Jurisdiction - China
Reports and Analysis
China – Recent Anti-Corruption Developments.

30 July, 2012

 
Legal News & Analysis – Asia Pacific – China – Regulatory & Compliance

 

Overview
 
With the continuing economic problems in the US and Europe, many multinationals are increasingly focused on pursuing business opportunities in China. As a result, they are having to operate in a vastly different business environment to that of their home countries. In China, the value of personal relationships and the concept of guanxi are the focal points of business culture. Guanxi is best described as a personal connection between two people and is typically established by providing personal favours, such as gifts, entertainment or other benefits. These business practices make it challenging for foreign firms operating in China to secure business in a manner consistent with Western anti-corruption laws. This has been highlighted by an increasing number of enforcement actions in the US involving China. Since 2002, the DOJ and SEC have brought enforcement actions against 22 corporations and 15 individuals relating to business activities in the country.
 
At the same time, there have been recent extensions of China’s domestic anti-bribery provisions as well as an uptick in domestic enforcement activity. There have been a number of high profile prosecutions in recent years including the case against the former head of China’s food and drug watchdog, who was sentenced to death in 2007 for taking 6.49 million yuan in bribes in return for approving hundreds of medicines, some of which proved dangerous. In 2009, the mayor of Shenzhen was arrested and jailed along with many other public officials from the province of Guangdong. And in Chongqing, a recent anti-corruption drive led to mass arrests with more than 1,550 suspects being investigated, including forty police officers and the head of the judicial bureau. Bo Xilai, the former governor of Chongqing who orchestrated these efforts, is now himself subject to an investigation by the Communist Party.
 
The recent increase in international and domestic enforcement activities means that it is all the more important for companies operating in China to ensure that their policies and controls are compliant with international and domestic legislation.
 
Recent international corruption cases
 
A global investment bank
 
In April 2012, a former executive at a global investment bank pleaded guilty to DOJ charges of FCPA-related violations. The executive, who was head of the firm’s Shanghai real estate business, was alleged to have arranged for millions of dollars, disguised as finder’s fees, to be paid to himself and a Chinese official. He was charged with conspiring to evade internal accounting controls that the firm was required to maintain under the FCPA and is due to be sentenced in July 2012. The executive also settled charges brought by the SEC by agreeing to pay approximately US$250,000 in disgorgement and to forfeit Shanghai real estate worth approximately US$3.4 million.
 
Significantly, neither the SEC nor the DOJ opted to charge the investment bank in relation to this matter. In its press release the SEC noted that the firm had cooperated with its inquiry and conducted a thorough internal investigation to determine the scope of the improper payments and other misconduct involved. The SEC and DOJ complaints also note the comprehensive internal controls the firm had in place at the time. These included numerous anti-corruption training programs for employees. The employee in question had himself received anti-corruption training on at least 7 occasions between 2002 and 2008 in both live and web-based sessions.
 
Biomet Inc
 
On 26 March 2012, Biomet Inc. settled FCPA charges brought by the DOJ and SEC, agreeing to pay a criminal fine of US$17.3 million and disgorge US$5.5 million in profits and pre-judgment interest. Biomet was alleged to have paid more than US$1.5 million in bribes, disguised as commissions, royalties, consulting fees, and scientific incentives, to Asiaanti-corruption Summer 2012 | 19 doctors at government hospitals in China. The enforcement action is part of the government’s industry-wide investigation into alleged bribes paid by orthopaedic device makers to doctors and administrators employed by state-controlled hospitals.
 
Dun & Bradstreet Corporation
 
On 18 March 2012, Dun & Bradstreet Corporation (“D&B”) announced that it had suspended operations of one of its Chinese subsidiaries, Shanghai Roadway D&B Marketing Services Co Ltd (“Roadway”) pending an investigation into whether the subsidiary violated the FCPA (and other laws). The announcement followed news that the Chinese police were investigating Roadway for breach of the local Chinese consumer data privacy laws. D&B is cooperating with local investigators and voluntarily reported the issues to the SEC and the DOJ. The investigation is ongoing.
 
