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China Potpourri

A collection of recent China-related developments and issues.

First, a recent U.S. Chamber of Commerce report titled “China’s Approval Process for Inbound Foreign Direct Investment” which details a number of trade barriers and distortions (which can serve as breeding grounds for harassment bribery) when doing business in China.

Second, U.S. developments which demonstrate that trade barriers and distortions are a two-way street.  A recent House Intelligence Committee report recommending that the U.S. block acquisitions or mergers involving two Chinese telecom companies and President Obama’s recent Executive Order directing the divestiture by a U.S. company (owned by Chinese nationals) of its investment in Oregon wind farms and a subsequent lawsuit brought by the company.

China’s Approval Process for Inbound Foreign Direct Investment

Why do Foreign Corrupt Practices Act violations occur?

To be sure, certain violations have occurred because a company has a corrupt culture and has used bribery and corruption as a short-sighted business strategy.  However, such occurrences – as evidenced by actual enforcement actions alleging such egregious facts – are rare.  Rather, as I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) many FCPA violations occur because companies are subject to various trade barriers and conditions in foreign markets.

In short, trade barriers (ranging from customs procedures, licensing and certification requirements, foreign government procurement policies, etc.) create the conditions in which harassment bribes flourish as companies are funneled into an arbitrary world of low-paying civil servants.

As relevant to China (a jurisdiction in which many recent FCPA violations have occurred and in which many companies are currently the subject of FCPA scrutiny), the U.S. Chamber of Commerce recently released an extensive report titled “China’s Approval Process for Inbound Foreign Direct Investment:  Impact on Market Access, National Treatment and Transparency” (see here).  The report, based on research conducted by Covington & Burling at the Chamber’s request, should be must read for practitioners advising clients on FDI in China as well as others generally interested in the topic of trade barriers.  Although the report does not contain the words bribery or corruption, it is very much on topic.

The report draws on interviews conducted with foreign companies doing business in China and discusses, among other topics, the following.

How China’s Foreign Investment Catalogue requires “different levels of approval scrutiny or tougher application requirements” for non-Chinese prospective investors and how the Catalogue “may require that investment take certain forms and/or that the foreign shareholder’s proportion of investment in the enterprise be limited.”

Various project and regulatory approvals needed to do business in China and how various characteristics of the approval process have resulted in “application of vaguely written or unpublished rules in ways that restrict or unreasonably delay market entry by foreign companies” and how in other instances “approval authorities have orally communicated deal-specific conditions for investment approval beyond those required by written law.”  As to China’s licensing regimes, the report notes that licenses are required for more than 100 business activities in China and that government approval is also needed for certain modifications to an enterprise “such as change of registered capital, change of shareholders, amendment of business scope, merger, or the acquisition of a company in a restricted industry.”

As if the various Chinese governmental approvals were not enough, the report also notes that obtaining certain governmental approvals is exacerbated by the fact that in certain Chinese – foreign joint ventures, the local partner may serve in certain instances as the applicant and “control the communications channels between the foreign investor and the government approval authorities …”.

House Intelligence Committee Report

As noted in this recent Wall Street Journal article, the House Intelligence Committee has concluded that two Chinese companies (Huawei Technologies and ZTE Inc.) pose security risks to the U.S. because their equipment could be used for spying on Americans,  The House Committee recommended that the U.S. block acquisition or mergers involving the two companies through the Committee on Foreign Investments in the U.S. (“CFIUS”).

The report (here) also accuses Huawei of bribery and corruption.  Page 35 of the report states as follows. “[Huawei] employees have alleged instances [of] fraud and bribery when seeking contracts in the United States.”  The apparent lack of a “foreign official” may take this alleged conduct outside the scope of the FCPA, but the Travel Act may remain relevant.

President Obama’s Executive Order and Subsequent Lawsuit

As noted in this recent Reuters article, President Obama recently issued an Executive Order ordering Ralls Corp. (a U.S. company owned by two Chinese nationals) to sell off four planned winds farms in Oregon due to national security threats.  As noted in the article, President Obama’s recent order is the first time since 1990 that a President has formally blocked a business transaction.

