China has historically been considered a high risk location for multi-national companies. An analysis of publicly available information determined that in the past five years alone, there have been 29 actions by U.S. enforcement agencies alleging FCPA violations involving China.
These enforcement actions have ensnared 19 companies — nearly three quarters of which are in the pharma/life sciences, industrial products and technology sectors — resulting in nearly $470 million in fines.
Most recently, 50 percent of company settlements during the first quarter of 2016 included alleged improper activity in China.
China’s prevalence in named FCPA actions is not limited to the previous five years: there has been at least one settlement involving misconduct in China per year since 2004. Looking forward, the country is mentioned in nearly 30 percent (24) of the 83 currently open FCPA investigations as disclosed in public filings.
These numbers, which were based on an analysis of publicly available information, signal continued FCPA enforcement activity addressing companies operating in China over the coming years.
When it comes to local anti-corruption enforcement, China is no longer dormant — a fact that could trip up many U.S. executives doing business there. In fact, the Chinese government, as part of a new five-year plan, has dramatically strengthened its anti-corruption laws and enforcement measures. This turn of events could arguably be even more critical, since many U.S. executives are doing business in China either directly or indirectly through intermediaries such as joint venture partners, distributors and agents.
On the legislative end, China has either strengthened or introduced new anti-corruption laws, including harsher penalties, new sentencing standards for embezzlement, and measures providing for prosecution of executives found to be responsible for market swings.
On the enforcement side, the transformation has been even more dramatic. Today, China employs a far more sophisticated model for anti-corruption enforcement, including the use of an app-based whistleblower program, a series of extradition programs focused on capturing corruption suspects overseas and recovering assets, and a well-publicized crackdown on corruption.
The app-based whistleblower program from the Central Discipline Inspection Commission was launched on June 18, 2015, and enables users to report corruption from their cell phones. As of December 2015, over 41,000 tips were reported through the app.
In 2015, approximately 5,500 Chinese officials accepted gifts or cash, thereby breaking applicable party rules. Between 2013 and 2015, there have been eight rounds of inspections of 69 state-owned entities by the Central Inspection Group of the Communist Party.
Not unexpectedly, according to PwC’s 2016 Global Economic Crime Survey’s China Supplement, there’s unprecedented demand for experienced compliance personnel in China. Compliance-themed conferences and events are usually packed, and organizations are trying to invest in larger and more sophisticated compliance departments, despite a chronic shortage of qualified talent.
As these compliance risks are growing, so are the opportunities (and appetite) for foreign companies to enter or expand their existing operations in this market. For the second year running, PwC’s CEO Survey respondents pointed to China as one of their top two overall growth prospects in the next 12 months.
And recently China has been encouraging such growth, with measures including a new incentive plan, called Made in China 2025, focused on improving efficiency, increasing international competitiveness and driving more foreign investment. Under the plan, China is actively encouraging inbound transactions in the form of cross-border partnerships with newly reorganized state-owned entities — some in industries which were never before open to foreign investment.
While such openness is encouraging, incoming companies should intensify their focus and proceed with caution. Since contact with government parties triggers potential corruption risk, they should weigh carefully the threats, risks and benefits of these kinds of cross-border transactions and interactions.
The two most important questions that all executives in China, or those contemplating China, should ask are:
- Are we up to speed with the latest local anti-corruption developments in this market?
- Are we ready for a significantly heightened degree of scrutiny?
The growing opportunity to invest in China, coupled with increased and strengthened enforcement, translates into significantly more risk for market entrants. Whether you’ve been doing business in China for decades, or are just contemplating entering this dynamic market, here are some critical points to keep in mind:
- It is no longer appropriate (or safe) to view compliance from a U.S.-law-only perspective.
- China’s anti-corruption enforcement regimen — and the laws that underpin it — are becoming increasingly sophisticated and robust.
- Settlements are on the rise; and while there is still no treaty between the US and China, we’ve seen a clear increase in international cooperation among global enforcement agencies — a trend that’s been communicated by U.S. regulators.
- With the combined growth of activity and enforcement in this market, it is essential that your compliance programs keep pace, and remain at the highest standards.
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In this post, PwC refers to the U.S. member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
This post is for general information purposes only and should not be used as a substitute for consultation with professional advisors.
Manny Alas is a partner with PwC’s U.S. Forensic Services. He serves as the firm’s U.S. FCPA Practice Leader and Chair of its Global Forensic Anti-bribery and Anti-corruption Working Group.
Janine Kovats is a Director in PwC’s U.S. Forensic Services who advises clients on FCPA issues.
The authors thank Elena Allen, Irina Fateycheva, and Madeline Schatzman for their contributions to this post.