Watts Water Technologies, Inc
 
In October 2011, Watts Water Technologies, Inc. (“Watts”) settled FCPA charges with the SEC. Watts agreed to pay US$2.7 million in disgorgement, US$820,000 in prejudgment interest, and US$200,000 in penalties without admitting or denying the SEC’s allegations.
 
Watts designs and retails water valves. Between 2006 and 2009, it was alleged that Leesen Chang (“Chang”), a US citizen and the former Vice President of Sales for Watts’ whollyowned Chinese subsidiary, Watts Valve (Changsha) Co Ltd (“Watts China”), implemented a policy of approving payments of up to 3% of a salesperson’s commissions to employees of government-owned design institutes for creating design specifications that favoured Watts China products or recommending Watts China products to its state-owned enterprise customers. Watts China also allegedly paid for meals, entertainment, and travel expenses incurred by employees of the design institute. These payments were alleged to have been improperly recorded as commission payments in the accounts of Watts China.
 
Watts acquired the business that became Watts China in 2006. It implemented its FCPA compliance policy at Watts China shortly after the acquisition, but failed to conduct FCPA compliance training until 2009. Watts became aware of potential FCPA violations in the course of FCPA training in 2009 and self-reported the conduct to the SEC in August 2009.
 
The SEC was of the view that Watts “failed to implement a system of FCPA compliance and internal controls commensurate with the risks posed” by Watts China. It did, however, commend Watts for taking prompt remedial action upon learning of the misconduct and for self-reporting to the SEC. As remedial measures, Watts abolished commission-based remuneration, conducted a global anti-corruption audit, and engaged external counsel to
enhance its anti-corruption and compliance programme.

 

A multi-national technology firm
 
In March 2011, a multi-national technology firm reached a settlement with the SEC in relation to alleged violations of FCPA provisions on books and records and internal controls in relation to its subsidiaries in China and South Korea. Without admitting or denying the allegations, the company agreed to pay a US$2 million civil penalty, disgorge US$5.3 million in profits, and pay US$2.7 million in prejudgment interest.
 
The SEC’s allegations focused on gifts and tourism provided to foreign officials. In breach of their own internal policies, the company was alleged to have paid for at least 100 trips for Chinese government employees. 
 
The case highlights the difficulties of reconciling Chinese business culture with the requirements of the FCPA and emphasises the importance of monitoring ongoing compliance with a company’s internal control policies.
 
Recent domestic corruption cases
 
Chinese Football Association
 
In February 2012, the Intermediate People’s Courts of Tieling and Dandong (in the Liaoning province in northeast China) handed down verdicts and sentences to more than 35 individuals in relation a bribery and match-fixing scandal in the Chinese national football league, including: (i) Yang Yimin, a former deputy-chief of the Chinese Football Association; (ii) Zhang Jianqiang, a former chairman of the CFA Referee Commission; and (iii) Lu Jun, a former World Cup referee once celebrated as the nation’s “Golden Whistle”, a title awarded by the CFA to the best referee of the season.
 
While Yang was charged with accepting bribes as a government official, Zhang and Lu were convicted as private individuals. Under Chinese law, a private individual can be convicted of bribery where he/she takes advantage of his/her position and solicits or accepts money or property from another individual and in return confers benefits sought by that person.
 
Yang was sentenced to 10.5 years imprisonment and ordered to pay a fine of RMB200,000 (US$32,000) for taking bribes of RMB1.25 million (US$200,000). Zhang was sentenced to 12 years in prison and ordered to pay a fine of RMB 250,000 (US$40,000) for taking bribes of RMB2.73 million (US$433,000). Lu was sentenced to 5.5 years imprisonment for taking bribes of RMB820,000 (US$128,000).
 
