Anti-Corruption Enforcement in China on the Rise Minimizing Risk of FCPA and Chinese Law Violations and Responding to Investigations Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. TUESDAY, MARCH 5, 2013 Presenting a live 90-minute webinar with interactive Q&A Michael S. Diamant, Partner, Gibson Dunn & Crutcher, Washington, D.C. Robert Hunt, Partner, Herbert Smith Freehills, Hong Kong, China Michael Li-Ming Wong, Partner, Gibson Dunn & Crutcher, San Francisco
47
Embed
Anti-Corruption Enforcement in China on the Risemedia.straffordpub.com/products/anti-corruption... · 3/5/2013 · consultants. Use of these third party agents without conducting
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Anti-Corruption Enforcement
in China on the Rise Minimizing Risk of FCPA and Chinese Law Violations and Responding to Investigations
China’s New Leadership Brings Changes in Anticorruption Laws and Enforcement
Recent changes to anti-bribery laws and policies include:
• Limits on party officials • Increased criminal prosecutions • Incentives for confessing to bribery • A new five-year plan • Asset disclosure for public officials
The Chinese authorities’ enforcement tends to focus on the demand / receipt side
of bribery (passive corruption), particularly involving State personnel. Between
2003 and 2011, it is reported that more than 42,000 CPC members faced
corruption charges.
But employees of foreign corporates have also been targeted for receiving bribes.
And now China’s highest court and top prosecutorial body has issued a joint policy statement
regarding enforcement of PRC anti-corruption laws against bribe-givers. The policy statement:
• does not substantively change the legal requirements of the PRC anti-corruption prohibitions;
• focuses on which bribery offences will be subject to increased criminal penalties; and
• may signal a new enforcement priority against bribe-givers in the PRC.
15
<Presentation Title/Client Name>
Recent Chinese Corruption Headlines
Foxconn Begins Bribery Investigation
“The company said last week that an internal
investigation had uncovered possible wrongdoing in the
supply chain and that those findings had been shared
with the authorities in China.”
“Foxconn, which is based in Taiwan but has production facilities throughout China, did not offer details about the nature of the investigation or how the problem was uncovered. But last week, the Taiwan edition of Next Magazine reported that a Foxconn executive in the coastal Chinese city of Shenzhen had been detained by the police on bribery allegations.” -The New York Times, 1/13/2013
“Tao Liming, Chief Executive of the Postal Savings Bank of China (PSBC), China’s sixth largest commercial bank, was officially arrested on corruption charges at the end of December, after being held for several months.” “The charges for his arrest included issuing illegal loans, taking bribes, and illegal fund-raising . . .” -The Epoch Times, 1/7/2013
Chief of Top Chinese Bank Arrested for Corruption
Bo Xilai Ousted from Communist Party “China’s Communist leaders have dealt a hammer blow
to the disgraced politician Bo Xilai, expelling him from
the party and accusing him of everything from corruption
to improper sexual behaviour . . .”
“The state news agency Xinhua said the flamboyant
leader now faced criminal charges. It alleged that he took
huge bribes and abused his power . . .”
-The Guardian, 9/29/2012
Former Provincial Official Sentenced to Death for Bribery
“A former provincial official in east China's Jiangxi
Province was sentenced to death with a two-year reprieve
for taking bribes, a court heard on Wednesday.”
“He helped bribe-givers benefit from projects and
assisted them with job transfers and promotions by
taking advantage of his post, said the prosecutors.”
-Xinhua, 12/19/2012
16
<Presentation Title/Client Name>
Chinese Anti-Corruption Enforcement
660,000 By the Numbers:
Number of officials found guilty of
disciplinary violations over the past
five years
18,100 Number of Chinese officials punished
for corruption concerning construction
projects during the past three years.
30,000 Number of business-to-business
corruption cases investigated by the
Administration of Industry and
Commerce over the last five years.
“We must uphold the fighting of tigers and flies at the same time.”
- Communist Party Chief Xi Jinping, in a January 2013 statement indicating that he would target both low level and
high level officials.
17
<Presentation Title/Client Name>
Chinese Anti-Corruption Enforcement
Industry Focus:
Health Care: Investigations focused on hospital
officials in Southern and Western China accused
of taking kickbacks from distributors of medical
devices and drug manufacturers.
