The FCPA paparazzi like to wring its hands over anti-corruption compliance in China. Some of the wringing makes sense; some does not.
No company should avoid entering or expanding into China because of corruption risks. Any company which decides not to enter China for that reason has a limited perspective. China is a corruption compliance challenge. You must enter China with a full plate of anti-corruption tools and resources.
corruption and bribery
In order to minimize risks, enhanced procedures have to be implemented. These include:
1. Documentation – as always, documentation of steps taken to resolve red flags or concerns is at the heart of the compliance program. Documentation is the equivalent of an insurance policy – it protects the company against any claim that it acted with a corrupt intent. Once an issue is identified, the response has to be documented. While this may seem burdensome, it can be integrated into a program in an easy fashion – short and sweet memos which are placed in the file, or preserved in emails is all that is needed.
2. Due Diligence – is the most important component of a compliance protocol in China. State-owned enterprises can be difficult to identify. In one case, it took three separate due diligence inquiries to confirm the ownership of a specific joint venture partner. Not all due diligence companies or consultants are equal (that is an understatement). Some are strong in China and some are weak.
An effective due diligence process should start with an internal procedure for identifying and confirming the ownership of the entity. Open source intelligence screening is a starting point; the next is a documented questionnaire; and an inspection and interview process. If issues arise, it may be necessary to conduct a more elaborate boots on the ground type of investigation.
If the investigation stalls at a certain point and you have dug down into the entity as much as you can, representations and warranties as to specific red flag issues may provide sufficient comfort to move forward. If relied on, documentation of the facts supporting the representation and warranty should be documented.
The same approach needs to be applied when dealing with agents. A careful due diligence and monitoring process has to be relied on to protect the company. One of the more significant risks in the use of agents in China is the risks created by sub-agents. Depending on the number of possible sub-agents, a protocol has to be built to address these risks. If a large number are involved, a modified due diligence screening process may need to be employed with a risk-based deeper dive into particular sub-agents.
Most companies enter the Chinese market through acquisition or joint venture partnerships. Due diligence is key when acquiring a company with Chinese operations or entering into a joint venture partnership.
In the case of joint venture partnerships with a state-owned or controlled entity, a company needs to focus on specific rules of the road internal relations with the Chinese entity because all of the employees fall under the “foreign official” definition. It is important that the joint venture agreement contain specific safeguards addressing this issue, including representations and warranties on compliance and commitments to adopt and follow specific protocols. Joint venture risks include not only internal relations between the partners but external risks in how the joint venture interacts with Chinese customers.
3. Gifts, Meals, Entertainment – No elaborate formulas or complex coding schemes are needed in this area – just common sense. A prospective policy which recognizes some of the cultural factors is what is needed to provide safety. What do I mean? The company has to design a prospective policy which builds in tiered levels of review and approvals. Documenting the reasons for the expense and the need to build cordial relations and marketing relationships with potential customers is critical. For example, providing gift cards of a certain amount to a number of foreign officials in recognition of a holiday pursuant to a uniform policy which is transparent and executed without any inference of corrupt intent can be done – it just needs to be done carefully and with documentation.
This artilce originally appeared on Corruption Crime Compliance
