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.”