Banking: Bank presidents from China’s “Big
Four,” as well as those from institutions serving
low-income clients, have been prosecuted in
recent months.
Real Estate Development: High-level officials
have recently been prosecuted for accepting bribes
in exchange for favorable treatment in land acquisition and development deals.
18
<Presentation Title/Client Name>
Topics To Be Discussed
I. Corruption Risks in China
II. Chinese Anti-Corruption Laws
III. FCPA Enforcement and China
IV. Coordination Between U.S. and Chinese Authorities
V. Compliance Strategies for Mitigating Corruption
Risk in China
19
<Presentation Title/Client Name>
An Overview of the Foreign
Corrupt Practices Act
(“FCPA”)
20
<Presentation Title/Client Name>
Overview: FCPA What is the Foreign Corrupt Practices Act?
• Anti-Bribery Provisions: The FCPA prohibits corruptly giving, promising, or
offering anything of value to a foreign government official, political party, or party
official with the intent to influence that official in his or her official capacity or to
secure an improper advantage in order to obtain or retain business.
• Accounting Provisions: The FCPA also requires issuers to maintain accurate
“books and records” and reasonably effective internal controls.
The FCPA was enacted in 1977 in the wake of reports
that numerous U.S. businesses were making large
payments to foreign officials to secure business.
21
<Presentation Title/Client Name>
Overview: FCPA (cont’d) Who is covered by the FCPA?
• Issuers: Any company whose securities (including level two and level three ADRs
and registered debt) are registered in the United States or that is required to file
periodic reports with the SEC.
• The FCPA also applies to stockholders, officers, directors, employees, and agents
acting on behalf of the issuer.
• Domestic Concerns: Any individual who is a U.S. citizen, national, or resident of the
United States (not just U.S. citizens), or any business organization that has its principal
place of business in the United States or which is organized in the United States.
• The FCPA also applies to stockholders, officers, directors, employees, and agents
acting on behalf of the domestic concern.
• Other Persons: Anyone who takes any act in furtherance of a corrupt payment while
within the territory of the United States.
22
<Presentation Title/Client Name>
Definition of “Foreign Official”
• Any officer or employee (including low-level
employees and officials) of a foreign
government or any department, agency, or
instrumentality of the government, which
U.S. regulators have construed to include
employees of government-owned or
government-controlled businesses and
enterprises.
• Officers and employees of public
international organizations, such as the
United Nations, World Bank or other
international financial institutions, the Red
Cross, and others.
• Party officials and political candidates.
• Members of royal families.
The FCPA prohibits corrupt payments to “foreign officials,” which is expansively
defined to include:
Resource Guide on the
Definition of “Foreign Official”
In recently published guidance, DOJ
endorses a list of nonexclusive factors that
courts have considered when determining
whether an individual or entity should be
considered a state actor, including:
• Extent of ownership of the entity by a
foreign state;
• Foreign state’s degree of control over
the entity; and
• The general perception that the entity is
performing official or government
functions.
The guide also notes that the FCPA “covers
corrupt payments to low-ranking
employees and high-level officials alike.”
-A Resource Guide to the U.S. Foreign Corrupt
Practices Act (ch. 2)
23
<Presentation Title/Client Name>
What Constitutes a “Thing of Value”?
• Liability exists from the first dollar – there is no “de minimis” exception.
• It is not limited to tangible items of economic value.
• It can include anything a recipient would find interesting or useful, including:
• Gifts and/or “Comps”
• Theatre Tickets
• Entertainment
• Food and Wine
• Red Envelopes
• Internships
• Professional Training
• Trips
• Loans
• Employment
• Consulting Fees
• Meals
• Education
• Political or Charitable Contributions
“As part of an effective compliance
program, a company should have
clear and easily accessible guidelines
and processes in place for gift-giving
by the company’s directors, officers,
employees, and agents.”
