U.S., China enforcement crossfire creates new risks

At the beginning of this year, China’s president Xi Jinping promised to fight both “tigers” and “flies” — high-ranking and low-ranking corrupt officials — in his crackdown on corruption. Since then, the anti-graft campaign has led to the conviction of Bo Xilai and to the front-page investigations of foreign companies in the pharmaceutical and oil and gas sectors, among others.
 
Meanwhile, the DOJ still has lots of attention on U.S. entities operating in China. JP Morgan is now under scrutiny for hiring the children of high-level Chinese officials (so-called “princelings” or “elephants”) in a practice known as “Elephant Hunting.”
 
The pharmaceutical and medical device industries have already been under fire from both China and U.S. authorities. After settlements by several companies — Smith & Nephew, Biomet, Orthofix, Pfizer/Wyeth, and Eli Lilly — Chinese enforcement agencies started their own investigations of GlaxoSmithKline, Danone, and AstraZeneca, among others. As the FCPA Blog has said, the pharma sweep looks like the first case when China echoed an ongoing FCPA investigation.
 
Despite the risk of being caught in the crossfire, Western companies operating in China are still unprepared. An Ernst & Young survey of executives in the Asia-Pacific region earlier this year found that only forty percent of the respondents had anti-bribery policies in place at their companies, compared with a global average of eight-one percent.
 
Those numbers indicate that more foreign companies doing business in China are likely to find themselves on the wrong side of enforcement efforts by China, the United States, or both.

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Lisa Prager is a partner in both the New York and Washington, D.C. offices of Schulte Roth & Zabel. She’s a former Assistant U.S. Attorney for the District of Columbia and Acting Assistant Secretary and Deputy Assistant Secretary for Export Enforcement at the U.S. Department of Commerce’s Bureau of Industry and Security. She can be contacted here.

Lara Covington is a special counsel in the Washington, D.C. office of Schulte Roth & Zabel. She helps companies create compliance programs and has handled FCPA investigations with issues in China, India, Poland, Nigeria, Russia, the United Arab Emirates, and Vietnam. She can be contacted here.