How the Foreign Corrupt Practices Act is Affecting Asia – Part 1

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By Benedict Lynn

The Foreign Corrupt Practices Act (FCPA) is a piece of U.S. federal law that aims to achieve accounting transparency and clamp down on corruption. Its remit is extensive and includes both U.S. companies and companies incorporated in the U.S., along with their officers, directors, employees, stockholders, and agents. The act prohibits payment to foreign officials, which it broadly defines as being: “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.

Although in place since the late 1970’s, the act has been particularly prolific over the last year. The American government has already settled a number of corporate FCPA enforcement actions, including the US$384 million settlement in January with Alcoa Inc for the bribery of officials of a Bahraini state-controlled aluminum smelter.

As foreign investment into the Asia-Pacific region has increased dramatically over the last decade, so too has the scrutiny and enforcement efforts of the FCPA. The act’s investigators are likely to be even more active in the coming year, with the U.S. Department of Justice claiming that the investigations will be conducted more “swiftly, efficiently, and effectively”. As we approach the new year, we take a look in this two-part article at how the FCPA might affect key nations in the Asia-Pacific, focusing this week on China and India, next week on ASEAN.

RELATED: How the Foreign Corrupt Practices Act is Affecting Asia – Part 2

China

China, with its growing global role, has been under increased scrutiny from the FCPA in recent years. Details published by the FCPA Blog earlier this year showed the rapidly growing economy to be dominating the Corporate Investigations List (current through March 31, 2014), with 37 ongoing and unresolved FCPA-related investigations. Russia, in second place, has only seven in comparison.

China poses a particular risk for foreign companies as so much of what seems to constitute the private sector is permeated by the government. A foreign company will often have to do business with State Owned Enterprises (SOEs), which can appear to be private entities. The employees of the SOEs are foreign officials for FCPA purposes, thus putting foreign employees and the company itself in peril of violation.

The FCPA forbids paying a foreign official “anything of value to obtain business”. This can be broadly defined. Last year JPMorgan Chase & Co were investigated by U.S. prosecutors and regulators for hiring the relatives of well-connected Chinese political officials. Normally, Chinese doctors are employed by the government; in 2012 Pharmaceutical giant Pfizer Inc was fined millions for bribing doctors and other healthcare professionals. This also has implications for the medical devices sector.

RELATED: What China’s Latest Anti-Corruption Campaign Means for Foreign Investment

In addition to U.S. action under the FCPA, companies in China must be wary of local corruption enforcement actions. It is no secret that President Xi Jinping has sought a crackdown on local corruption, notably with his “Tigers and Flies” anti-bribery initiative, and foreigners are not exempt. Indeed, Chinese authorities have been making examples of corrupt multinationals, keen to dispel the nation’s reputation as an environment where petty corruption is common and tolerated. Leading UK Pharmaceutical multinational GlaxoSmithKline was recently found guilty of bribery allegations, which led to a several hundred million dollar fine for the company and potential criminal punishments for several top executives.

Other risks abound. Conducting business in China often requires the services of a middle-man, and the giving of “gifts” is not uncommon. Implementing effective internal controls are important, and it’s never too late to start a fraud prevention plan. Proper due diligence is key, and a compliance program entailing broad training and education should be established.

India

India resembles China in that it is also a rapidly developing economy becoming increasingly prominent on the global stage. Like China, it has a history of, and reputation for, corruption. Like China, bribes have long been a normal, and even expected, part of doing business. And like China, it has recently been facing increased scrutiny from the FCPA whilst simultaneously developing its own measures for combating corruption.

With its corruption perceptions index (CPI) standing at 36, the level of corruption in India is high and there is therefore an increased risk of falling foul of the FCPA . Civil servants are grossly underpaid in an overly bureaucratic system and middle-men, or “agents”, are normally used to interface with government agencies. This creates an environment where opportunities for bribery are constantly arising, albeit at the lower levels of government where the majority of corruption occurs.

RELATED: India Struggles Forward with Prevention of Corruption

These sorts of routine services and others, such as obtaining permits and licenses, can be delayed if a bribe to “grease the wheels” is not paid. According to recent research conducted by Ernst & Young, the sectors perceived as the most corrupt are infrastructure and real estate, metals and mining, aerospace and defense, and power and utilities.

In recent years, there have been few high profile FCPA cases in India. The last action occurred in 2012, where a U.S. company was charged with failure to prevent a subsidiary from hiding money that was eventually used to make unauthorized payments.

However, India has taken steps to present a stouter corruption prevention regime. India passed the Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations Bill in order to close existing loopholes in the law and bring India into compliance with the United Nationals Convention Against Corruption. India also recently authorized a new independent anti-corruption agency with broad investigatory powers. For a country which has struggled in the past with corruption enforcement, these are strong steps that bode well for the future.

Public feeling is also overwhelmingly in favor of reducing corruption in India, and several high-profile figures are calling openly for change. However, local laws are still badly enforced, and foreign companies should take pains through careful due diligence, strong compliance programs and a thorough understanding of FCPA.


About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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