-A Resource Guide to the U.S. Foreign Corrupt Practices Act (p.16)
24
<Presentation Title/Client Name>
FCPA Enforcement and China
25
<Presentation Title/Client Name>
Continued Focus on China by U.S. Enforcement Agencies
Enforcement Actions:
• InVision Technologies, 2004
• Diagnostic Products Corp., 2005
• Schnitzer Steel Industries, 2006
• Paradigm BV, 2007
• York International, 2007
• Alcatel-Lucent, 2007
• AGA Medical, 2008
• Faro Technologies, 2008
• Siemens AG, 2008
• ITT Corporation, 2009
• Avery Dennison, 2009
• Control Components, Inc., 2009
• UTStarcom, Inc., 2009
• Daimler AG, 2010
• Veraz Networks, Inc., 2010
• Alliance One International, 2010
• RAE Systems, Inc., 2010
• IBM Corp., 2011
• Maxwell Technologies, 2011
• Rockwell Automation, 2011
• Watts Water Technologies, Inc., 2011
• Biomet, Inc., 2012
• Pfizer/Wyeth, 2012
• Nordam Group, Inc., 2012
• Tyco, 2012
• Eli Lilly, 2012
26
<Presentation Title/Client Name>
2012: An Active Year for China-Related FCPA Investigations
Five of the year’s twelve FCPA enforcement actions against companies involved conduct
in China:
27
<Presentation Title/Client Name>
China FCPA Enforcement Trend: Health Care
Focus on the following risks when doing business in China’s health care sector:
Key Lesson: Appropriately allocate resources if your company is involved in a high-risk industry, such as health care. Know the risks and red flags associated with working with public hospital officials, and sponsored travel.
1. Distributors
2. Non-transparent tendering and
procurement processes
3. Medical training and conferences
28
<Presentation Title/Client Name>
China FCPA Enforcement Trend: Pre-Acquisition Due Diligence
Key Lesson: Effective and probing pre-acquisition due diligence is a must in order to avoid inheriting the FCPA liability of newly acquired businesses.
In the Pfizer/Wyeth case, due diligence is underscored as a must in order to avoid inheriting the FCPA liability of newly acquired businesses.
• Following Pfizer’s 2009 acquisition of Wyeth, its due diligence review found potential improper payments, prompting SEC and DOJ investigations.
• Wyeth paid $18.8 million to resolve the SEC charges.
• DOJ declined to pursue charges against Pfizer, citing its due diligence and the prompt implementation of internal controls in Wyeth’s entities.
29
<Presentation Title/Client Name>
China FCPA Enforcement Trend: Third-Party Risks
Recent investigations show that third parties remain the single greatest area of risk for companies doing business in China.
Key Lesson: Although use of third parties is often a useful, and sometimes necessary, part of doing business in an emerging market, it will often present corruption risks. Conduct due diligence on third parties in high-risk countries, actively monitor third-party behavior during the relationship, and insist upon absolute integrity when dealing with foreign government officials.
• Nordam
• Biomet
• Tyco
• Rockwell Automation
30
<Presentation Title/Client Name>
China FCPA Enforcement Trend: Third-Party Risks (cont’d)
Watch for red flags when dealing with third parties in China.
Common Third Parties to Watch in the PRC:
• Consultants
• Design Institutes
• PR/Marketing Firms
• Event Organizers
• Travel Agents
• Import/Export Companies
• Distributors & Dealers
• Unexplained increases in purchase prices
• Generic or unsatisfactorily explained invoices
• Inflated commission or fee arrangements
• Payments of money through indirect channels
• Hiring employees who are connected or related to
government officials
• Excessive travel and entertainment expenses.
• Third party domiciled in a country other than the one
where it provides services
31
<Presentation Title/Client Name>
China FCPA Enforcement Trend: Gift Giving
Key Lesson: Be aware of cultural conditions that may present risks. Closely monitor the provision of gifts, entertainment, and other business hospitality, especially around local holidays.
Recent enforcement actions involving China show continued focus on abuses of the region’s gift-giving culture.
• Eli Lilly
• Pfizer/Wyeth
• Biomet
• RAE Systems
• Schnitzer Steel
32
<Presentation Title/Client Name>
China FCPA Enforcement Trend: U.S.-Listed PRC Companies
“U.S. investors should be able to rely on the quality of audited financial statements. Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect U.S. investors from accounting fraud.”
