Foreign companies with operations in China have been put on notice that they are now under scrutiny. From antitrust to anti-bribery, the Chinese government has undertaken a number of investigations recently that have made headlines around the world. In the anti-bribery context, the alleged behavior of employees of some multinationals being investigated is likely to have significant Foreign Corrupt Practices Act (FCPA) implications for those companies in the U.S.

Foreign companies have always been held to a higher standard of ethical behavior than Chinese companies. The government’s enforcement actions are not always consistent, but when it decides that a message needs to be sent to curtail certain behavior, the axe falls on foreign companies first. The government does not even need to come knocking at a company’s door; many times investigations are set in motion by a disgruntled employee.

U.S. companies entering China for the first time need to take a step back and assess whether they have correctly calculated their anticipated costs of doing business in China. Ensuring compliance with Chinese anti-bribery and U.S. FCPA regulations will increase internal administrative costs and likely result in lost business, external administrative issues and other intangible costs that may not have been considered. Companies will likely be up against competitors able to engage in unlawful behavior with impunity.  It is not a level playing field by any means but foreign companies can and do succeed without going over to the dark side. If U.S. companies want a viable long term strategy in China, they must acknowledge the limitations they will need to operate within, factor certain intangible costs associated with operating within such limitations into their business plans, and set the tone for ethical business practices from the moment they enter the Chinese market.

For U.S. companies that are already operating in China, it would be prudent to do a health check of whatever compliance programs they have in place regarding detecting, preventing and correcting unlawful behavior.

An effective compliance program must consist of the following:

  1. Training and education for employees. This is important as many employees will not realize that what they are doing violates the FCPA or Chinese anti-bribery laws. Certain common practices, such as handing out gift cards are so prevalent, that many people consider it as business as usual.
  2. Clear due diligence procedures for third party service providers. It is alleged that certain companies in China used travel agencies to book conferences that were never held, diverting funds that were used for corrupt purposes.
  3. Accurate financial recordkeeping.
  4. Mechanism for reporting violations.
  5. Monitoring of high-risk activities and continuous evaluation of potentially creative ways that employees may devise to influence third parties. Certain things that may not raise red flags in the U.S. are commonly used for bribes in China. As part of its ongoing anti-corruption campaign, the Chinese government frowns on the purchase and giving of highly priced mooncakes. Mooncakes come in a variety of forms and are traditionally eaten during the mid-Autumn festival. However, specially packaged luxury mooncakes can run in the hundreds of dollars and are often used as bribes. Mooncake gift cards can also be traded for cash.
  6. An effective investigator and enforcer. All of the above are ineffective if a company doesn’t have an effective investigator and enforcer of its policies. This most often falls to the local in-house counsel, who will face great pressure to look the other way in the pursuit of profit. Companies need strong personalities in these positions that are able to push back, especially where certain practices are commonly accepted throughout a certain industry.

Perhaps the most important task for companies is to ensure that local management and U.S. management with oversight for China operations are on the same page.  Too often there is a serious disconnect between what is expected and happening on the ground in China, and what is expected and perceived to be happening by management in the U.S.

U.S. management must understand the difficulties local employees face in meeting targets when one hand is tied behind their back because they have been told they cannot win business the way a competitor is doing it. These restrictions should be built into performance metrics so employees are not being penalized for complying with company policies.  At the same time, local management and employees must have an understanding of the serious consequences for themselves and the company if they engage in non-compliant practices. Expectations must be carefully managed on both sides of the Pacific.