China Mobile Ltd
 
In the summer of 2011, two members of the senior management of China Mobile Ltd. (“China Mobile”) received death sentences for accepting bribes. One of the executives, the former general manager of China Mobile Anhui, Shi Wanzhong (“Shi”), became the target of an investigation in China after US officials reportedly provided evidence through diplomatic channels to the People’s Procuratorate that Shi had received bribes from Siemens AG (“Siemens”). The US discovered the information about Shi in the course of its extensive investigation into Siemens for FCPA violations between 2006 and 2008 that ultimately led to the largest FCPA settlement in history. Shi was sentenced to death with a two-year reprieve for taking US$5.06 million in bribes. Shi used a middleman, Tian Qu (“Tian”), to facilitate the payments. Tian himself was sentenced to 15 years imprisonment.
 
The Shi conviction is of particular interest because it was the result of collaboration between US and Chinese authorities. 
 
The PRC Supreme People’s Court’s clarification on the elements of bribery
 
On 21 December 2011, the PRC Supreme People’s Court (“SPC”) sentenced a Nanjing city official to death with two-year reprieve and another Nanjing city official to life imprisonment for corruption. The city officials allegedly took advantage of their positions to sell the use rights of a parcel of state-owned land to a third party at a discount in exchange for a “profit interest” in an unrelated company.
 
In its decision, the SPC set out a number of principles to be applied in future public corruption cases:
 
  • A civil servant is guilty of an offence if he accepts benefits from a party in the knowledge that the party is seeking a favour. The offence is committed whether or not the official actively solicits the benefits from the donor.
  • The receipt by a public official of a discounted purchase price for a house or other asset will constitute a bribe if received in return for performing a favour for the donor.
  • It is not a defence to the offence of bribery to return an item of value to the donor after an investigation has been commenced.
 
Recent developments in domestic anti-corruption legislation
 
Extension of PRC Criminal Law to cover foreign bribery On 1 May 2011, China adopted the 8th Amendment to the PRC Criminal Law which extended its anti-bribery provisions to cover foreign government officials and officials of international public organisations. In doing so, China fulfilled the requirements of the United Nations Convention Against Corruption (“UNCAC”) and became one of the few countries in Asia Pacific to criminalise the bribery of foreign public officials.
 
Article 164 of the Criminal Law previously only criminalised the giving of money or property to an employee of a company or enterprise for the purpose of seeking illegitimate benefits in China. The amendment extended this offence to foreign public officials and created the first transnational bribery offence under PRC law. The new offence is potentially broad in scope as it does not provide for statutory defences or exceptions. It is also vague in nature with some key terms left undefined, such as the meaning of “foreign official”.
 
On 14 November 2011, the Supreme People’s Procuratorate and the Ministry of Public Security provided some clarity in relation to the threshold amounts that may trigger an investigation and prosecution of an offence of foreign bribery: RMB10,000 (US$1,600) for individual bribe-payers and RMB200,000 (US$32,000) for companies that pay bribes. There is not yet, however, any publicly available information regarding any prosecutions under the new provision.
 
The lack of clarity in the new regulation provides prosecutors with a broad discretion and the impact of the provision is likely to depend on the government’s enforcement priorities over the next few years.
 
Trends in anti-corruption enforcement
 
The levels of foreign direct investment in China together with its ongoing corruption problems are likely to result in a continued increase in international enforcement actions arising out of business conducted in the country. Enforcement on the domestic front also looks set to increase with the People’s Supreme Procuratorate announcing in January 2012 that it would be intensifying its investigation of anti-bribery and corruption cases.
 
China has been shoring up its domestic anti-corruption legislation over recent years and has recently set up a number of whistle-blowing hotlines which are reportedly used on a regular basis. Its anti-corruption efforts are key to ensuring that the country is able to continue to achieve its remarkable levels of growth and are likely to remain in the spotlight as the country transitions towards a new leadership later this year.
 
 

For further information, please contact:

 

Mark Johnson, Partner, Herbert Smith

mark.johnson@herbertsmith.com  

 

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