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Anti-Bribery Crackdowns in China: How Will U.S. Companies React?

Aug. 25, 2013
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U.S. companies in China are facing increasing anti-corruption scrutiny from both the United States and Chinese governments. Naturally, the increased scrutiny brings with it increased costs. To avoid running afoul of anti-bribery laws, such as the U.S.’s Foreign Corruption Act (FCPA), companies will need to implement expensive compliance measures and avoid unscrupulous deals.

Earlier this week, the New York Times reported a Security and Exchange Commission (SEC) investigation into whether JP Morgan Chase & Co hired the children of powerful Chinese officials to help it win business. Under the FCPA, it is potentially illegal to hire a government official’s family member with the intent to help the employer retain or obtain business.  The JP Morgan Chase investigation is not without precedent, and companies see the investigation as a sign of U.S. authorities’ desire to pursue stricter enforcement in China.

Besides facing stricter enforcement of the FCPA, U.S. companies also face the Chinese government’s tighter enforcement of its own anti-bribery laws and Anti-Monopoly Law. Pharmaceutical companies are often the target of anti-bribery investigations. In China, doctors are not paid a living wage, and therefore expect bribes. Last month, executives in China from British pharmaceutical giant GlaxoSmithKline were arrested for doling out nearly $500 million in bribes. Eli Lilly, the U.S. pharmaceutical company is also being accused of giving doctors kickbacks to prescribe drugs.

U.S. companies are concerned about the increased enforcement of Chinese anti-corruption laws, but Ohio State University Moritz School of Law Professor Daniel Chow argues it is the increased enforcement of the FCPA that most worries U.S. companies.

“Criminal FCPA violations are prosecuted by the Justice Department, which could result in criminal liability for executives on an individual basis where they go to jail,” Chow said. “The fines could be huge. These create significant risk for U.S. companies. They will have to pay much more attention than they’ve been paying to compliance on the ground in China.”

Paying more attention, however, comes at a high cost.

“I think companies will need to invest a lot of resources in compliance departments and consultants,” Chow explained. “A compliance department costs a lot of money. These training programs cost a lot of money. It’s going to make companies extremely nervous because they’re afraid of the FCPA. Putting in proper compliance measures takes a lot of time and a lot of management and resources. That’s going to make the cost of doing business higher across the world. I think that we’re going to see an increase in these cases in China. It’s going to be a dangerous problem for companies that are doing business in China.”

Even if U.S. companies implement robust compliance measures, they might not be conducive to China’s political and economic landscape. As a result, there might be an increase in FCPA cases in the future.

“The JP Morgan and Glaxo cases reveal only the tip of the iceberg,” Bucknell Professor of Political Science Zhiqun Zhu said. “The larger picture here is that corruption is so rampant in China that even some foreign firms have followed the flow in China.  It’s an open secret that to oil the wheels, some foreign companies, just like their Chinese counterparts, may have used bribery to win business.”

The JP Morgan case is particularly worrisome for U.S. companies because U.S. authorities did not previously regulate the hiring of influential government officials’ offspring. Unlike bribery cases in China, the hiring of powerful officials’ children is not a violation of Chinese law.

“For three decades, foreign firms have commonly hired the sons and daughters of high ranking Chinese elites to succeed in the China business” University of New Hampshire Professor Lawrence Reardon said. “Should the SEC actually bring charges against JP Morgan, foreign firms will find other means to ‘win friends and influence people.’”

Many pro-business lobbying groups have sought to weaken the FCPA. However, in a speech last year, then-Secretary of State Hillary Clinton staunchly opposed any weakening of the law. Some attribute the more stringent enforcement to post-9/11 anti-terrorism efforts. The logic being that corrupt countries have more porous borders or are more likely to support terrorism. Another possible reason for the FCPA’s increased enforcement is the passage of the Sarbanes-Oxley Act in 2002 because companies are responsible for their foreign subsidiaries’ financial actions. No matter what the reason, according to Case Western Professor Steven Feldman, author of Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict, and Ethics, increased enforcement of the FCPA impacts U.S. business abroad.

“Americans either are not doing some business because they are being extra careful to avoid violations or in some cases foreign competitors win business because their governments are less concerned about bribery,” Feldman explained. “American business ethics is the most demanding in the world. We don’t always live up to them but the general sense is that we should and the government will usually prosecute if we don’t. So Americans are also number one in having strict regulations. Japan and Europe have moved in this direction too more recently. But I would say they are less sensitive to bribery issues than the Americans.”

Although U.S. companies might be missing out on some deals, Feldman does not believe that increased scrutiny by U.S. authorities will keep U.S. companies out of China.

“I think the SEC concerns U.S. companies, but I don’t think that is a major part of their focus,” he continued.  “Their major focus is to get into that market, establish themselves and develop profits. Part of doing that is developing good relationships with the government. In the end, their primary focus is not the Chinese government or the SEC, but really just doing business in China and making it profitable. China’s not the worst place in the world to do business. There is risk and difficulty everywhere. Good companies develop good management systems that can address these issues worldwide.”

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JP Morgan Chase New York City from Creative Commons