The US Foreign Corrupt Practices Act: what companies in China need to know

The US Foreign Corrupt Practices Act is a powerful statute which governs many US-China transactions and communications. Its implications for Chinese, US and other companies are far-reaching, and the penalties for its violation severe. By Li Li and Steven Michaels, Debevoise & Plimpton

Sixty years after founding of the People’s Republic of China in 1949 and 30 years after normalization of diplomatic relations between the US and the PRC in 1979, the economies of the two nations – the first and third largest in the world – are intertwined more than ever. The US and the PRC are bound by hundreds of billions of dollars in annual trade and substantial cross-border investments, while at the same time there is increasing competition between Chinese and US companies for business on every continent.

A key component of the legal architecture underlying these commercial activities is the US Foreign Corrupt Practices Act (FCPA). The FCPA is a 1977 statute with broad international application. It governs in numerous and often-unanticipated ways interactions by companies and individuals alike with non-US officials, employees of State-owned enterprises, non-US political parties, party employees and candidates, as well as employees of nearly 100 international organizations, including the United Nations and its entities, the International Red Cross, the World Bank, and the Asian, African, and Inter-American Development Banks. In fact, due to the role of the State in the Chinese economy, virtually every China-centred transaction involving US-listed companies or US-China communications can potentially trigger this powerful statute.

Anyone doubting the impact of the FCPA on companies based or operating in China need look no further than the December 2008 settlement by Siemens of corruption allegations around the world, in which the company paid US$800 million in fines, civil penalties and disgorgement to the US government to resolve criminal and civil charges. Those charges included civil allegations of improper payments to PRC officials in connection with medical solutions and transportation services businesses. All told, there have been more than 20 civil and criminal cases brought by US authorities against companies and individuals operating in China, including most recently cases against Avery Dennison and Control Components, each of which agreed to settlements within the past nine months. In 2005, DPC (Tianjin), a Chinese subsidiary of the US company Diagnostic Products Corporation, pleaded guilty to a primary FCPA anti-bribery violation in the US District Court for the Central District of California in Los Angeles, the first conviction of a Chinese company in the history of the FCPA. The same day, DPC (Tianjin)’s parent company settled a case filed by the US Securities and Exchange Commission (SEC), paying a US$4 million civil fine.