Here’s a head-scratcher. China is the country mentioned most often in FCPA enforcement actions — 63 times by my count. And yet, only one PRC-headquartered parent company has been the subject of an FCPA enforcement action.
A lot of China subsidiaries of non-PRC companies are named in FCPA enforcement actions. But not PRC-based parent companies.
At the end of 2019, more than 150 China-based companies had securities listed on U.S. stock exchanges, according to the SEC. Surprisingly, just one of those issuers has been a defendant in an FCPA case. Based on (estimated) probabilities, it looks like something must be inhibiting FCPA enforcement against PRC-headquartered companies.
If so much non-compliant behavior happens in China, why aren’t Chinese parent companies appearing as FCPA defendants?
Here are a few possible reasons for the anomaly.
There’s a foreign-judgment enforcement problem. For years, China-based companies registering Wall Street IPOs have warned potential investors that it’s uncertain whether any court in the PRC would recognize or enforce judgments of U.S. courts.
Why not? Mainly because China doesn’t have any treaties or other formal arrangements with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. Beyond that, China-based issuers have been clear that PRC courts will not enforce a foreign judgment against them (the issuer and its directors and officers) if the PRC court believes the foreign judgment violates the basic principles of PRC laws or national sovereignty, security, or public interest. So, there have always been questions whether a PRC court would enforce a judgment rendered by a court in the United States.
Has the absence of reciprocal enforcement been an obstacle to FCPA cases against China-based companies, particularly those whose personnel and assets are all or mostly in China?
There’s an audit-integrity problem. The SEC published a white paper in July titled “U.S. Investors’ Exposure to Domestic Chinese Issuers.” In June, the White House released a “Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies.”
Most of the scrutiny concerns the ability of public accounting firms to produce accurate audit reports about companies headquartered in China or that have significant operations there. Since late 2018, the PRC government has prohibited the U.S. Public Company Accounting Oversight Board, or PCAOB, from inspecting auditors in China, without special approval from PRC authorities. So, the integrity of public-company audits is clouded for China-based companies or any issuer’s China operations.
Does that audit-integrity problem impede the DOJ and SEC when they’re trying to make an FCPA case against a China-based company?
There’s an evidence-discovery problem. China enacted its first “blocking” statute in 2018. The International Criminal Judicial Assistance Law prohibited anyone in China from disclosing evidence and information located there to criminal enforcement authorities outside China in connection with a criminal investigation or prosecution, according to FCPA Blog contributing editor Eric Carlson.
In March this year, China extended the blocking effect to administrative and civil matters. Newly enacted Article 177 of the securities law provides that no overseas securities regulator is allowed to directly conduct investigative or evidence-collection activities within the territory of the PRC. It’s also against the law now for an entity or individual in China to hand over documents and information about business activities to overseas regulators, except with official permission from Chinese authorities. The prohibition reaches evidence sought in securities-related investigations or relevant to other non-PRC civil litigation or enforcement.
The blocking statutes prompted this warning from a China-based issuer in its recent SEC filing for an IPO: “The [SEC and DOJ] and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors or executive officers in the PRC. The SEC has stated that there are significant legal and other obstacles to obtaining information needed for investigations or litigation in China.”
Can FCPA investigations and prosecutions move forward against PRC-based companies if the DOJ and SEC are blocked from legally collecting evidence from sources inside China?
Those are my (over-simplified) thoughts. Your comments are welcome.