FCPA Compliance in China

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SPECIAL TO THE WEB

By Mark Jenkins, CFE; Sunny Chu, CFE, CPA; and Christopher Meadors, J.D., CPA

As you sip your frothy Cappuccino while basking in the glow of your most recent quarterly report, which shows a dramatic increase in sales in your China division, your assistant busts into your office with a letter from …. the Department of Justice! Hmmm. What could they want?? 

While foreign direct investment (FDI) in China has lost some momentum — it decreased from $116 billion to $111.7 billion from 2011 to 2012 — China still remains one of the most preferred locations for corporate investment. Of course, great opportunities can often precede large frauds. Some multinational companies, such as the British pharmaceutical giant GlaxoSmithKline (GSK), are finding themselves in the headlines faced with allegations of violations of the U.S. Foreign Corrupt Practices Act (FCPA) and Chinese anti-bribery laws.  

When multinationals decide to enter China through FDI, several underlying forces could be a problem: 

  • Corruption that has long been the norm in China.
  • The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) is now vigorously enforcing the FCPA.
  • The existence of state-owned entities (SOE) that appear to be private entities.

CORRUPTION IN CHINA 

Although China is attractive for FDI, multi-nationals must know with whom they do business and be aware of the inherent risks of corruption. Transparency International’s 2013 Corruption Perceptions Index (CPI) ranks China a relatively poor 40th. (According to Transparency International, zero means highly corrupt, and 100 means limited corruption. To provide points of reference, Afghanistan and Somalia are 8 on the CPI, and Denmark and Finland are 90. Although China isn’t the highest in corruption, it remains a high-risk country.) 

What corruption risk could a multinational expect when doing business in China? In the GSK case, Chinese authorities are investigating the company for colluding with a travel agency to funnel money to government doctors using fraudulent invoices. (See “ GlaxoSmithKline Accused of Corruption by China,” by David Barboza, The New York Times, July 11, 2013.) In 2012, Eli Lilly had similar issues when its sales force employees were submitting expense reimbursements for cash, bathhouse visits and meals they were giving to Chinese government doctors in return for the doctors purchases of Eli Lilly products. 

The pharmaceutical industry is not alone in struggling with corruption in China. In 2012, Morgan Stanley’s real estate and fund advisory managing director, Garth Peterson, colluded with a former chairman of a Chinese state-owned enterprise, Yongye Enterprise Group. Peterson paid the Chinese official and himself “finder’s fees” of $1.8 million that Morgan Stanley owed to third parties. In exchange for the fees and personal interest in Morgan Stanley’s investments, the Chinese official brought business to Morgan Stanley. (See the SEC release, “ SEC Charges Former Morgan Stanley Executive with FCPA Violations and Investment Adviser Fraud.”) 

Read the full article on Fraud-Magazine.com.