to a government contract, but also when the thing of value influences a foreign official to take action or refrain from taking action that allows the payor to gain a competitive advantage, including reduced tax payments or securing government-issued licenses or permits.

Most important in terms of FCPA compliance in China is the broad application of the “foreign official” element of an anti-bribery violation. The term “foreign official” includes “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” Under the U.S. enforcement agencies’ interpretation of the term, an individual can become a foreign official not only by being a high-ranking member of the government (or by virtue of an appointment to a government ministry or agency, such as a tax official or a customs official), but also by virtue of being employed by an “instrumentality” of a government. Under this interpretation, once a company is deemed an instrumentality of a government, every single employee will be considered a foreign official for purposes of the FCPA, regardless of how local law may characterize the employee. It is clear that U.S. enforcement agencies view Chinese state-owned or state-controlled enterprises (SOEs) as being instrumentalities of the Chinese government and employees of the SOEs as foreign officials under the FCPA.

The anti-bribery provisions also contain broad third-party payment provisions, under which the actions of others (such as agents, distributors, and joint venture partners) can result in liability for those subject to the FCPA. Thus, Chinese companies subject to the FCPA cannot be willfully blind to the actions of business partners or funnel improper payments through third parties.

Scenarios in Which Chinese Companies and Business Executives Can Directly Be Subject to U.S. Prosecution for Violating the FCPA

A Chinese Company With Shares Listed on a U.S. Exchange
Chinese companies are increasingly listing shares on U.S. stock exchanges. One of the consequences of this trend is that more Chinese companies are becoming “issuers” and thus subject to a variety of U.S. securities laws, including the FCPA. Although no Chinese issuer has yet been prosecuted in the United States for FCPA violations, it is likely only a matter of time before this occurs given: (1) the increase in overall FCPA enforcement activity; (2) the increase in FCPA enforcement activity against foreign companies and nationals subject to the FCPA; and (3) the increase in FCPA enforcement activity concerning business activity in China.

A Chinese Subsidiary Company Acting as an Agent of a U.S. Company
Even though foreign subsidiaries of U.S. companies acting alone are generally not considered to be directly subject to the FCPA, a Chinese subsidiary may nevertheless be directly subject to FCPA prosecution if U.S. enforcement agencies conclude that the subsidiary acted as an agent of the U.S. company and took action in the United States in furtherance of an improper payment.

For example, this aggressive theory of FCPA prosecution is best demonstrated by the Department of Justice’s (DOJ’s) prosecution of DPC (Tianjin) Co. Ltd. (DPC (Tianjin), the Chinese wholly owned subsidiary of U.S. issuer Diagnostic Products Corporation (DPC). In 2005, DPC (Tianjin) pled guilty to violating the FCPA for making improper payments to physicians and laboratory personnel employed by Chinese-government-owned hospitals (individuals deemed foreign officials by the DOJ and SEC). The DPC (Tianjin) theory of prosecution could conceivably subject any Chinese subsidiary of a U.S. company to direct FCPA prosecution if the subsidiary is found to have participated in an improper payment.

A Chinese Business Executive Acts in the United States in Furtherance of a Bribe Payment
The FCPA’s anti-bribery provisions also can reach Chinese business executives individually if an executive acts in the United States in furtherance of an improper payment.

The 2007 prosecution of Christian Sapsizian (a French citizen and former executive of French issuer Alcatel CIT who pled guilty to violating the FCPA in connection with improper payments to Costa Rican officials) shows the enforcement agencies’ aggressive pursuit of FCPA violators regardless of nationality. The Sapsizian prosecution (and other recent enforcement actions against foreign nationals) should alert Chinese business executives that if they engage in an improper payment scheme that has any nexus to the United States — such as use of a U.S. bank, use of U.S. computer servers or wires, or attendance of U.S. meetings — the individual could be subject to U.S. prosecution.

The FCPA has potential for a broad reach and may present a trap for the unwary. To stay off the radar, Chinese companies and business executives should avoid scenarios in which they may run afoul of FCPA prohibitions.