November 30th, 2015

By Wendy Wysong, Lei Shi and Min He

The Chinese government has embarked on an unprecedented anti-corruption campaign for the past two years. This increase in enforcement activity, coupled with new and amended anti-corruption rules, has led to improved compliance practices for many foreign companies and their affiliates in China (PRC). This article examines the impact of the surge in enforcement actions, particularly the GlaxoSmithKline (GSK) investigation and decision. It also provides a series of steps that can be taken in developing an appropriate corporate compliance strategy in China.

A changed landscape: new norms or old dramas?

The strength of the anti-corruption crackdown in China in the past two years is without precedent. Some commentators question whether the anti-corruption campaign is merely a political purge that will recede once the current leadership consolidates power. Observers have noted the government’s somewhat selective approach to enforcement, as well as its failure to refute criticism of the lack of judicial transparency. However, Chinese president, Xi Jinping, strongly denied this kind of speculation during his visit to the USA in September 2015. The 2014 GSK case, together with various legislative changes, has reinforced the impression that the Chinese government is determined to continue to aggressively prosecuteinstances of public and private sector bribery and corruption. Multinational companies operating in China are particularly concerned by the recent turn of events.

Increased enforcement activity

The seniority of the government officials being targeted for public sector bribery and the breadth of the private sector bribery enforcement programme, sweeping across several different business sectors, have not been seen before. Prominent examples include:

  • Zhou Yong Kang, former head of the Political and Legal Committee of the Central Communist Party and a member of the Central Politburo, was found guilty of corruption, intentionally disclosing state secrets and abuse of public powers in June 2015.
  • Xi Xiaoming, Vice President of the Supreme People’s Court (SPC), was reportedly detained and put under investigation for “serious violations of discipline and laws”, a common reference to corruption, in July 2015.
  • Ling Jihua (Vice Chairman of the National Chinese People’s Political Consultative Conference (CPPCC), and the head of the United Front Work Department of the Communist Party Central Committee), Rong Su (Vice Chairman of the CPPCC) and Xu Caihou (General in the People’s Liberation Army and Vice Chairman of the Central Military Commission) have been targeted in recent months.
  • Suppliers, vendors, and business partners of state-owned enterprises have been caught up in the slipstream of public sector bribery enforcement efforts, including the detention of dozens of senior managers of Sinopec and China National Petroleum Corporation.
  • The GSK case, which has demonstrated how vulnerable multinationals can be during criminal proceedings in China and how much damage can be caused to business operations as a result of poor corporate compliance practices.

New and amended anti-corruption legislation

The National People’s Congress of China recently passed the ninth amendment to the Criminal Law of the People’s Republic of China 2015 (2015 Criminal Law), making China’s anti-corruption rules among the strictest in the world. In addition, various judicial and administrative authorities have issued other rules to improve government procedures, record- keeping, interagency communications and transparency.

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March 31st, 2015

By Wendy Wysong, Nish Shetty, Diana Chang, Michelle Mizutani, Yu Bing, Montse Ferrer and Michelle Williams

In addition to the widely publicized penalties, prison terms, and the associated costs of investigation and defense, another less well-known consequence of bribery is debarment from contracting on projects funded by the World Bank. Not only does the debarment affect a company’s ability to bid for the multi-million dollar projects in emerging markets funded by the World Bank, a company may also be cross-debarred from projects financed by other multilateral development banks (“MDBs”) and may appear as a “blacklisted” company on due diligence checklists even after the debarment period. For the last two years, companies and individuals in the Asian region were hit harder with sanctions than any other region.

When bidding on a World Bank project, a company should be aware that it becomes subject to the contractual anti-corruption measures between the bank and the borrowing country or company, including audit rights, lower evidentiary standards, and non-appealable decisions. The practical consequences of this additional penalty are explained in detail below.

The World Bank

The World Bank offers low-interest loans, grants, equity investments and guarantees to projects in developing countries, investing a total of USD65.6 billion in 2014. Five of the top ten recipient countries were in Asia. In order to prevent the diversion of funds from development projects, conduct that would ultimately hinder the World Bank’s goal of reducing poverty, the World Bank has put in place a comprehensive set of administrative sanctions for corrupt, fraudulent, collusive and coercive practices.

