U.S. Businesses, China and the Foreign Corrupt Practices Act

The 1988 Trade Act by the United States Congress directed the U.S. Attorney General to provide guidance to potential exporters and small business regarding the Foreign Corrupt Practices Act of 1977, an act all U.S. businesses operating in China need to be familiar with.

The FCPA prohibits the "corrupt" payment of money or bribes to foreign officials for the purpose of keeping or maintaining business. The FCPA also links in with several other U.S. acts, providing for federal prosecution of violations of state commercial bribery statutes. The FCPA requires U.S. listed companies to meet their accounting provisions, which are designed to operate in parallel with the anti-bribery provisions of the FCPA and require corporations to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.

The basic requirements of the FCPA are fairly straightforward. Rather, it is the cultural traditions and the common business practices that lend a layer of complexity to enforcement of the FCPA with respect to business done in the People's Republic of China. While some business practices may be considered entirely acceptable, or even expected, in the course of doing business in China, these practices can often be a violation of the FCPA and are subject to steep fines and jail time in the United States. Companies subject to the FCPA may find themselves faced with making the decision between losing business and violating the FCPA. Violators face the prospect of criminal sanctions, civil sanctions, and injunctions. Criminal sanctions against corporations and other entities can exceed fines of one million dollars. Sanctions against individuals may reach five years in prison and fines of one hundred thousand dollar.

American companies hoping to retain business in China, as well as American companies with the desire to enter the market, face an imperfect and dubious business environment with respect to the FCPA. However, with meticulous planning, careful oversight, and the proper tools violations of the FCPA can be avoided. The mounting prominence of China's position in the world markets is undeniable. Certainly the benefits of investment in China far outweigh the risks presented by the FCPA, so long as the proper precautions are taken. With an annual growth in the GDP of 9 percent for the last 26 years and an increasingly attractive environment for foreign direct investment, foreign companies cannot afford to ignore the opportunities for investment. However, companies subject to the FCPA must be aware of several particular risks that are posed by doing business in China.

A potential violation of the FCPA would include the following elements:

• An act by an individual, corporation, or other business "covered" by the FCPA
• An offer to give something of "value"
• To a "foreign official"
• With "corrupt" intent
• To "obtain or retain business"

There are two categories of "persons" under the FCPA: issuers and domestic concerns. An issuer is essentially a listed company that has filing requirements with the Securities Exchange Commission - the enforcing agent with respect to FCPA for issuers. A domestic concern is an individual or any form of business organization not registered with the SEC. The U.S. Department of Justice has enforcement responsibility with respect to domestic concerns. As defined by the Justice Department, the FCPA potentially applies to "any individual, firm, officer, director, employee or agent of a firm, and any stockholder acting on behalf of a firm." It is vital that individuals or companies considering doing business or currently doing business in China understand that they are likely subject to the standards of the FCPA.

With respect to an offer to give something of value, there is no materiality to this act. It is illegal to offer anything of value as a bribe, including cash or non-cash items. Any promise, offer, or authorization of payment for the purposes of persuading a government official to aid in obtaining or retaining business is prohibited. The actual payment does not need to be successful; rather it is the mere intent to bribe that violates the FCPA. In addition, non-monetary gifts, entertainment expenses, and travel expenses are also prohibited.

There are multiple important and convoluted exceptions to the prohibition of payments to foreign officials. However, these exceptions must be handled very carefully for a multitude of important reasons.

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Dezan Shira & Associates is a fully licensed accounting practice in China and offers business advisory, tax accounting, due diligence, payroll and audit services for multinational clients in China, Hong Kong, Vietnam and India. For inquiries or more information, please contact info@dezshira.com or visit www.dezshira.com.