Asia, with its seemingly endless supply of natural resources and capital, its wealth of strong conglomerates and relative insulation from the toxic assets that catalysed an economic collapse of catastrophic proportions in the West, is being rightly regarded as one of the brightest stars on an otherwise dark economic horizon.

As investors’ attention is turning (or returning) to Asia, so too is the attention of regulators worldwide, most notably in the United States. Here, both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) – custodians of arguably the world’s most authoritative corporate compliance statute, the US Foreign Corrupt Practices Act (FCPA) – have bolstered their resources and manpower as a precursor to increasing their investigations of companies who breach the Act. Asia, in particular China, is in their crosshairs.

The sternest test

It’s almost impossible to pick up a daily broadsheet at the moment without seeing a headline splashed across it providing (sometimes entertaining) vignettes about corporate misfeasance. From bribery and corruption, to the selling and stealing of state secrets and the fleecing of innocent investors, we seem to have heard it all since the onset of the global financial crisis.

One particularly popular story at the moment is the case of Stern Hu, the head of Anglo-Australian mining giant Rio Tinto’s Shanghai operations. Hu, along with four other colleagues, was accused and charged with bribing up to 16 Chinese steel mills to purchase his company’s iron ore, along with stealing state secrets.

To the surprise of many, it is the former charge that may see Hu and Rio Tinto investigated for FCPA violations. How can a company listed in the United Kingdom and Australia attract the attention of regulators in the US? Quite simply, because Rio Tinto has ADRs that trade on the NYSE (NYSE: RTP), so wide is the FCPA’s purview.

No need for the red, white & blue

“The FCPA doesn’t only apply to US companies or citizens,” said Walter Ricciardi, a New York-based partner with Paul Weiss and former Deputy Director of the SEC’s Division of Enforcement.
“The law generally applies to companies listed in the US, or that have securities registered [there] even if they are incorporated elsewhere.”

Ricciardi said the result is that acts of bribery committed by companies and individuals may be subject to the regulations on books and records, internal control, and anti-bribery provisions contained within the FCPA.

Actions deemed to be in furtherance of a bribe with a connection in the US may also see companies, both US-based and their worldwide subsidiaries, incur the wrath of the SEC and DOJ.
Plenty of instances exist where investigations into possible FCPA breaches have been initiated against companies along these lines. In 2007, Lucent Technologies settled an FCPA enforcement action for US$2.5m, based principally on the conduct of employees based in China.

Recently the reflective division of Avery China, a subsidiary of label maker Avery Denison settled a claim by the US authorities for a similar sum. Since it came into force in 1977, no less than eight violations of the FCPA in Greater China have been recorded, among the highest of any country. This is not to mention the much higher number of investigations launched and fines and penalties issued against companies that do business in Asia.

It’s worth noting that the number of enforcement actions being initiated under the FCPA has been steadily increasing year-on-year. In 2003, only six investigations were launched – yet in 2007 there were 38 fresh investigations initiated. In the first half of 2009 alone, 19 enforcement actions have gotten underway.

The DOJ’s lead prosecutor, Mark Mendolsohn, said that US regulators are looking to increase the number of investigations rather than scale back over the coming months – especially in Asia, a region he deemed to be among the worst offenders.

Factors and risks

According to the lawyers interviewed by ALB, there are a number of factors which pose heightened FCPA risks for those companies operating in China. There is arguably no country in the world where the lines between business operations and cultural practices are as blurred. There is no other country where business practices like the giving of gifts, money or favours – no matter how well-intentioned or innocuous – is as common. This is so much so in China that a failure to offer hong bao to business associates at Chinese New Year or treat clients (whether they are employees of a private company or an SOE) to the occasional meal, show and a night on the town may be considered an affront.

Notwithstanding the important position these practices hold for doing business, engaging in them may actually mean breaching the FCPA, the partner-in-charge of Jones Day in Beijing, Peter Wang, explained. “The gift-giving culture in Chinese business is pervasive and well-known. It is getting more attention now, and will [have] more attention in the future because of the levels of investment going into and coming out of China. But gift-giving and the like may actually be in violation of the FCPA, especially if done repeatedly and with intent to obtain or retain business,” he said.

Even certain one-time actions may still be deemed in breach, and although more extravagant gifts raise more concerns, “the size of the gift may be irrelevant because no gift is considered too small for the FCPA, if there is an improper purpose.”