World Bank Debarment

The World Bank’s Procurement Guidelines, Consultant Guidelines and Anti-Corruption Guidelines (together, the “Guidelines“) provide for the sanctioning of firms and individuals who are found to have engaged in, among other things, corrupt practices in the procurement of goods and services, the selection of consultants, the execution of resulting contracts, and the use of loan proceeds in connection with World Bank financed projects.

The default sanction applied by the World Bank is to impose a minimum period of debarment of three years (but with an early release if specific conditions have been met), during which the concerned firm or individual (the respondent) is ineligible to be awarded a World Bank-financed contract or to participate in World Bank-financed activities. Other possible sanctions include a letter of reprimand to the respondent, a conditional non-debarment (conditions include, for example, putting in place a compliance program), a fixed-term or indefinite debarment, or restitution. If a borrower has failed to abide by its obligations under the Anti-Corruption Guidelines or has been sanctioned under another project, the World Bank may also suspend disbursement of a loan or require early repayment.

The term “corrupt practice” is defined broadly in the Guidelines as offering, giving, receiving or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party. Another “sanctionable practice” is obstruction during an investigation or the exercise of the World Bank’s inspection and audit rights. The practice does not have to succeed or be completed.

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November 7th, 2014

By Wendy Wysong

Transparency International (TI) publishes a Bribe Payer’s Index (BPI) which provides help to companies seeking to accurately assess the risk of doing business in Asia Pacific or with a partner from the Asia Pacific Region. The BPI provides critical additional information to inform a company’s due diligence efforts in the context of joint ventures, as well as mergers and acquisitions. Accurately assessing the bribery risk that a potential business partner or target company poses and taking appropriate measures to prevent corrupt payments in the future is absolutely critical in protecting against liability for third- party conduct under the US Foreign Corrupt Practices Act and for conduct by associated persons under the UK Bribery Act. Assuming that the risk is low because the country itself has a low risk of corruption ignores the potential behavior of companies operating outside their own country.

BPI/CPI

The BPI, published in 2011, ranks 28 countries by their companies’ perceived likelihood to pay bribes when doing business abroad. Not surprisingly, there is a high correlation between the BPI and Tl’s Corruption Perception Index (CPI). The 2012 CPI ranks 175 countries by their perceived level of government corruption. In other words, the CPI assesses bribe recipients while the BPI measures the opposite, those paying the bribes. Countries which de-emphasise anti-corruption are likely to export this attitude abroad.

While there is a relationship between the two Indices, there are some anomalies. For example, while China ranks just above the mid range for the CPI (80 of 175), it has consistently ranked second from the bottom in the list of bribe payers since the survey began in 1999. The effect of China’s new foreign corruption law (in force since 1 May 2022) is not yet evident in the BPI. Moreover, countries perceived as very clean in terms of bribery on the CPI, such as Singapore, are less than perfect on the BPI. Hong Kong, despite being ranked high on the CPI, is mid-range on the BPI and tied with Malaysia, a country ranked much lower on the CPI.

Country selection

Tl has published the BPI five times since 1999, each time varying in the number and selection of countries surveyed, attempting to capture the leading exporting countries’ impact abroad. The country selection is based on the value of their Foreign Direct Investment (FDI) outflows, the value of their exports (accounting for 78% of total global FDI and exports), and their regional trade significance. In 2011, 28 countries were ranked; in 2008, there were 22; in 2006, 30 countries; in 2002, 21 countries; in 1999, there were 19. Thus, there is not a perfect correlation when comparing year to year results or rankings.

For example, the fact that China went from 20th in the rankings in 2002 to 27th in 2011 does not indicate a significant decline given the variances in the number of countries included; it has been consistently second to last. However, India since joining the list in 2006 has moved from dead last to 4th from the bottom in 2008 to 9th from the bottom in 2011. While still in the bottom half, it is no longer among the lowest ranking.

