How to Create Effective Anti-Corruption Compliance Programs in China

Implementing and maintaining an effective anti-corruption compliance program can be challenging and costly, but this is essential for U.S. companies doing business in China. Foreign companies are facing increased scrutiny from the Chinese government, as President Xi Jinping has made an anti-corruption drive one of his top priorities since he took power last year.

Recent investigations of foreign companies allegedly caught engaged in corrupt practices have made global headlines.The Chinese government’s enforcement actions are not always consistent, but when it embarks on a campaign like the current anti-corruption campaign, foreign companies are easy targets. 

China’s enforcement actions of its own anti-bribery laws can be a catalyst for enforcement actions in the U.S. by the Department of Justice for violations of the U.S. Foreign Corrupt Practices Act (FCPA).

Given the above, U.S. companies currently operating in China would be wise to review and assess their compliance programs. Those entering China for the first time need to ensure that the implementation of a good compliance program is on their to-do list.

China is far from the most corrupt country in which to do business, but it is a high risk country particularly in certain industries. An inadequate compliance program or the failure to implement one will eventually lead to problems, with potentially serious consequences for U.S. companies both in China and the U.S.

Elements of an Effective Compliance Program

An effective compliance program needs to consist of the following:

• Training and education for employees. This is important as many employees will not realize that what they are doing is wrong and violates the law.  Certain common business practices that violate the law will be considered essential to conducting business;
• Due diligence and ongoing monitoring of third party service providers.  This is particularly important as many of the recent investigations have found violations where a company was using a third party service provider.  Further information regarding the use of third parties is set out in the next section;
• Accurate financial recordkeeping;
• Mechanism for reporting violations;
• Monitoring of high-risk activities and continuous evaluation of potentially creative ways that employees may devise to influence third parties.  Certain gifts that may not raise red flags in the U.S. are commonly used for bribes in China. 
• An effective compliance team.  A compliance program is useless unless a company has someone who is keeping an eye on operations and enforcing the company’s policies. This needs to be someone or a team that has the ability to push back at the business when certain practices come to light, particularly where certain practices are commonly accepted throughout a certain industry.

An important aspect of an effective compliance program is to ensure that local management and U.S. management with oversight for China operations are on the same page.

U.S. companies operating in China are often up against competitors able to engage in unlawful behavior with impunity.  As a result, local management is likely to be reluctant to implement and actively enforce robust anti-corruption compliance programs. The big picture is often difficult to see or appreciate, particularly in light of a focus on financial or other performance targets.

Working with Third Parties

Most companies operating in the global economy use some degree of third-party services. Under the FCPA, companies can be held liable when they make payments to third parties knowing (which includes turning a blind eye) that any portion of the payment will go directly or indirectly to a foreign official. U.S. companies must be confident that their dealings with the third parties they use in China are normal business relationships and that the third parties do not make corrupt payments.  They also need to be in a position to provide good reasons for why they believe this to be the case. The below steps will assist companies in achieving this:

• Always carry out due diligence of a third party, including obtaining references and/or recommendations where appropriate.
• Always use a written contract with a third party, which includes the following:
  • anti-corruption language;
  • detailed description of the work scope and outcomes to be performed by the third party;
  • specific and reasonable budget lines for the work;
  • provision for termination of the contract in the event of suspected corrupt behavior; and
  • a commitment to comply with your anti-corruption policy.
• Closely monitor the third party.
• All fees and expenses should be checked to ensure that they are appropriate and justifiable for the services provided by the third party.
• Payments should only be made to the third party and not any other entity.

When following the above, it is important for U.S. companies to be sensitive to the following red flags:

• The third party is reluctant to respond to due diligence questions or provide references;
• A customer suggests or requests that a bid or contract negotiations are arranged through a specific third party;
• The third party does not appear to have the experience, qualifications or resources for what they are being engaged to do;
• The third party is either reluctant to sign a detailed contract or objects to anti-corruption compliance undertakings;
• The compensation requested by the third party is not proportional to the scope of work;
• Unusual upfront or excessive payments are being requested by the third party; and
• The third party is requesting indirect or unusual billing or payment arrangements.

Warning signs should be a trigger for further investigation and should be recorded and discussed with a company’s compliance team. 

Conclusion

An effective anti-corruption compliance program is essential for U.S. companies operating in China, particularly given current priorities of the government. U.S. management must set the tone for ethical business practices and ensure such practices are followed, while at the same time understanding the difficulties their local teams will face when following such practices.

Kevin L. Jones is a partner with Faegre Baker Daniels. Based in Shanghai, he chairs the firm’s labor and employment practice in China.