Spike in FCPA actions against companies in China risks triggering Chinese investigations
15 August 2016. By Toh Han Shih.
The sharp rise in enforcement actions and investigations this year by US authorities of companies for their China operations under the US Foreign Corrupt Practices Act, or FCPA, is exacerbating the risk that this trend could, in turn, trigger investigations of these companies by Chinese authorities themselves.
So far this year, the US Securities and Exchange Commission, or SEC, has punished 13 companies for violating the FCPA, of which eight, or nearly 62 percent, involve China, according to the SEC’s website.
In comparison, a much smaller number and percentage of companies were punished by the SEC for violating the FCPA in previous years: In 2015, that number of companies was three, or one-third; in 2014, it was two, or one quarter; and in 2013, China accounted for only one of eight companies punished by the SEC under the FCPA.
There are ongoing FCPA investigations of 87 companies that are publicly known, of which China tops the list with 23, followed by Brazil with 19, Russia with eight and India with six.
“Unlike past years, where enforcement actions have involved a relatively diverse group of countries and industries, thus far, 2016 can be defined in large part by one country and one industry: China and healthcare,” said a report by Shearman & Sterling, a US law firm.
In terms of industries, the focus of the US Department of Justice, or DOJ, and the SEC has been on healthcare, with technology companies ranked second, the report added. Of the 13 enforcement actions in 2016, six involved the healthcare industry and four involved technology companies. The healthcare companies punished for their activities in China include Novartis and SciClone Pharmaceuticals, while US technology firms punished for their China activities include PTC and Qualcomm.
The sharp uptick in US actions against companies for their violations in China comes at a time when the Chinese government is in the midst of a widespread anti-corruption campaign of its own, probing literally thousands of government officials, including some at the highest levels, with repercussions for companies, both domestic and international, doing business in the country.
International law firms with offices in China are heavily engaged in assisting companies to enhance their compliance programs and to train employees in China to reduce the risk of bribery and enforcement, MLex was told.
While the number of Chinese government investigations of multinationals for corruption is likely to increase, the attention being paid to decisions by US authorities is expected to attract further attention from Chinese authorities and trigger their own follow-up investigations, it is understood.
“Since social media is so developed in today’s world and the decisions publicized by the SEC and the DOJ are well known to professionals in China, it has already happened that some companies are reported to the Chinese authorities due to the publicized decisions by the SEC and there are also cases that the Chinese authorities start their investigations against the companies sanctioned by the SEC,” Harry Liu Haitao, a Shanghai-based partner of King & Wood Mallesons, an international law firm, told MLex.
In an SEC filing on April 20, PTC, a NASDAQ-listed firm, announced that China’s State Administration for Industry and Commerce, or SAIC, was investigating a China subsidiary of PTC, partly due to an earlier FCPA enforcement against PTC. The company warned it may be fined or receive other sanctions by Chinese authorities. In February, the SEC announced that PTC and two of its China subsidiaries agreed to pay $28.5 million to settle bribery-related offences in China.
In the case of the US and China, the ability of an anticorruption action in one jurisdiction to trigger one in the other appears to be mutually reinforcing. An investigation or enforcement action by the Chinese authorities against a company, if made public, will likely attract the interest of US regulators if the company is subject to the FCPA, while a company that pays an FCPA settlement for its conduct in China is likely to attract the interest of Chinese authorities, it is understood.
A company, even if it is not a US firm, is liable to the FCPA if it has a US connection such as a listing or operations or email communications in the US.
Companies that voluntarily self-disclose possible corruption and cooperate with the DOJ will receive more lenient treatment by the US authorities, under a one-year DOJ pilot program that took effect on April 5. This pilot program is one possible reason for the sharp rise in FCPA enforcement this year, MLex has learned.
The recent US legal climate suggests the exposure of companies is not limited to the FCPA, but could also include other US laws such as the Racketeer Influenced and Corrupt Organizations Act, or RICO, it is understood. On June 20, the US Supreme Court announced a decision that increased the ability of US prosecutors to pursue violations of RICO outside the US, MLex reported.