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October 21st, 2014

By Wendy Wysong, Michelle Mizutani and Richard Sharpie

The SFO, the agency principally responsible for prosecuting cases under the UK Bribery Act 2010 (UKBA), has received its fair share of criticism for being perceived to lack the prosecutorial zeal displayed by the U.S. Department of Justice (DOJ) in relation to the Foreign Corrupt Practices Act (FCPA). Developments in 2014 may indicate that this is about to change, however.

The UKBA passed into law on July 1, 2011, inciting a compliance frenzy within British connected corporations, particularly those operating in the Asia Pacific and China region. Justifiably concerned that the SFO’s enhanced investigating and prosecutorial powers would lead to the same aggressive approach as that taken by the DOJ, companies were even more concerned by the vast scope and reach of the UKBA. Now facing strict liability for the conduct of their partners and agents, in both the public and private sectors, regardless of geographical location, companies expected to see a firestorm of dawn raids and high-profile prosecutions. That day has not come; at least not yet. As set out below, there is evidence of a slow burn. Consequently, it would be a mistake for companies to assume the UKBA is a paper tiger, and in doing so, allow their compliance vigilance to relax.

Complex corporate bribery investigations necessarily take around 18 to 24 months to complete. Once the investigation is complete, a charging decision has to be made, and if the case is not settled, trials can take months – if not years – to proceed. Moreover, only acts conducted after July 1, 2022 will be covered by the UKBA. Thus, there are time lags between when an offense occurs, when it is discovered, when an investigation is conducted and concluded and when the matter is navigated through the courts or to settlement.

What is clear is that the SFO is building a portfolio of high-profile international bribery cases, some of which are likely to be prosecuted under pre-UKBA law.

Rolls-Royce

On December 23, 2013, the SFO announced that it had launched a criminal investigation into allegations that Rolls-Royce paid bribes through intermediaries to obtain contracts in Indonesia and China. A whistleblower made claims that a US$20 million bribe, along with a car, was given to Tommy Suharto, the son of the former Indonesian dictator, in return for help in persuading an Indonesian airline to purchase aircraft engines. Allegations were also made that bribes were paid to Chinese airlines that were prospective purchasers of aircraft engines.

Rolls-Royce self-reported the alleged improprieties to the SFO in December 2012, stating that its own internal investigation had “identified matters of concern.”

In January 2014, the UK Treasury approved “blockbuster funding” to the SFO (estimated in the low millions of pounds) to pursue the investigation. The SFO is able to seek such funding if an investigation may cost more than 5 percent of its annual budget.

This is the latest in a string of cases where the SFO has received this “exceptional” funding. David Green, the head of the SFO, recently explained, “We have had a 10 percent increase in our budget this year. Yet we are demand-led and we cannot always anticipate what is around the corner. Hence our arrangement with the Treasury known as “blockbuster funding,” by which any case likely to cost more than a certain percentage of our budget is paid for from the reserve. Whilst not a perfect arrangement, it does the job.”

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September 2nd, 2014

By Wendy Wysong, Richard Sharpe, Diane Chang, Nish Shetty, Bing Yu and Michelle Mizutani

The Hong Kong Court of Final Appeal (“CFA”) has confirmed that Hong Kong’s much feted anti-graft laws do not apply to conspiracies made in Hong Kong to offer bribes abroad, whether to foreign public officials or private corporations, even if the bribes result in a benefit to a Hong Kong company.

In its 6 August 2022 decision, the CFA upheld a lower court’s decision to set aside the convictions of two executives for conspiracy to offer bribes to a government official in violation of Section 9 of the Prevention of Bribery Ordinance (“POBO”). Because the parties conspired in Hong Kong but the bribes were offered by an agent in Macau, the CFA agreed that Hong Kong did not have jurisdiction over the crime.

