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Nan Wang: Two thousand foreign companies have ADRs. But do they have compliance?

Growing up in the People’s Republic of China, I often heard the proverb, “water that is too clean has no fish.” Sadly, the adage is a rationalization for corruption. It claims that ethical business doesn’t yield profits.

But Chinese companies with connections to the United States must accept that U.S. enforcement agencies expect clean conduct — unqualified by ancient Chinese aphorisms — or suffer the consequences.

Perhaps the most striking example is China’s telecommunications giant, ZTE Corporation. On June 7, the Commerce Department announced a novel settlement with ZTE, resolving the company’s alleged U.S. export and embargo violations. In addition to the hefty fines exceeding $1 billion, ZTE is required “to retain a team of special compliance coordinators selected by and answerable” to the U.S. government for a period of 10 years.

According to Commerce Secretary Wilbur Ross, the coordinators will include American compliance professionals, and will be responsible monitoring “on a real-time basis ZTE’s compliance with U.S. export control laws.”

While the ZTE compliance coordinators will focus on preventing export violations, it is not hard to imagine that if they see conduct that is problematic with the FCPA, they’ll take steps to address it, and report it to the DOJ and SEC. ZTE’s American Depository Receipts (ADRs) are traded in the over-the-counter market in the United States, making the company an “issuer” under the FCPA. As FCPA Blog readers know, this means ZTE is fully subject to the FCPA’s anti-bribery, books and records, and internal controls provisions.   

The DOJ and SEC haven’t been hesitant to pursue FCPA enforcement actions against foreign issuers, including those with little or no other connection with the United States. Take last year’s enforcement action against Sociedad Química y Minera de Chile, S.A. (SQM), a Chilean chemicals and mining company with ADRs traded on the New York Stock Exchange.

According to the DOJ and SEC, SQM personnel funneled improper payments to Chilean government officials — in other words, to officials in its home jurisdiction. The agencies found that SQM had inadequate internal controls and had inaccurately recorded improper payments on its books and records, and as a result, the company was fined $30 million and required to engage a monitor.

Practitioners won’t be surprised by SQM’s legal problems. Its ADRs render it an issuer, and with that status comes a requirement to comply with the FCPA. But for the approximately 2,000 foreign companies with ADRs traded in U.S. capital markets, it may come as alarming news that improper conduct that itself has no connection with the United States can land them in hot water under the FCPA. This is particularly the case for the 274 Chinese companies that have ADRs traded in the United States.

In my experience, a significant number of Chinese multinational companies are years behind their western counterparts when it comes to compliance. They have been eager to gain access to U.S. investors, but have yet to develop the internal compliance infrastructure required of issuers. I routinely find that many of my in-house peers at Chinese companies have never heard of the FCPA.

Chinese issuers should be particularly concerned given the volatile relationship between the United States and my native China. In this climate, Chinese companies should not be surprised to find themselves in the FCPA’s crosshairs. 

Over the last two years, foreign issuers have been disproportionately subject to FCPA enforcement actions.  Since the start of 2017, the number of foreign issuers subject to DOJ enforcement actions was double the number actions against U.S. issuers. This is despite the fact that only 25 percent of issuers are based in foreign jurisdictions. Moreover, only two of the ten largest FCPA settlements involve U.S.-based companies.

This is not to say that U.S. enforcement agencies are targeting foreign companies that violate the FCPA. But as my colleague Bill Steinman pointed out a few weeks ago, the enforcement of the FCPA against foreign issuers is entirely consistent with this administration’s American First approach to foreign policy.

I believe the ZTE settlement is the beginning of an era, when Chinese and other foreign companies will understand that misconduct abroad can create serious legal exposure in the United States. It’s now time for foreign issuers to forget the idea that clean water contains no fish, and instead remember another Chinese proverb — “fight no war unprepared.” Or, as stated in English — an ounce of prevention is worth a pound of cure. 


Nan Wang, pictured above, is an associate at Steinman & Rodgers, a boutique law firm in Washington DC focused exclusively on international anti-corruption law. She earned her LL.B. from China University of Political Science and Law, and her J.D. at George Washington University Law School. She’s fluent in both Mandarin and English. Among other things, she specializes in assisting Chinese issuers develop and implement anti-corruption compliance programs. 

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