Baker & McKenzie’s Hong Kong-based partner and head of Asia Pacific dispute resolution practice, Gary Seib, said that instances in which money changed hands may not be the only things posing increased compliance risks. “There is a usual clutch of suspects, including the offering of condolence money, travel, entertainment, sight-seeing and even golf days.”

But FCPA risks needn’t only arise due to the conscious acts of a company or its employees. They can also arise in connection with the use of third party agents or in the context of M&As or JV agreements – both areas in which Ricciardi’s team regularly advises clients. “In M&A deals and joint-venture agreements, companies must realise that as much as they are purchasing another company, they are also picking up its problems,” he said. “So if the target company is non-FCPA compliant then that becomes an immediate problem for the purchaser,” Ricciardi said.

A similar liability attaches to payments made to, or the engagement of, third-party agents. “With respect to the use of  third-party agents such as sales agents, consultants, and others, the FCPA says that a company is legally responsible for their conduct. These risks are another important area to pay attention to.”

These are risks that Jones Day’s Wang noted are increasing, as companies in the region start to feel the pinch of the financial crisis. “The job of the enforcement agencies probably becomes easier during economic slowdowns as companies and people become more desperate,” he said. “Laid-off staff or workers in companies which have downsized tend to use what they have seen and heard as leverage.”
Other lawyers that ALB interviewed concurred with this trend. These risks are not necessarily unique to doing business in China, however, but are just as common in other jurisdictions.

“While the PRC presents particular challenges due to the gift-giving culture and the prevalence of state-owned and state-controlled enterprises, it is not the only jurisdiction where clients are concerned about FCPA compliance,” said Ricciardi. “The SEC and DOJ have brought recent cases involving countries in Africa, Asia, the Middle East and elsewhere, indicating that there are numerous places where risks to compliance are prevalent.”

Empirical data supports the view that China isn’t the only hotspot for FCPA violations in Asia. Since 1977, there have been 22 FCPA violations recorded in Asian countries other than China. India, Indonesia and the Philippines are the worst offenders.

Complete compliance

Owing largely to the close relationship between business operations and the cultural practices noted above, Wang said there is still reluctance on the part of some Asia-based clients to strive for wholehearted FCPA compliance.

Yet he does concede that these attitudes are not as common as they used to be. “There are still a number of local managers we encounter who try to resist our advice by saying that everyone else gives gifts or presents,” he said. “This leads to some [managers] trying to fit their conduct into the exceptions to the FCPA rules. But this is not the correct way to run a business, there needs to be compliance with the spirit of the law as well as the law itself.”

On the back of the government’s efforts to curb corruption, attitudes are shifting rapidly – a trend evidenced by the types of matters practice groups in this area are handling.
“Clients are becoming more and more sophisticated in terms of their FCPA compliance,” says Paul Weiss’ Ricciardi. "They will often come to us in an effort to proactively address [this],
and will want to work with us in designing policies and procedures to enhance their compliance. In some cases [clients] will have already identified potential problems through internal and external audits.”

This increased sophistication notwithstanding, there are clients who still require a fair amount of hand-holding, says Baker & McKenzie’s Seib. “Despite improved knowledge about the FCPA in Asia, many clients still come to us with an elementary knowledge of what compliance entails, even where their US parent company already has compliance programs in place,” he said.

Here, lawyers are required to assist clients, according to Seib “from the ground up.” Jones Day’s Wang highlights the sometimes antiquated business practices of many PRC companies as yet another area where clients are in need of assistance. “There are still some issues regarding how cash is handled in local businesses,” he stated. “More established companies have older ways of doing things, for example, expenses may be reimbursed using cash and there may be no sound way of keeping track. This increases risks, some  which clients aren’t necessarily aware of.”

Awareness of the FCPA compliance risks that are inherent in day-to-day business practices was an area identified by all lawyers who were interviewed by ALB, as perhaps the most important.
While some companies have sought to address this by engaging outside training providers to educate staff on the implications of improper conduct, lawyers have cautioned companies not to rely on these providers as the sole source of FCPA training.

Instead, a ‘practice what you preach’ approach within companies is needed. “It’s important to create a culture of FCPA compliance within one’s organisation,” says Ricciardi. “It is not something you can outsource or delegate to an outside provider. Frequent communication from the top of the company about FCPA compliance is vital, as is periodic training of employees on how to comply with the rules – as well as the consequences for non-compliance”