In a three-part series examining U.S. enforcement actions against Chinese companies, Kirkland attorneys provide guidance for Chinese companies navigating this new environment. Part I offers companies with U.S. operations three key considerations to help mitigate against the increased risk of Foreign Corrupt Practices Act actions.
As trade tensions between China and the U.S. continue to increase, the tit-for-tat tariff battle has dominated headlines. But a contemporaneous threat to Chinese companies may be the U.S.’s demonstrated willingness to target Chinese companies and individuals for prosecution.
The Department of Justice’s “China Initiative” was perhaps the first signal of the Trump administration’s willingness to use U.S. law enforcement as a tool in geopolitical negotiations with China. The criminal indictments against Huawei and its CFO Meng Wanzhou are current high-profile examples of a Chinese company at the center of legal debates between the United States and China.
The question remains: Should other Chinese companies be worried that aggressive and targeted enforcement by U.S. authorities will spread?
Targeted FCPA Enforcement
While the focus of the China Initiative is a “strategic priority to counter Chinese national security threats”, one goal of the Initiative was to “[i]dentify Foreign Corrupt Practices Act (FCPA) cases involving Chinese companies that compete with American businesses.”
The targeted enforcement of the FCPA against companies from a particular country is a paradigm shift for the DOJ, which previously has rejected any suggestion that it targets companies from a specific country.
Should Chinese companies be bracing for more anti-corruption investigations?
To date, the DOJ and the Securities and Exchange Commission have brought approximately 83 FCPA cases involving conduct in China—more than any other country by far. However, all of these cases have involved multinational corporations operating in China.
Chinese Companies Spared
U.S. authorities have never brought an FCPA action against a Chinese company. Although this might bring some comfort to Chinese companies, there is still reason to worry.
The lack of FCPA enforcement actions against Chinese companies may be tied to a problem of establishing jurisdiction. More than 200 Chinese-headquartered companies, however, are listed on U.S. exchanges, which creates a jurisdictional nexus.
For example, news outlets reported in August 2017 that the U.S. was investigating China Petroleum & Chemical Corp. (Sinopec), a Chinese state-owned enterprise listed on the New York Stock Exchange, for potential FCPA violations related to a project in Nigeria.
In addition, the fact that more FCPA enforcement actions have involved conduct in China means that U.S. authorities now are familiar and comfortable with bringing cases based there. American prosecutors know what bribery looks like on the ground, they understand cultural customs, and they monitor local enforcement actions brought by the Chinese Public Security Bureau and the State Administration for Market Regulation.
In addition, the DOJ and SEC have prosecuted individuals affiliated with Chinese companies. Even before the China Initiative was announced, the DOJ has charged a number of Chinese nationals with violating the FCPA.
For instance, Patrick Ho, a member of the a national-level Chinese political legislative advisory body, was tried in New York and sentenced to three years’ imprisonment for bribery, money laundering, and conspiracy. Ho’s conduct involved the payment of bribes to African government officials on behalf of CEFC China, a Shanghai-based conglomerate that operates in multiple sectors, including in oil & gas and banking.
Since 2000, more than 15 Chinese nationals have been targeted by U.S. regulators for allegedly violating the FCPA.
To mitigate against the increased risk of enforcement, Chinese companies with U.S. operations should consider the following:
- Evaluate the effectiveness of compliance policies and internal controls. Paper policies are insufficient. The DOJ’s recent “Evaluation of Corporate Compliance Programs” guidance update highlights three questions used to evaluate a company’s compliance program: 1) whether the program is well-designed; 2) whether the program is implemented effectively; and 3) whether the compliance program works in practice. Chinese companies must ensure that their compliance programs are fit for purpose based on their industry, their interactions with government entities, and their risk profile.
- U.S.-listed Chinese companies and those with operations in the U.S. should assess their overall international risk exposure. Past enforcement actions and investigations demonstrate that U.S. authorities track enforcement actions by Chinese authorities and allegations raised in short-seller and financial analyst reports. Companies facing these issues must have a response plan in place if and when U.S. authorities pose further questions.
- Chinese companies that receive subpoenas from U.S. regulators should carefully navigate international laws governing their responses. For example, the recent PRC International Criminal Judicial Assistance Law prohibits the production of documents in response to criminal investigations by foreign authorities. It would be wise to consult further with counsel experienced in handling cross-border investigations.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jodi Wu, a partner in Kirkland’s Shanghai office, has broad experience in the areas of cross-border litigation, government enforcement, and internal investigations. She advises public and private multinational companies in China on cross-border litigation, anti-corruption, trade sanctions, antitrust, data privacy and cyber securities matters.
Cori A. Lable is a partner in the government and internal investigations practice in Kirkland’s Hong Kong office. She advises multinational clients throughout Asia on international risks related to cross-border investments and operations, including corruption, money laundering, economic sanctions, and financial fraud, and defends clients facing U.S. criminal and regulatory investigations on these issues.
Gerald Lam is an associate in the government and internal investigations practice in Kirkland’s Hong Kong office. He advises multinational clients on international risk related to cross-border investments and operations, and conducts internal investigations on behalf of clients in the areas of anti-corruption, economic sanctions, anti-money laundering and financial fraud.
Parts II and III of this series will address economic sanctions laws and trade secrets regulations.