The Executive Order (here) states that “there is credible evidence” that Ralls Corp. “might take action that threatens to impair the national security of the United States.”  President Obama’s order followed a recommendation by CFIUS (see here) recommending the divestiture.

In response, Ralls Corp. filed this lawsuit against President Obama, CFIUS and others.  In pertinent part, the suit alleges as follows.

“At no time has Ralls ever had any opportunity to view, review, respond to, or rebut any evidence that CFIUS, the President, or any person or entity acting on their behalf has obtained, reviewed, or relied upon in reviewing the transaction in question, concluding that the transaction raises national security concerns, issuing the aforementioned orders, and imposing the foregoing extraordinary prohibitions and restrictions.  In issuing their respective orders, CFIUS and the President acted in an unlawful and unauthorized manner. By exceeding the powers granted to it [by law] and failing to provide any evidence or reasoned explanation for its decision, CFIUS violated the Administrative Procedure Act. By imposing restrictions far beyond the limited scope of the powers specifically granted to him [by law], the President has committed ultra vires acts in violation of the law. By failing to provide Ralls with sufficient notice and opportunity to be heard prior to prohibiting its acquisition of the windfarms and imposing extraordinary restrictions on the use and enjoyment of its property interests, CFIUS and the President have unconstitutionally deprived Ralls of its property absent due process. And by unfairly and unjustly singling out Ralls for differential treatment compared to similarly situated parties, CFIUS and the President have violated Ralls’s right to equal protection of the law.”

Former U.S. Solicitor General Paul Clement (here) represents Ralls.  For additional analysis, see this recent Covington & Burling alert and this recent Mayer Brown client alert.

Friday Roundup

From the dockets, an FCPA compliance defense – yes or no, hiring a woman closely associated with a foreign official, and a focus on the FCPA’s “red-haired stepchild” – it’s all here in the Friday Roundup.

From the Dockets

Last month when Judge Lynn Hughes dismissed, at the close of the DOJ’s case, the FCPA charges against John Joseph O’Shea (see here for the prior post), it was only a partial victory as O’Shea still faced non-FCPA charges.  Complete victory is imminent as yesterday the DOJ filed a motion to dismiss (here) the remaining charges (conspiracy, money laundering and obstruction) against O’Shea.

In July 2011, Patrick Joseph (a former general director for telecommunications at Haiti Teleco and thus a “foreign official” according to the DOJ) was added to the extensive Haiti Teleco case.  (See here for the prior post).  Because the FCPA does not apply to bribe recipients, the DOJ charged Joseph with a non-FCPA offense: one count of conspiracy to commit money laundering.  Earlier this week, Joseph pleaded guilty to the charges (see here).  Pursuant to the plea agreement, Joseph agreed to forfeit approximately $956,000.  It is clear from the plea agreement that Joseph was likely an early cooperator in the Haiti Teleco case as the plea agreement refers to a June 2009 proffer agreement with the DOJ.  Many of the other individual defendants in the Haiti Teleco case were charged in December 2009 (see here).  The plea agreement requires Joseph’s continued cooperation and later this month a trial is to begin as to other defendants in the wide-ranging Haiti Teleco case.

FCPA Compliance Defense – Yes or No?

That is the title of a free webcast on February 21st to be hosted by Bruce Carton’s Securities Docket (see here to sign up and for more information).  I will be discussing my  paper “Revisiting a Foreign Corrupt Practices Act Compliance Defense”and will argue in favor of Congress creating an FCPA compliance defense.  On the other side of the issue, Howard Sklar (Senior Counsel, Recommind and a frequent commentator on FCPA issues at, among other places, his Open Air Blog) will argue that Congress should not include a compliance defense to violations of the FCPA.

Former Employee Alleges FCPA Issues at GE

As previously reported by Chris Matthews at Wall Street Journal Corruption Currents (see here) Khaled Asadi (a dual U.S. and Iraqi citizen) who was previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan, has filed a civil complaint (here) in the Southern District of Texas against G.E. Energy.   GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleges that G.E. harassed, pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucractive, multi-year deal with the Iraqi Ministry of Electricity.”  The substance of Asadi’s complaint is that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricty (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and that the exclusive materials and repairs provision is estimated to be valued at $250,000,000 for the seven year agreement.)

