Managing a corruption investigation in China

What are you going to do now? Employees in your production plant in China, aided by a couple of management-level employees in your home office in the US, may have bribed Chinese government officials, avoided paying Chinese taxes, and possibly engaged in a host of other regulatory and criminal violations of Chinese laws. This

seems to have occurred despite your company’s robust compliance programme, implemented as advocated by the many legal observers who, for good reason, counsel that such programmes are essential in managing risk against the increasingly enforced Foreign Corrupt Practices Act (FCPA).

The FCPA is a potent anti-corruption statute with a broad jurisdictional reach extending, under certain circumstances, even to companies largely outside the United States. Sometimes, even if your company has done all that it could do to avoid FCPA issues, misconduct still occurs. We offer here some practical first steps to take when navigating the treacherous waters your company may face.

Prepare to act quickly

You should acquaint yourself with lawyers who have FCPA expertise before you ever need them. Once you discover potential misconduct, you may not have much time to swing into action: you could have reporting obligations to the US Securities and Exchange Commission (SEC), or investors, or others, and there may be other legal and business reasons to expedite your internal investigation. You need counsel with a proven track record of handling complex criminal matters, particularly with FCPA enforcement actions involving China, who also have experience with the SEC (which, along with the US Department of Justice, has enforcement powers regarding the FCPA). And this should be someone you personally like – you may be working with him or her, under stressful circumstances, for some time.

Location, location, location

Political and cultural differences within and among China’s provinces, and the special administrative regions of Hong Kong and Macau, can be significant. You will need Chinese counsel – but bear in mind that there are important distinctions between members of the Chinese Bar and registered foreign lawyers in international law firms, which could affect your choice of lawyer in mainland China. Foreign lawyers (including registered foreign lawyers like those practising in American law firms in China) cannot appear in Chinese courts.

In Hong Kong and Macau, the legal systems are to remain distinct from the legal system in mainland China for 50 years following their return to Chinese sovereignty, in 1997 and 1999 respectively. This has, effectively, left an English legal system in Hong Kong and a Portuguese legal system in Macau. Foreign lawyers may not appear in the Hong Kong courts or the Macau courts. The fact that the languages of the law in Macau are Portuguese and Chinese may add further complications for foreign litigants.

Having the right Chinese lawyer is critically important, not only to assist with the internal investigation, but to advise regarding Chinese laws that proscribe bribery. Anti-corruption laws are serious business in China (as in the US). In March, Stern Hu, an Australian executive with Rio Tinto, received a 10-year prison sentence for, among other things, receiving bribes. Three Chinese employees of Rio Tinto received stiff sentences of between seven and 14 years.

An internal investigation will also require accounting expertise. If electronic data must be harvested, you may need to retain electronic data experts sensitive to confidentiality and potential labour issues unique to China. And in such a large and diverse country, don’t neglect logistics, such as local copying capabilities and travel arrangements.

Special consideration for SOEs

Under the FCPA, it is illegal corruptly to give anything of value to a “foreign official” to influence a government action. Although the concept is relatively straightforward, state-owned enterprises (SOEs) can complicate matters. SOEs are companies in which the Chinese government has an ownership interest. Defining an SOE can be problematic because the level of Chinese government involvement in a business can vary widely and is often unclear. Even joint ventures between Chinese and non-Chinese companies can be considered to be SOEs, and hence by definition have “foreign officials” as employees and managers.

American companies thus need to be wary of payments to SOEs: such payments could be construed as illegal bribes to “foreign officials.”

In one case, US authorities took the position that a joint venture involving a foreign company that was partially owned by the foreign state but majority-owned by private multinational companies was an SOE. Based on this theory, US authorities maintained that employees of the SOE were “foreign officials” within the meaning of the FCPA. Under this interpretation (which has not yet been tested in court) an improper payment received by an employee of the SOE was considered a violation of the FCPA because it involved an improper payment to a “foreign official.”

Other practical issues can arise if your company is in a joint venture with a Chinese company that is considered to be an SOE. As your lawyers investigate possible misconduct, it may be critical to have the assistance of your Chinese joint venture partner, particularly if employees of that partner may have been involved. Yet both your company and its lawyers must be careful what information is shared with a Chinese partner because the Chinese managers and employees of an SOE may have obligations to report criminal conduct to Chinese law enforcement authorities.

Attorney-client privilege?

If Chinese lawyers (as opposed to registered foreign lawyers) are involved in an investigation, they may have their own obligations to report certain crimes to authorities; don’t assume that the sacrosanct confidentiality afforded attorneys and their clients in the US applies to Chinese attorneys in China.

Before you or your lawyers undertake an investigation of possible criminal and civil matters in China, you should consider carefully to whom the results of the investigation will be communicated.The steps outlined above are just the beginning. Your best move is to be aware of the issues and to have an experienced team ready to act if corruption problems surface.

Anthony Pacheco is a partner and Keith Butler is a senior associate at Proskauer in Los Angeles.

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Los Angeles, CA 90067-3206, USA

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电子信箱 E-mail: apacheco@proskauer.com