Background

Lionel Krieger and James Tan were the former President and a Director respectively of Companhia de Sistemas de Residuos Limitada (“CSR”), a waste services company that was set up as a joint venture held 80% by a Hong Kong company and 20% by a Macau-based company. The two were convicted in February 2012 of entering into a conspiracy in Hong Kong with Federico Nolasco, a Macau businessman and owner/operator of Nolasco Ltd, to offer advantages (bribes) to the former Macau Secretary for Transport and Public Works, Ao Man Long (“Ao”), in order to ensure the continuing award of public waste contracts to CSR. Ao was sentenced to 29 years imprisonment in Macau for his receipt of these bribes. Nolasco gave evidence at trial against Krieger and Tan under an immunity agreement.

Krieger and Tan appealed their respective convictions to the Court of Appeal.

Of particular importance on appeal was the fact that whilst Krieger, Tan, and Nolasco all conspired with one another within Hong Kong to offer bribes to Ao, the offers of bribes themselves were made to Ao by Nolasco outside Hong Kong’s jurisdiction, in Macau.

Krieger and Tan had been indicted for a conspiracy to commit an offence under Section 9(2) of the POBO.2 The prosecution argued that the offer of a bribe to Ao was complete as soon as the conspiracy was made (notwithstanding that the offer had not yet been communicated to Ao). Accordingly, the prosecution argued, as the conspiracy was made in Hong Kong, this was sufficient for jurisdiction, even if Hong Kong did not have jurisdiction over the actual bribery, in Macau. The District Court agreed, and it was on this basis that Krieger and Tan were convicted.

The Court of Appeal (whose judgment was subsequently approved by the CFA) rejected this analysis. It ruled that even if a conspiracy to offer bribes abroad was made within Hong Kong, such a conspiracy was not within the jurisdiction of Hong Kong, as the conspiracy itself did not constitute the offering of a bribe. Accordingly, as the criminality agreed to be embarked upon (i.e., the offering of bribes) would take place outside Hong Kong’s jurisdictional reach, the courts of Hong Kong had no jurisdiction over the conspiracy. The Court of Appeal set aside the convictions of Krieger and Tan.

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June 9th, 2014

By Wendy Wysong

Unfortunately for companies seeking a way to avoid liability in countries known for corruption, not knowing what a third party is doing on the company’s behalf can be more dangerous than knowing. A company can protect itself against what it actually knows—the “known knowns.” But a company must also seek to anticipate and protect against what it doesn’t know—the “known unknowns” and the “unknown unknowns,” by assessing risks, conducting due diligence, and monitoring the third parties very carefully. However, what the company truly is going to get in trouble for is ignoring what it knows the third party is doing, i.e., pretending that the known is unknown.

The question of how a company can “know” what is being done by individuals and entities on its behalf frequently arises in the context of bribery in Asia Pacific. If a company does not actually know what a third party is doing, how can the company be held responsible for what the third party does? Or alternatively, can a company avoid responsibility by not knowing what is really going on?

Generally, these questions are asked in relation to a company’s subsidiaries operating in distant places, third party agents handling the bureaucratic maze of government approvals, permits, and licenses, or distributors and sales persons who promise to penetrate emerging markets.

Hiring a third party in order to insulate the company from knowledge about bribes being paid on its behalf is not a viable strategy for avoiding liability under the UK Bribery Act (“UKBA”), the US Foreign Corrupt Practices Act (“FCPA”), as well as other countries’ anti-corruption laws. Here’s why.

The FCPA Knowledge Standard for Third Party Conduct

The FCPA was drafted to ensure that companies could not use third-party agents in bribery schemes to avoid actual knowledge of a bribe. Accordingly, a company is deemed to know about a bribe if there is awareness of a “high probability of the existence of such a circumstance.” This means that liability is imposed on those who purposefully avoid actual knowledge. As the US Congress wrote in passing the FCPA,

[T]he so-called “head-in-the-sand” problem—variously described in the pertinent authorities as “conscious disregard,” “willful blindness” or “deliberate ignorance”—should be covered so that management officials could not take refuge from the Act’s prohibitions by their unwarranted obliviousness to any action (or inaction), language or other “signaling device” that should reasonably alert them of the “high probability” of an FCPA violation.

