Having introduced the theme on “corporate compliance”, today it is necessary to address some other aspects.
As stated in the previous entry, FCPA influences, or at least it should help in establishing the best practice when doing business with a Chinese counterpart. The key to understanding China FCPA risk, and thus the key to ensuring FCPA compliance in China business operations, resides first in the fact that it is necessary to keep in mind that despite certain market-based changes China has many state-owned or state-controlled enterprises (“SOEs”). And management most of the cases is appointed by governmental institutions. Then, is to be understood that the Department of Justice and the Securities and Exchange Commission (the two “Enforcement Agencies” with FCPA enforcement authority) view employees of these SOEs (regardless of rank, title, position or how these employees are classified under Chinese law) as being ”foreign officials” under the FCPA’s anti-bribery provisions.
Definition of foreign official:
One specific issue in China is that with so many companies and institutions owned by or linked to the state, there are many people who could be considered government officials under the FCPA who would not be in other countries. The “foreign official” recipient of the alleged improper payments sometimes are not core government officials or employees of government offices, but rather employees of alleged SOEs.
To avoid running afoul of the FCPA, foreign businesses need to take several steps:
Training all company personnel in China, not just high-ranking personnel, is a must. This is also the reason why a company should have in place not only specific policies but also a precise corporate compliance system.
Before conducting any business activity, it is a must to do thorough due diligence on potential partner(s), whether a joint venture, customer, manufacturer, distributor, or other entity or individual with which you (i.e. the company) will be dealing. Find out detailed background information on the Chinese company, its stockholders and its officers. Often, the Chinese government will be involved in one capacity or another, whether as a parent company, majority stakeholder or manager. If the government is involved in one of these capacities, then the directors, officers and employees of that company will likely be considered government officials for purposes of the FCPA.
Second, officers and managers must clearly understand what would be considered violations of the FCPA and be able to effectively communicate the same to employees and other Staff members. When dealing with SOEs, they should be especially careful about possible gifts and extravagant meals or trips.
Therefore, it is a necessity to develop and follow a good compliance policy and to ensure that the policy is communicated to employees and other Staff members when connecting to Chinese companies (especially SOEs). This policy has to be updated on a regular basis.
A good compliance policy should have the following elements:
- Clearly state your company’s policy against violations of the FCPA and give examples of what such violations could be.
- Provide internal reporting mechanisms and designate a compliance officer.
- Provide a way for employees to seek advice before any potential violations occur.
- Review and update the policy on a regular basis.
This should serve as a basis however when drafting specific policies, especially regarding corporate compliance, reference must be also made to China’s company law and other pieces of legislation:
– The company law provides for the establishment of a supervisory board, or for small companies the appointment of one or two supervisors (Article 52 ii Company Law). Directors and senior officers may not concurrently serve as supervisors making this organ particularly suitable for a top compliance role in the organization. However, many companies have not yet defined a clear role for its supervisory board and therefore may want to take a more cautious approach. They may instead appoint a Chief Compliance Officer (CCO) or at least support the general manager with a compliance department.
– Foreign companies doing business in China are also subject to the Chinese anti-bribery rules which are governed by the (i) Anti-Unfair Competition Law of the PRC (“AUCL”), (ii) the Interim Rules of the State Administration of Industry and Commerce on Prohibition of Commercial Bribery (“Interim Rules”) and the already mentioned (iii) Criminal Law of the PRC (“Criminal Law”). Under the AUCL and Interim Rules, a business operator may not give something to another legal entity if the purpose is to exclude its competitors from obtaining transaction/opportunities or favorable business conditions. In addition, a sales commission payment which is not correctly booked is deemed to be commercial bribery. Under the Criminal Law neither government officials nor commercial entities may give or accept bribes for any “wrongful and unlawful interest”.
Once an appropriate compliance management organization has been developed it should be properly anchored in the corporate constitutional documents (e.g. in the AoA)
Some other useful tools to help implementing a corporate compliance culture are the so called “code of conducts.” They could help in implementing a 360
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compliance system if the company issues specific guidelines which cover issues like for example:
(i) Insider trading rules; (ii) Offer and acceptance of gifts; (iii) Policy on expenses; (iv) Policy on “donations.”
If well drafted and adjusted to Chinese sensitiveness these guidelines/policies can have an important role to play and strong moral force.
Cristiano Rizzi