The Higher Costs of Bribery in ChinaBy
In late June, more than 150 executives from Siemens (SI), the German industrial giant, met in Beijing to discuss compliance with Chinese and U.S. anticorruption laws. That a multinational would spend millions to strategize about avoiding bribery charges in a country where bribery is rampant shows how much business is changing in China.
U.S. prosecutors, empowered by the Foreign Corrupt Practices Act of 1977 (FCPA) to investigate allegations of bribery anywhere in the world, have been stepping up their activities in China, where a tradition of gift-giving in business often degenerates into serious graft. The FCPA bans U.S. companies from bribing foreign officials. It also applies to foreign companies like Siemens that list their securities on U.S. exchanges. Companies that violate the FCPA face millions in fines, and executives can go to prison. U.S. authorities have upped the number of bribery cases they pursued to a resolution around the world, from 11 in 2005 to 34 last year, according to Trace International, a nonprofit anti-bribery group based in Annapolis, Md. In a report released June 17, Trace pointed out that China, with 25 cases completed since enactment of the FCPA, fell behind only Iraq and Nigeria for the most international corruption prosecutions. Citing a World Bank estimate that more than $1 trillion in bribes are paid each year, U.S. Attorney General Eric H. Holder Jr. on May 31 called "combating corruption one of the highest priorities of the Department of Justice."
Chinese prosecutors, meanwhile, are getting more aggressive under their own antibribery laws, says Patrick M. Norton, a partner with Steptoe & Johnson who focuses on international mediation. Earlier this year a Chinese court handed down prison sentences for four employees of London-based mining company Rio Tinto (RTP) for taking bribes from Chinese buyers of iron ore. In other cases, Norton says, there's a "blowback" problem when Chinese authorities take note of a U.S. investigation: "You get an FCPA prosecution involving payments in China. The company has paid huge fees to settle. They think it is over, and now they are being pursued in China" on essentially the same charges.
U.S. investigators have notched a number of recent victories. In 2008, Siemens pled guilty to FCPA violations in China and numerous other countries. It agreed to pay a $450 million fine. In 2009, U.S. label and reflective material maker Avery Dennison (AVY) agreed to pay a civil penalty of $200,000 after the Securities & Exchange Commission filed a civil action alleging violation of the FCPA. Avery's Chinese subsidiary had bankrolled sightseeing trips for local officials.
In another case last year, UTStarcom (UTSI), a telecom equipment manufacturer, resolved U.S. investigations by agreeing to pay $3 million in fines and penalties. Its Chinese unit had spent almost $7 million on 225 trips for Chinese government employees. This spring cosmetics marketer Avon Products (AVP) suspended four executives as part of an internal investigation into possible bribery in its China division. Avon had already alerted U.S. authorities to its in-house probe in 2008.
And in late June, the Chinese press reported that Johnson & Johnson was under investigation by local prosecutors for allegedly bribing a Chinese drug regulator. J&J says it has not heard anything from the Chinese government. A person familiar with the matter says the U.S. is investigating J&J's medical device unit. Neither the SEC nor the Justice Dept. would comment.
"One of the problems companies run into is reconciling Chinese customs of entertainment and gift-giving with the culture of compliance," says Mark F. Mendelsohn, who from 2005 until earlier this year oversaw Justice Dept. FCPA prosecutions and now works at the law firm Paul Weiss in Washington. The customs can be as harmless as giving lunar cakes during the autumn moon festival. Some companies, though, go a lot further. Lucent Technologies provided 315 trips for Chinese officials to the Grand Canyon, Universal Studios, and Disneyland (DIS). The company characterized the travel as factory inspections and training. In 2007 it was charged under the FCPA. Ultimately, Lucent entered into a settlement with Justice and agreed to pay a $1 million fine.
U.S. companies must also heed the Sarbanes-Oxley Act of 2002, which made it harder to hide bribery by keeping separate books. In 2005 the medical-test maker Diagnostic Products was charged with paying $4.8 million in bribes to Chinese hospitals and administrators and violating record-keeping rules. The company agreed to pay $2 million as part of a plea agreement.
Foreign companies sometimes can get tripped up by using local middlemen to help secure deals. Hiring representatives can be an entirely legitimate way to cut through red tape. It can also lead to questionable practices. "Often the third party is created solely for paying the bribe; there is no other business reason," said Nathaniel B. Edmonds, assistant chief of the Justice Dept.'s fraud section, during a talk at an anticorruption conference in Shanghai on June 23. What's more, under FCPA a U.S. company is as liable for the actions of a middleman as it is for its own employees.
The temptation to offer a bribe in China is strong because the practice is so common. The risks of getting caught, however, are increasing rapidly.
The bottom line: The U.S. is policing the activities of big multinationals in China more aggressively, with China's own prosecutors sometimes following suit.