Hiring friends, family members, etc. of a “foreign official” at the request of the ‘foreign official” has been the basis, in part, for previous FCPA enforcement actions – particularly if the hired individual was not qualified for the position, did not engage in any meaningful work, or was paid an unreasonably high salary.  For instance, the 2011 FCPA enforcement action against Tyson Foods (see here for the prior post) involved, in part, allegations that a company subsidiary placed the wives of Mexican “foreign officials” on its payroll and provided them with “a salary and benefits, knowing that the wives did not actually perform any
services” for the company.

In the WSJ Corruption Currents article, a GE spokesman stated as follows.  “Mr. Asadi’s termination had absolutely nothing to do with any allegations he is making.  Regarding our contracts in Iraq, GE followed all requirements and his allegations are false.”

Travel Act Readings

A few informative Travel Act readings to pass along.

In this article from Thomson Reuters News & Insight, Mike Emmick (Sheppard Mullin Richter & Hampton) calls the Travel Act the “FCPA’s red-haired stepchild” and says that in conducting an internal investigation “there are some additional rocks to flip over” before celebrating findings of no payments to “foreign officials.”

In this article from Bloomberg Law Reports, John Rupp and David Fink (Covington & Burling) note that a “move by U.S. authorities to target commercial bribery robustly is a distinct possibility.”  The piece discusses the laws that could be used by U.S. authorities to prosecute foreign commercial bribery.”

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A good weekend to all.

Potpourri

Neither Admit Nor Deny Headed to Second Circuit

It is not an FCPA enforcement action, but Judge Rakoff’s recent rejection of the SEC’s neither admit nor deny settlement policy in the Citigroup case (see here) is certainly relevant to the SEC’s enforcement of the FCPA.  Yesterday, the SEC filed a notice of appeal in the Second Circuit.  This will certainly be an issue to watch in the New Year as the SEC’s  resolution policy (”hallowed by history, but not by reason” in the words of Judge Rakoff) goes before the Second Circuit.  See here for Robert Khuzami’s (Director of the SEC Division of Enforcement) statement on the appeal and here for a recent speech delivered by Khuzami in which he talks, in part, on the SEC’s resolution policy.  In yesterday’s statement, Khuzami said that the “new standard adopted by [Judge Rakoff] could in practical terms press the SEC to trial in many more instances ….”.  Jesse Eisinger (ProPublica) asks here does the SEC have trialphobia?

SEC Launches FCPA Site

The SEC recently launched, apparently with little fanfare, a specific FCPA site – see here.  The site contains a list (and in some cases a summary) of SEC FCPA enforcement actions from 1978 to the present, including (for most actions) links to original source documents.  Kudos to the SEC for this FCPA specific site.  The DOJ’s FCPA specific site is here.  Both of these resources, along with others including two new resources mentioned below, can be found on the “Resource Center” pageof  this site.

Big, Bold, and Bizarre

One thing academic publishing is not is fast.  Those cite-checking parties and author revisions take time.  In any event, before the calendar flips to 2012, I am pleased to share my recent article “Big, Bold, and Bizarre:  The Foreign Corrupt Practice Act Enters A New Era” published by the University of Toledo Law Review.  The article can be downloaded here and it is, for the most part, a review and analysis of 2010 FCPA enforcement actions and related developments (current as of January 15, 2011).  For collectors of FCPA Year in Review pieces, my review and analysis of 2009 FCPA enforcement actions and related developments published by the Indiana Law Review can be downloaded here.

Decision Tree

In this first-of-its-kind FCPA/Travel Act “decision tree,” Perkins Coie Partner and former federal prosecutor T. Markus Funk provides in-house counsel and others in the anti-bribery space with a handy, practical analytical tool for walking through the standard range of foreign (and domestic) bribery issues that may come up.  Markus, an FCPA practitioner and who serves as the National Co-Chair of the ABA’s Global Anti-Corruption Task Force, included not only the steps to FCPA liability, but he also integrated the Travel Act’s prohibitions into the comprehensive analysis.  This is a very useful one-stop chart for anyone involved in FCPA issues or likely to encounter foreign bribery issues.

