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Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Bill Steinman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Russell A. Stamets
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Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Companies create special FCPA disclosures for China risks

It has been a common practice for SEC-registered companies with international operations to include FCPA enforcement as a “risk factor” that investors should consider before buying the company’s securities.

Some companies with operations in China have also included warnings about the risks of doing business there. The disclosures mention the prevalence of corruption and, more lately, stepped up enforcement by local agencies.

Now the trend among some issuers is to combine their risk warnings about the FCPA and China.

The idea is that there’s more risk of an FCPA-related investigation or enforcement action because the company does business in China.

Companies based in China and are SEC-registered are also adopting this disclosure practice.

In an SEC registration statement filed this month, Shineco, Inc., a Beijing-based manufacturer of traditional Chinese medicines, said,

We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control.
Although we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct for which we might be held responsible.

San Francisco-based pharma FibroGen, Inc. wrote a disclosure to deal with special industry risks, the FCPA, and China.

It said in a Form 10-Q filed with the SEC this month:

[A]nti-bribery laws present particular challenges in the pharmaceutical industry because in many countries including China, hospitals are state-owned or operated by the government, and doctors and other hospital employees are considered foreign government officials. Furthermore, in certain countries (China in particular), hospitals and clinics are permitted to sell pharmaceuticals to their patients and are primary or significant distributors of pharmaceuticals. Certain payments to hospitals in connection with clinical studies, procurement of pharmaceuticals an d other work have been deemed to be improper payments to government officials that have led to vigorous anti-bribery law enforcement actions and heavy fines in multiple jurisdictions, particularly in the U.S. and China. . . .

In the pharmaceutical industry, corrupt practices include, among others, acceptance of kickbacks, bribes or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical manufacturers, distributors or their third party agents in connection with the prescription of certain pharmaceuticals. . . .  The Chinese government has also sponsored anti-corruption campaigns from time to time, which could have a chilling effect on any future marketing efforts by us to new hospital customers. There have been recent occurrences in which certain hospitals have denied access to sales representatives from pharmaceutical companies because the hospitals wanted to avoid the perception of corruption. If this attitude becomes widespread among our potential customers, our ability to promote our products to hospitals may be adversely affected. . . .

As we expand our operations in China and other jurisdictions internationally, we will need to increase the scope of our compliance programs to address the risks relating to the potential for violations of the FCPA and other anti-bribery and anti-corruption laws. Our compliance programs will need to include policies addressing not only the FCPA, but also the provisions of a variety of anti-bribery and anti-corruption laws in multiple foreign jurisdictions, including China, provisions relating to books and records that apply to us as a public company, and include effective training for our personnel throughout our organization.

China isn’t the only country singled out for corruption risks in SEC disclosures. There are warnings that mention Brazil, Russia, and some African countries, among others.

But because of the volume of investment in China, and the number of SEC registrants based there, the China-related warnings appear more often.


Richard L. Cassin is the publisher and editor of the FCPA Blog.

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