A “signaling device” refers to a red flag associated with the third party, such as excessive commissions, a lack of relevant expertise, or a close relationship with a foreign official. A company that is aware that the market it is entering is highly corrupt or requires frequent government interaction may increase the probability that bribery is likely to occur.

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April 29th, 2014

By Wendy Wysong, Montse Ferrer, and Romesh Weeramantry

A company in the midst of arbitration proceedings that discovers potential bribery related to the contract at issue faces inherently irreconcilable conflicts – does it attempt to confine the allegations within the arbitration proceeding or does it disclose them to anti-corruption authorities to stave off potentially astronomical fines? It is critical to understand how the corruption issues will impact the arbitration and vice versa in order to make the appropriate strategic decisions. As often happens, timing is everything … and nothing.

The conflicting considerations are these. Arbitration proceedings are ordinarily private and confidential, raising a hope that if a corruption issue is uncovered, it could be handled outside public scrutiny and without regulatory notice as contractual concerns are resolved. Although confidential, the bribery allegation will probably affect the arbitration outcome as arbitral tribunals are increasingly willing to dismiss the company’s claims under a contract found to have been obtained through bribery.

Moreover, there are exceptions to the confidentiality of arbitration proceedings that would expose the corruption issues to the public, including regulatory and enforcement authorities. Should the authorities learn of the corruption through such public exposure, the company loses the benefit of penalty mitigation that is possible through timely voluntary disclosure, as explained below. Thus, in weighing its options and timing its disclosures, a company must understand what it can and cannot control.

Voluntary disclosure of potential bribery to anti-corruption authorities

The US authorities that regulate and enforce anti-corruption laws, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”), encourage companies to voluntarily disclose potential violations of the Foreign Corrupt Practices Act (“FCPA”), by offering potential penalty mitigation. In fact, there have been no FCPA declinations reported by the DOJ or the SEC which did not result from voluntary disclosure.

However, disclosure does not guarantee leniency. For one, the disclosure must be timely. Most recently, in announcing a settlement with the Ralph Lauren Corporation, the SEC emphasized that “[w]hen they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC” – “immediately” meaning “within two weeks of discovering the illegal payments and gifts.” And yet, there are risks in premature disclosure, particularly unnecessary investigation costs and negative publicity for acts that may not ultimately warrant enforcement action. A study of FCPA cases resolved between 2004 and 2011 found no correlation between the extent of the penalties and companies’ efforts to voluntarily disclose the violations.

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December 2nd, 2013
By Wendy Wysong and Michelle Mizutani

Wendy Wysong

Michelle Mizutani

Anti-bribery due diligence in merger and acquisition transactions (“M&A transactions”) has been relatively commonplace in transactions involving buyers subject to the US Foreign Corrupt Practices Act 1977 (“FCPA”) for some time. With the UK’s new Bribery Act 2010 (“UKBA”) now in force, and with the intensified focus on corruption by authorities across the globe, the demand for anti-bribery preventative measures has become much broader. Buyers (and underwriters), even those not within US jurisdiction, are increasingly concerned about target companies’ historic compliance breaches and the measures and controls in place to prevent such breaches prior to acquisition. As enforcement spreads, the business community has recognised that the lack of a robust anti-bribery compliance programme will affect their bottom line directly, including the value realised from corporate acquisitions and disposals.

Put simply, the answer to this question is that the UKBA has broader application than any other anti-bribery law legislated around the world to date and diligence in the acquisition process may help with providing the proverbial “get out of jail free” card down the track (at least those jails in the UK).

The UKBA, passed in 2010, provides that a commercial organisation (a company or partnership) is guilty of a crime if a person associated with it (which the legislation refers to as an “Associated Person”) bribes someone, anywhere in the world, with the intention of obtaining or retaining business or a business advantage for the commercial organisation. This offence is commonly known as the “Corporate Offence”. The Corporate Offence has wide application as it is not only applicable to UK commercial organisations but also to any organisation, wherever incorporated, that carries on a part of its business in the UK. (Read more)
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