-Kara Brockmeyer, Chief, Securities and Exchange
Commission FCPA Unit, 12/3/2012
Chinese
Private
Company
U.S.-listed
Public Shell
Company
U.S-listed Public
Chinese Company
Recent SEC action shows that the regulatory agencies are actively investigating Chinese headquartered U.S.-listed companies.
33
<Presentation Title/Client Name>
China FCPA Enforcement Trend: Scrutiny of Compliance Programs
Recent cases show that U.S. enforcement agencies will factor in a company’s compliance program when determining whether to commence an enforcement action.
• April 2012: Garth Peterson, former
managing director in Morgan Stanley’s real
estate investment and fund advisory
business, pleaded guilty to conspiring to
evade internal accounting controls that
Morgan Stanley was required to maintain
under the FCPA.
• The SEC and DOJ both declined to accuse
Morgan Stanley of any wrongdoing, and
cited the company’s robust FCPA
compliance program and internal controls.
34
<Presentation Title/Client Name>
Topics To Be Discussed
I. Corruption Risks in China
II. Chinese Anti-Corruption Laws
III. FCPA Enforcement and China
IV. Coordination Between U.S. and Chinese Authorities
V. Compliance Strategies for Mitigating Corruption
Risk in China
35
<Presentation Title/Client Name>
Enforcement is Global
A single enforcement action may involve several countries, regions, or
regulators, including those in the U.S. and China.
• Biomet: China, Argentina, and Brazil
• Eli Lilly & Co: China, Brazil, Poland, and Russia
• Pfizer: China, Bulgaria, Croatia, Indonesia, Kazakhstan, Pakistan, Russia,
and Saudi Arabia
• Tyco: China and multiple other countries in Asia, Europe, Africa, and the
Middle East
Key Lesson:
When an issue arises, assess whether the problem extends beyond the borders of a single country or region.
36
<Presentation Title/Client Name>
Coordination Between U.S. and Chinese Authorities
• In 2011, China-U.S. Joint Liaison Group on Law
Enforcement Cooperation established the U.S.-China
Anticorruption Working Group
– Facilitated an anti-bribery roundtable with U.S.
and Chinese executives
– U.S. agreed to repatriate Chinese officials living
in the U.S. accused of receiving bribes in China
– In December, 2012 working group led U.S. &
China to agree to work together to implement
obligations under the U.N. Convention Against
Corruption
“[F]ighting against transnational bribery is . . . an area that holds good prospects for U.S.-China cooperation.”— Cameron F. Kerry, General Counsel, U.S. Dept. of Commerce (Aug. 1, 2011)
37
<Presentation Title/Client Name>
Topics To Be Discussed
I. Corruption Risks in China
II. Chinese Anti-Corruption Laws
III. FCPA Enforcement and China
IV. Coordination Between U.S. and Chinese Authorities
V. Compliance Strategies for Mitigating Corruption
Risk in China
38
<Presentation Title/Client Name>
“After considering all the available facts
and circumstances, including that Morgan
Stanley constructed and maintained a
system of internal controls, which
provided reasonable assurances that its
employees were not bribing government
officials, the Department of Justice declined
to bring any enforcement action against
Morgan Stanley related to Peterson’s
conduct.”
- DOJ Press Release on the Morgan Stanley
Investigation
Establish an Effective Compliance Program
The Morgan Stanley case from 2012 reiterates the importance of maintaining
robust compliance programs.
39
<Presentation Title/Client Name>
“Fundamentally, the design of a company’s internal controls must take into account the
operational realities and risks attendant to the company’s business, such as . . . the degree to
which it has operations in countries with a high risk of corruption.”
-A Resource Guide to the U.S. Foreign Corrupt Practices Act (p. 40)
Establish an Effective Compliance Program Cont’d
The “basic elements DOJ and SEC consider when evaluating compliance
programs” are especially relevant to companies operating in emerging markets.
These include:
• Tailored Compliance Program
• Clear Compliance Policies
• Targeted Compliance Training
• Culture of Compliance
• Third-Party Due Diligence
• Confidential Reporting of Misconduct
• A Compliance Program That Evolves With The Business
40
<Presentation Title/Client Name>
Conduct Extensive Due Diligence on Potential Targets
Effective Due Diligence:
• Evaluate the target’s compliance program
• Evaluate particular risks associated with the target’s business
• How does the target deal with government officials?