FCPA Database

Richard Cassin of FCPA Blog fame, along with his partners at Ethics360, recently launched the FCPA Database – see here.  On his FCPA Blog (here) Cassin notes that the FCPA Database is “a unique suite of products designed to aid today’s compliance professionals.”  The FCPA Database  includes a searchable collection of current anti-corruption legislation from over 130 countries, information regarding anti-money-laundering laws, privacy laws, enforcement agencies, and a directory of more than 2,000 law firms, and about 1,000 law firm memos on anti-corruption enforcement and compliance.  I’ve spent some time in the database and feel like the holidays have come a bit early as it is a useful research and learning tool.

Bourke Follow-Up

This previous post discussed the Second Circuit’s opinion this week in the Bourke matter.  The post ended by noting that Bourke still had a motion for a new trial pending, but that it was unlikely Judge Scheindin (S.D.N.Y.) would grant that motion.  The FCPA Blog reports here that Judge Scheindin denied the motion for a new trial.

The Globalization of Anti-Corruption Law

Today’s post is from Juliet S. Sorensen (here) a  Clinical Assistant Professor of Law at Northwestern University, where her teaching and research interests include international criminal law and corruption.

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At the annual meeting of the American Bar Association in Toronto last week, the Presidential Showcase Program of the Criminal Justice Section (here) was entitled “The Globalization of Anti-Corruption Law.”  Moderated by T. Markus Funk of Perkins Coie (here), the panel included Andrew S. Boutros (here) of the U.S. Attorney’s Office in Chicago (appearing in his personal capacity); Walter H. White Jr. (here)  from the London office of McGuire Woods; Tyler Hodgson (here) of the Canadian firm Border Ladner Gervais; and yours truly.

Audience members who braved a driving rainstorm en route to the Metropolitan Toronto Convention Centre on Sunday morning were privy to a wide range of insights and perspectives on the worldwide proliferation of aggressive anti-corruption laws.  Funk set the scene and introduced both the topic and speakers, Boutros spoke about the latest trends in FCPA and international enforcement, White discussed the implications of the brand-new UK Anti-Bribery Act, Hodgson talked about Canadian anti-bribery actions, and I examined the global impact of international anti-bribery conventions such as the OECD Anti-Bribery Convention.

The consensus among the panelists was that aggressive enforcement of bribery statutes is an international trend not limited to the U.S., although the U.S. remains the undisputed leader in that regard.  Even Canada, which Transparency International has deemed the laggard of the G-7 in its anti-bribery enforcement, has brought a significant indictment in the last year and currently has twenty active investigations into possible violations of the Corruption of Foreign Public Officials Act.

After Funk pointed out that the number of FCPA indictments increased by a power of 10 from 2004 to 2010, Boutros noted that many of the most significant recent U.S. cases were against foreign companies.  This points not only to increased commercial globalization—foreign companies that pass bribes overseas possess a jurisdictional connection to the U.S.—but also to increased international cooperation by law enforcement.  Boutros also pointed out an increased trend in what he termed “carbon copy” prosecutions, a phenomenon where foreign authorities rely on the factual findings emerging out of U.S. enforcement actions to vindicate the local laws of their own jurisdiction—often the site of the bribe payment or bribe receipt.    Indeed, a corporate defendant’s obligation to cooperate not just locally, but internationally is increasingly spelled out in U.S. plea agreements or deferred prosecution agreements.  Given that the Double Jeopardy Clause does not bar foreign-federal prosecutions (see, e.g., U.S. v. Jeong), such a term of agreement may well be cause for concern to defense counsel.

That’s not to say, however, that other countries are equal to the U.S. in terms of number or aggressiveness of prosecutions.  In my own remarks, I reviewed three G-7 “case studies”—France, Germany, and Japan—and found that France is hampered in its own prosecutions of foreign bribery by an excessively short statute of limitations (three years) and a ban on plea agreements, and in its cooperation with others by a sweeping blocking statute.  Germany is vigilant in the enforcement of its own anti-bribery laws, but the OECD has encouraged that country to increase the statutory maximums for its applicable fines and sentences of imprisonment, noting that the sentences imposed in these cases by German courts are too low to act as an effective deterrent.  Of the three, it is the anti-bribery landscape in Japan that is the most barren, with scant prosecutions due to a failure to gather evidence both at home and overseas.  In a searing self-assessment required by the OECD, Japan pointed to an absence of whistleblower support in corporate and popular culture and the limited foreign language skills of Japanese investigators overseas as two significant reasons for its failure to meet the expectations of the OECD.

