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Domestic Preference And China’s Accession To The WTO’s GPA: Implications For FCPA Enforcement

Today’s post is from Ken Chan, a Senior Analyst with Beijing Orient Business Investigation Company (here).

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“Given the major role played by the government in Chinese economy, it comes as no surprise that some multinational companies, with inadequate internal control, might fall foul of the Foreign Corrupt Practices Act (“FCPA”) when doing businesses in China. Less understood is the exposure under PRC Government Procurement Law for dealing with local government entities. China’s eventual accession to the WTO’s Agreement on Government Procurement (“GPA” – here), where the US and EU are current signatories, will also have implication for FCPA enforcement in the region.

Enforcement statistics indicate that most FCPA actions concerning conduct in China occur during the course of securing sales contracts from state-owned companies, as well as government entities like hospitals. It should be noted that in the latter case, the PRC Government Procurement Law (promulgated in 2002) is applicable. According to Article 10 of the law, government entities must use domestic goods and services, unless they are not available or cannot be acquired on reasonable commercial terms.

For example, in 2008 Siemens and AGA Medical were subject to FCPA enforcement actions for paying bribes in connection with the sale of medical devices to hospitals in China. And yet, while both companies ran afoul of the US anti-corruption law, they and their peers regularly evade enforcement under the local procurement law. It is unlikely that medical devices supplied by Siemens or AGA Medical fell into the exception categories of Article 10, since suppliers of competitive items are less prone to use bribery means to win contracts.

In fact, it is widely known that Article 10 of PRC Government Procurement Law is not strictly enforced. The reasons for this are threefold:

1. The absence of a legal or authoritative definition of the term “domestic”; 2. The absence of penalties for non-compliance; and 3. The absence of implementing regulations to support the statute.

As a result, today foreign companies effectively participate in the government procurement market in China without restrictions. US multinationals, with their well-known brands and superior products, are among the strongest competitors in the information technology, pharmaceutical and industrial equipment sectors.

However, in recent years there has been mounting pressure from local entrepreneurs in China, requesting the government to impose a genuine domestic preference practice in public procurement. It is argued that the same domestic preference practices are currently adopted by other developing countries (e.g. Buy Brazilian Act) and developed countries (e.g. Buy American Act and EU Utilities Directive). As a result, the Chinese government is enacting the Implementing Regulations of PRC Government Procurement Law, with a draft version issued on 11 January 2010.

Domestic forces are not the only ones shaping the government procurement market in China. International pressures are also at work. On 19 June 1997 China began the accession process for the WTO’s Agreement on Government Procurement, a multilateral agreement that today has over 40 signatories. Signatories are obligated to open their government procurement markets to companies from other signatories. China’s third accession offer, submitted on 30 November 2011, places the procurement activities of its central government agencies, as well as selected provincial and municipal agencies, within the GPA’s ambit. Once China becomes a party of GPA, foreign companies from signatory countries will enjoy treatment no less favorable than domestic companies when contracting with specified government agencies.

These developments in government procurement practices present important implications for FCPA enforcement in China. First, if the “buy local” movement has its way, then an increased preference for domestic sources would limit foreign firms’ access to the government procurement market. With fewer multinationals (and, by extension, companies with US anti-corruption law exposure) competing for government business, FCPA violations could fall as a result.

Since GPA accession would allow foreign bidders to take part in some PRC government contracts, it may provide more rooms for FCPA violations. Nonetheless, on the other hand, GPA would impose an obligation on China to implement fair and transparent tendering processes for government contracts. The attendant increase in public scrutiny may reduce the instances of bribe giving, bribe taking and other corruption practices.”

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