China Risk Focus – FCPA versus China Corruption Act
Author: Jean Kester – Partner (LehmanBrown International Accountants)
This article was originally published by Stout, Risius & Ross (SRR) under the section on China’s Emerging Anti-Bribery Regulations and Impact on Anti-Corruption Programs
The U.S. Foreign Corrupt Practice Act (FCPA) was enacted in 1977 after over 400 companies under investigation by the U.S. Securities and Exchange Commission (SEC) admitted to making hundreds of millions of dollars in bribes to foreign government officials, politicians, and political parties to obtain favorable treatment in business being conducted abroad.
From 2010 to date, the SEC charged over 50 different companies with violations of the FCPA.
1. The charges ranged from providing improper cash payments, gifts, travel, and entertainment to actual bribes made to government officials to secure business or regulatory approvals. Of those cases, 14 had some or all of their operations and the FCPA offenses occurring in China, including Eli Lilly and Company subsidiaries, charged with making improper payments to foreign government officials to win business ($29 million in fines), Tyco International subsidiaries, being charged with making illicit payments to foreign officials in more than a dozen countries, including China ($26 million paid to settle the charges) and Pfizer subsidiaries being charged with making illegal payments to foreign officials in eight countries including China to obtain regulatory approvals, sales, and increased prescriptions for its products ($45 million paid to settle the cases).
2. During the Qianlong era (Qing Dynasty) of the 1700s, offences listed in the Great Qing Legal Code included the receipt of bribes and acceptance of gifts by civil servants, as well as extortion by civil servants or their family members. China’s modern Anti-Bribery laws were put into place in 1979, in the post-Mao era, when the private sector began growing in China and it became clear that government officials were abusing their power during the economic development of the country.
3. These laws were strengthened and amended in 2011. In January 2013, then President-In-Waiting Xi Jinping resolved in a speech to fight “tigers” and “flies” in an effort to resolve corruption problems in China.
4. China’s anti-corruption activities have led to the prosecution of certain foreign firms under China’s Anti-Bribery laws. A high-profile corruption case in 2013 involved GlaxoSmithKline, a large multi-national pharmaceutical company in China, in which government officials conducting an investigation alleged that the company used travel agencies to pay billions of Yuan (hundreds of millions of USD) in bribes to doctors and officials to boost the sale of its medicine products.
5. The crackdown on the pharmaceutical company is an example of the anti-corruption enforcement actions the Chinese government has set in motion, with the pharmaceutical company scandal being one of the larger and higher profile examples.
FCPA v. China Anti-Bribery Laws
A comparison of the main provisions of the anti-corruption statutes of the FCPA and the China Anti-Bribery laws shown in the table below indicates that, while the U.S. laws are primarily aimed at bribery by U.S. companies in foreign markets, China’s laws include domestic measures, such as commercial bribery and bribery by China’s domestic entities and Chinese domestic officials. Further, under the FCPA, receipt of a bribe is not a prosecutable offense, but it is under China’s rules.
With regulatory anti-corruption laws increasing across the globe, an effective anti-corruption compliance program is a necessity. There are three fundamental elements of an effective program:
1) Creating and maintaining of a culture of honesty and high ethics and standards;
2) conducting a thoroughevaluation of the risks of fraud and corruption and ensuring the implementation of the policies, procedures, and controls needed to mitigate such risks and reduce the opportunities for fraud and corruption; and
3) ensuring development and functioning of an appropriate oversight process. The three elements of Culture, Evaluation, and Oversight, backed by a strong framework of Policies, Procedures, Processes, and Controls can help alleviate risks.
A comprehensive anti-corruption compliance program will incorporate these certain basic principles, including ensuring the procedures in place are proportional to the risks faced by the entity, and having commitment by the top levels of management of the entity. Additionally, appropriate risk assessment procedures, adequate due diligence, communication and training and monitoring and review procedures are advised (and in some cases required). A thorough annual risk assessment is one way an entity can understand the extent to which potential events might impact the company’s objectives, including those objectives related to the China Anti-Bribery or FCPA compliance. As noted in the comparison of the China Anti-Bribery and the FCPA regulations, however, while having a robust compliance program helps to reduce the risk of inappropriate cross-border payments, it is not a defense that can be used when dealing with regulatory actions under the rules.
Companies doing business in China should adopt a formal approach to oversee the risk assessment process and develop an anti-corruption program that minimizes corruption vulnerabilities. An annual risk assessment is fundamental to developing a strong compliance program and includes assessing the likelihood and impact of the risks of doing business in China (and other countries). The assessment identifies and evaluates possible responses to the risks identified. In that process, management evaluates options in relation to an entity’s risk appetite, cost versus benefit of potential risk responses, and the degree to which a response will
reduce impact and/or likelihood. Responses are selected and executed based on evaluations of the portfolio of risks and responses. Control activities are the policies and procedures that help ensure that risk responses, as well as other entity directives, are carried out. They occur throughout the organization, at all levels and in all functions.
While the risks a company faces operating in China can be challenging, the rewards and opportunities can outweigh certain of those risks with the implementation of an effective anti-corruption program. The risks of cross-border payments can be reduced through a combination of prevention, deterrence, and detection measures.
In 2011, a global retailer voluntarily announced an internal investigation over permitting, licensing, and inspections in its China operations, and whether those were in compliance with the FCPA, which was expanded to include Brazil and China in 2012.6 This investigation resulted from annual compliance audit procedures and highlights how effective annual monitoring can identify potential areas of remediation and allows an entity to control risk.
Improving governance and internal controls practices to avoid risk can also help entities maintain healthy relationships with its stockholders, lenders, vendors, and customers. It is one way to ensure that what an entity’s competitors and investors think about its competence, integrity, and economic health is the message it wants to send.
This article is intended for general information purposes only and is not intended to provide, and should not be used in lieu of, professional advice. The publisher assumes no liability for readers’ use of the information herein and readers are encouraged to seek professional assistance with regard to specific matters. Any conclusions or opinions are based on the specific facts and circumstances of a particular matter and therefore may not apply in all instances. All opinions expressed in these articles are those of the author and do not necessarily reflect the views of LehmanBrown International Accountants.