Walter White was peppered with questions about the impact of the sweeping UK Anti-Bribery Act, including its impact on Rupert Murdoch’s News Corp, accused of making payoffs to high-ranking law enforcement in the UK.  White reminded the audience that the UK Anti-Bribery Act was unlikely to be retroactive, and thus would not apply to the actions of News Corp., although there are other UK statutes as well as the FCPA that could encompass News Corp’s actions.

Another question pointed to the limited scope of the FCPA as compared to the UK law, noting that the payment of a bribe by a U.S. subject to a warlord in Afghanistan or Somalia could not be prosecuted under the FCPA as that warlord is not a public official, but that a similar payment by a U.K. subject was a violation of the Anti-Bribery Act.  True, Funk responded, assuming that a warlord operating as a quasi-official in a lawless state was not enough, but don’t forget the Travel Act, 18 U.S.C. § 1952: the Travel Act prohibits the use of a facility of foreign or interstate commerce (such as email, telephone, or personal travel), with intent to promote or distribute the proceeds of an activity that is a violation of state or federal bribery, extortion or arson laws, or a violation of the federal gambling, narcotics, money-laundering or RICO statutes.  Thus, for example, if a U.S. businessperson is negotiating a private deal in a foreign country and offers by telephone and wires money to a foreign counterpart to influence acceptance of the transaction–and such activity is a violation of the federal or state law where the individual is doing business–the Justice Department may conclude that a violation of the Travel Act has occurred.

Finally, an audience member pointed out that, U.S. anti-bribery culture notwithstanding, bribes and “grease” are expected in the normal course of business in many Eastern European and former Soviet republics.  Does that expectation shield the briber payer?

The panel was unanimous that, unless the payments were in fact legal—not merely expected—in the country in question, the U.S. bribe payer could be in violation of the FCPA.  But that’s ok: “leveling the playing field” for honest businesses is one of the stated purposes of the FCPA, the Anti-Bribery Convention, and the UN Convention against Corruption.  And who doesn’t want to play on a level field?

Judge Selna Appears Ready To Deny Carson Travel Act Challenge

Last Friday prior to oral argument on the motion, Judge James Selna (C.D. of Cal.) – as is often his custom – publicly released (here) his tenative ruling on the Carson defendants’ Travel Act motion to dismiss.  As detailed in this prior post, the defendants, among other things, argued that the Travel Act does not apply extraterritorially.  As detailed in this post, the DOJ in opposition argued, among other things, that because the majority of defendants’ unlawful conduct was based in the U.S. resort to extraterritorial application was not necessary and even if it was  the plain language of the Travel Act, the legislative history, and case law all indicate that the Travel Act does apply extraterritorially.

In his tenative ruling, Judge Selna denied defendants’ motion to dismiss.  In sum, Judge Selna tenatively concluded that: (1) “an extraterritorial analysis is unnecessary because the criminal offense was completed domestically, and (2) even if an extraterritorial analysis is implicated, the Travel Act counts are proper.”  As to (1), Judge Selna stated as follows.  “All the elements under the Travel Act were allegedly satisfied in California even if the target of Defendants’ commercial bribery scheme was overseas” thus making an extraterritorial analysis “unnecessary.” 

As to (2) above, an issue of greater big picture importance, Judge Selna stated as follows.   “… [C]riminal statutes may apply extraterritorially even without an explicit Congressional statement. In deciding whether criminal statutes apply extraterritorially, courts ‘must consider the language and function of the prohibition.’  […]  The Court agrees with the Government that ‘plain language of the Travel Act demonstrates Congress’s desire to reach conduct overseas.'”  

As to defendants’ position that “the subsequent enactment of the FCPA provides a clear inference that the Travel Act was not intended to apply extraterritorially,” Judge Selna disagreed and stated that “multiple criminal statutes can often be applied to the same criminal conduct” and he did “not discern any conflict between the Travel Act and the FCPA.”  Judge Selna also rejected defendants’ void-for-vagueness challenge.

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