• Evaluate the target’s use of and control over subsidiaries, field
offices, and agents.
• Conduct enhanced due diligence of any “red flags” that arise during
the diligence process.
41
<Presentation Title/Client Name>
Mitigate Risks Involving Third Parties
• Before: Conduct due diligence on potential agents, consultant,
distributors, and other intermediaries.
• After: Following the engagement of the third party, closely
monitor behavior to ensure continued compliance.
42
<Presentation Title/Client Name>
Gifts and Customer Travel • Gifts
– Tailor a compliance program to reasonably account for these cultural
expectations while preventing employees from using gifts as inducements to
win business.
• Travel
– Travel features especially prominently in corruption efforts in countries like
China, where public officials have limited opportunities for international
travel.
– When sponsoring travel for public officials, take precautions.
43
<Presentation Title/Client Name>
Other Tips for Mitigating Risks in China
Political and Charitable Contributions
• Contributions should not be used as a vehicle to conceal improper payments.
Establish pre-approval procedures for contributions.
Meals and Entertainment
• Meals and entertainment should only be given in connection with official
business and should, at all times, be reasonable under the circumstances.
Media Stipends
• Provide modest travel stipends uniformly, and never condition the stipend on
coverage. Journalists should provide written acknowledgement of receipt, and
all payments should be properly recorded in the company’s books and records.
Michael S. Diamant is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. His practice focuses on white collar criminal defense,
internal investigations, and corporate compliance.
Mr. Diamant has broad white collar defense experience representing corporations and corporate executives facing criminal and regulatory charges. He
has represented clients in an array of matters, including False Claims Act violations, accounting fraud, and antitrust violations, before the Department
of Justice and the Securities and Exchange Commission. Mr. Diamant also has managed numerous internal investigations for publicly traded
corporations and conducted fieldwork—including more than 200 witness interviews—in eleven different countries on four continents. In the area of
corporate compliance, Mr. Diamant regularly advises major corporations on the structure and effectiveness of their compliance programs. This often
includes reviewing reporting mechanisms, internal payment controls, and compliance messaging, as well as drafting new compliance materials, such
as ethics and anti-corruption handbooks.
Among Mr. Diamant’s substantive areas of expertise is the U.S. Foreign Corrupt Practices Act (“FCPA”). Mr. Diamant conducts internal
investigations for corporations regarding possible violations of the FCPA and assists them in complying with government subpoenas and negotiating
settlements with enforcement agencies. He also routinely advises corporations on the adequacy of the design and implementation of their FCPA
compliance programs. Mr. Diamant has designed entire anti-bribery compliance programs, as well as guidance and payment approval materials, for
Fortune 100 corporations. He also frequently conducts FCPA training for in-house counsel, corporate executives, and line employees. In addition to
his work for clients, Mr. Diamant has held leadership roles in the FCPA compliance monitorships of Siemens AG and Statoil ASA.
Mr. Diamant clerked for the Honorable Fortunato P. Benavides of the U.S. Court of Appeals for the Fifth Circuit. He is a 2003 magna cum laude
graduate of the Georgetown University Law Center, where he was inducted into the Order of the Coif. At Georgetown, he served as Senior Articles &
Notes Editor of the American Criminal Law Review and authored the article on the False Claims Act for the Seventeenth Survey of White Collar
Crime, 39 Am. Crim. L. Rev. 491 (2002). In 2000, Mr. Diamant received his Bachelor of Science in Foreign Service magna cum laude from
Georgetown’s Walsh School of Foreign Service, where he was elected to Phi Beta Kappa.
Robert has substantial experience advising on contentious matters in Asia and Europe. Robert has a particular focus on investigations work and has
advised clients on cross-border internal and regulatory investigations involving issues arising under the Foreign Corrupt Practices Act, Bribery Act and
other international anti-corruption statutes.
Between 2005 and 2007, Robert spent time in the firm’s Singapore office and associated office in Jakarta, engaging in a wide range of regional
disputes including contentious regulatory matters, shareholder disputes, distribution agreement disputes and claims arising out of a large environmental
disaster.
In February 2011, Robert relocated to Herbert Smith Freehills in Hong Kong, where he plays an active role in the Dispute Resolution group.