US and Chinese Regulators Focus on Corporate Malfeasance.

 

3 August, 2017

 

 

 

Chinese companies and multinationals with a presence in China are facing increased scrutiny from U.S. and Chinese regulators. Four aspects of the current regulatory environment are responsible for this increased scrutiny: (i) the Department of Justice (DOJ) and Securities and Exchange Commission’s (SEC) embrace of the Foreign Corrupt Practices Act’s (FCPA) “territorial theory of jurisdiction”; (ii) the U.S. government’s continued enforcement of international sanctions and export controls; (iii) China’s ongoing anti-corruption campaign; and (iv) increased cooperation between U.S. and Chinese authorities.

 

Territorial Theory of Jurisdiction

 

Under the territorial theory of jurisdiction, even fleeting contacts with the U.S. — e.g., a physical meeting on U.S. territory, wire transfers through U.S. bank accounts, and emails transmitted and stored on U.S. servers17 — may be sufficient to provide the U.S. authorities with the requisite jurisdiction to charge the entity or persons involved, so long as those U.S. contacts can be said to be “in furtherance of” alleged bribery. 

 

Last year, the DOJ entered into a settlement with the two Chinese subsidiaries of PTC Inc. (PTC China), the Massachusetts-based technology company, that illustrates the expansive scope of this theory of jurisdiction. The DOJ and SEC claimed that PTC China bribed Chinese government officials with trips to Los Angeles, Las Vegas and Hawaii, in return for contracts with state-owned entities worth more than $13 million. The DOJ and SEC asserted jurisdiction based solely on Chinese employees’ travel to the U.S. in the company of Chinese government officials. That was sufficient to enable the DOJ to assert jurisdiction over PTC China, and to charge it in a U.S. court, even though the two PTC China entities in question were not listed in the U.S. and did not have a physical presence in the U.S. PTC China subsequently paid the DOJ and SEC approximately $28 million in penalties and disgorgement, far exceeding the $13 million in contracts associated with the improper payments.

 

Sanctions and Export Controls

 

We also expect enhanced regulatory enforcement activity regarding Chinese companies and nationals in the area of economic sanctions and export controls. 

 

This past March, the U.S. Government: (i) reached a $1.19 billion settlement with ZTE for unlawfully exporting telecommunications equipment to Iran and North Korea in violation of U.S. embargoes;18(ii) publicly warned the Chinese government during Secretary of State Rex Tillerson’s visit to Beijing that the U.S. was preparing to impose heightened financial penalties on Chinese banks and companies doing business with North Korea;19 (iii) imposed sanctions on 30 foreign entities and individuals pursuant to the Iran, North Korea, and Syria Nonproliferation Act, specifically naming the entities and individuals alleged to have transferred sensitive materials in aid of Iran’s missile program — nine out of 11 of which were Chinese;20 and (iv) imposed sanctions, pursuant to the United Nations Security Council Resolutions, in response to North Korea’s development of weapons of mass destruction, on one entity and 11 individuals — five of whom are allegedly representatives of North Korean entities located in China.21

Whether or not these actions intentionally were closely timed, together they amplify the message that enforcement of U.S. sanctions and export control laws will be a top priority in the new administration.22 Lest there be any doubt, the unusually blunt press statements issued by the authorities in the ZTE case — that “the world” is put “on notice [that] the games are over,” that the U.S. government “will use every tool we have to punish” violators, who “will suffer the harshest of consequences” — forcefully underscore the point. 

 

Chinese Media’s Focus on Corporate Malfeasance 

 

Scrutiny by the U.S. authorities is only part of the picture. Now in its sixth year, China’s anti-corruption campaign shows no sign of waning. On a regular basis, the Chinese state media continue to feature the latest fallen “tigers,” including senior officials of Chinese state-owned enterprises. In the past few years, the Chinese government regularly uses the media to expose alleged corporate malfeasance, including wrongdoing by foreign companies that purportedly were to blame for various quality-of-life issues. 

 

For example, on December 24, 2016, reporters with the China Central Television, equipped with video and audio equipment, went “undercover” to several Chinese hospitals to expose kickbacks that sales representatives of pharmaceutical companies allegedly paid doctors in exchange for writing more prescriptions. The popular Chinese TV program “315 Gala” — aired each year on March 15 to coincide with World Consumers’ Rights Day — “names and shames” companies for committing abuses that allegedly hurt Chinese consumers. Recent targets have included such well-known foreign brands as Apple, Hewlett-Packard, McDonald’s, Muji, Nike, Starbucks and Volkswagen. Alleged offenses ran the gamut from false advertising to food safety violations. In addition to damage to their reputations, the targeted companies faced the prospect of follow-on enforcement action by the Chinese authorities. 

 

Increased Law Enforcement Cooperation by US and Chinese Authorities 

 

Further compounding the challenge for multinational companies is the new fact that law enforcement authorities in different jurisdictions, including those in the U.S. and China, are finding ways to bridge their differences and to advance cases of common interest. In the last two years, despite the absence of an extradition treaty, the U.S. has repatriated a number of high-profile Chinese fugitives who have been accused by the Chinese government of corruption. With less fanfare and out of public view, the U.S. authorities also have been able to obtain reciprocal assistance from the Chinese government on criminal matters. With increasing ease, prosecutors in the two countries are able to share information pursuant to the principle of reciprocity through various informal mechanisms. 

 

Acting Assistant Attorney General Kenneth Blanco, in the same speech that announced the extension of DOJ’s FCPA Pilot Program, explained why this trend will continue: 

 

[T]he department’s efforts to combat the most sophisticated white collar criminals require our prosecutors and the agents with whom they work to go all over the world to seek the evidence and witnesses necessary to build their cases, and to collaborate with our foreign counterparts. … [J]ust as we receive significant assistance from our foreign partners … , so too do we provide significant assistance to them. … [A] company operating in country X whose employees bribe a public official in violation of the FCPA, may be investigated and prosecuted by the United States, but also by several other countries with jurisdiction over the conduct that gave rise to the prosecution.23 The DOJ’s decision last year to return $1.5 million to Taiwan from the sale of two forfeited apartments that Taiwan’s former President Chen Shui-Bian’s family bought with corrupt proceeds sent a powerful message about the importance the U.S. authorities attach to building long-term cooperative relationships with their law enforcement partners.24

 

Conclusion

 

The confluence of factors described above makes it all the more imperative for multinational companies with operations in China to ensure that their local compliance programs are robust enough to prevent wrongdoing and detect misconduct early. In the event of violations, companies should be alert to the likelihood that the same conduct may attract scrutiny from both U.S. and Chinese regulators, and perhaps other authorities, and should develop their responses with this possibility in mind.