Many of the world’s multinational companies already have a number of years of experience operating in China. One of the major challenges cited by these companies is the constantly changing regulatory environment, as China attempts to standardise and develop its nascent regulatory structure governing a number of areas affecting business.
Just this year, for example, the significantly revised Labour Contract and Enterprise Income Tax laws have already come into effect, with China pushing for a long-debated, heavily amended Anti-monopoly Law to come into effect this August. However, it is another major regulatory challenge in China which presents arguably the most significant operational and financial consequences for MNCs in China: the U.S. Foreign Corrupt Practices Act and the OECD Anti-Bribery Convention.
Increasing Reach of Foreign Regulations
The implementation of the U.S. Foreign Corrupt Practices Act (“FCPA”) in 1977 was groundbreaking as the first anti-corruption regulation to govern overseas business activities of U.S. companies and individuals, as well as foreign companies with U.S.-based operations or that are publicly listed in the United States. However, it was only after 2002 that the FCPA was dusted off and given new life.
The OECD Anti-Bribery Convention, which came into effect in 1999, now has 37 member states (many of them European). The Convention is implemented through each member country’s creation and enforcement of its own laws criminalising bribery of foreign public officials. Bribery is defined as the voluntary giving, offering or promising of any object of value — directly or indirectly — to obtain an unfair business advantage.
Both the FCPA and OECD Anti-Bribery Convention regulate European and U.S. companies’ operations overseas, to ensure that operations outside of the home country — while not directly monitored — are still held liable to the same ethical and legal standards, since bribery of domestic officials is already a crime in most countries. According to both regulations, foreign public officials include any individual holding any public position: this not only includes government officials, but also company officers in public enterprises, or officials of international organizations such as the United Nations. The FCPA also specifically includes political parties and politicians in its scope.
In fact, 2007 was a record year for FCPA action by the U.S. Department of Justice and the Securities and Exchange Commission, in terms of number of enforcements against corporations — both U.S. based and foreign companies publicly listed in the United States — as well as the value of fines for FCPA violations.
Last year saw the Department of Justice and Securities and Exchange Commission impose the largest FCPA criminal and civil corporate penalty ever, worth USD44m. According to a Shearman & Sterling study, in 2003, there were only nine companies being investigated for FCPA violations. Now, according to most counts, some 50 to 60 companies are under investigation for FCPA violations, with this number expected to continue rising as the Department of Justice and SEC maintain the campaign against foreign bribery.
Compliance and Chinese Business Culture
As compliance with regulations such as the FCPA and OECD Anti-Bribery Convention becomes a growing priority for global companies, company standards of conduct are increasingly addressing these regulations, to which new employees must understand and agree to adhere.
However, many companies do not directly or adequately address the fact that in China, and many foreign business cultures, these regulations effectively criminalise what are and have been commonly accepted, deeply ingrained traditional business practices. Companies must take the time to educate employees for whom providing gifts or favours to secure business deals that in some instances have government links is a completely accepted practice.
Presenting and explaining the finer points of FCPA or OECD Anti-Bribery Convention regulations to employees forms only the first part of an education programme in international standards of business practice. MNCs must then place these regulations in the context of Chinese business culture. Without doing so, MNCs will discover that unknowing Chinese employees could unwittingly continue to violate FCPA or OECD Anti-Bribery Convention regulations in their daily business practices.
For instance, departments that face sales targets and pressures to meet such quotas are particularly susceptible to bribery risks. Because of this, sales and procurement transactions in China are particularly risky areas when it comes to FCPA or OECD Anti-Bribery Convention compliance as giving “gifts” in return for business is still a widely accepted practice, and under pressure may be used to meet targets. Employees must be educated to understand the context of bribery in terms of international business practices, and be convinced of the importance of compliance.
China in the International Business Community
As China continues to evolve and grow into its increasingly important role in the world economy, U.S. and European regulators will expect compliance by businesses that choose to conduct business here. Businesses with operations in China will be responsible for the standards of their operations, in which unethical practices, in terms of international business standards, cannot be explained away as “local business culture.” Nor will ignorance on the part of local employees be acceptable.
Companies are responsible for keeping up with local and international regulations and, crucially, for ensuring that their local employees fully understand how these regulations affect the way they conduct their business every day.
Last update : Sunday, 20 April 2008
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