High Tech and Corruption Risks

Silicon Valley should take note.  They are ripe for aggressive FCPA enforcement.  The high-tech industry is a risk industry for bribery violations.  Yet some say that the high-tech industry is behind the curve when it comes to anti-corruption compliance.

The high-tech industry outsources a significant amount of manufacturing.  They rely on production and related services in countries where the risk for corruption is extremely high, especially China, Taiwan and South Korea.

China is ranked 78 out of 178 countries on the Transparency International Corruption Perception Index; Taiwan is 33 out of 178; and South Korea is 39 out of 178.

China is the focus of anti-corruption enforcement because of its significant economic role in the high-tech sector (and other sectors as well).  In China, corruption costs are estimated at 3 percent of GDP.  Since 2002, DOJ/SEC have brought over 40 enforcement actions in China (18 percent of all enforcement actions).

corruption and bribery

The Chinese business culture is based on relationships, or guanxi, which are formed in part by giving gifts and doing favors. The FCPA (and the UK Bribery Act) include broad interpretation of “thing of value” which encompass all types of gifts, travel, and entertainment.

A quick examination of some of the prior enforcement actions is a laundry list of these types of violations: non-business related travel to company officials (Lucent); internships to Chinese official’s son and girlfriend, letters to obtain visas and use of vehicle (Daimler AG); payment for college tuition for children of two executives (Control Components); gift certificates and watches (Schnitzer Steel); $4500 in gifts to Chinese telecomm executive (Veraz); watches, cameras and laptop computers (Alliance One);  laptop computers, jade, fur coats, kitchen appliances, business suits and expensive liquors (RAE Systems).

The Chinese government has a significant and direct stake in the economy, both through state ownership and through stock ownership  70 percent of productive wealth in China is owned by the government.  Consider some of the prior enforcement actions: payments to Chinese steel producers either wholly or partially owned by Chinese government (Schnitzer Steel); payments made to Chinese oil company Sinopec (publicly traded on NYSE but 75% owned by Chinese government (Daimler).

For the high-tech sector they need to ramp up high-risk compliance efforts.  Such programs have to be carefully tailored to the unique challenges and risks in Asian economies and cultures.

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