Ｌｅｇａｌ－Ｅａｓｅ：Ｔｈｅ Ｆｏｒｅｉｇｎ Ｃｏｒｒｕｐｔ Ｐｒａｃｔｉｃｅｓ Ａｃｔ－Ｉｍｐｌｉｃａｔｉｏｎｓ ｆｏｒ Ｕ．Ｓ．Ｂｕｓｉｎｅｓｓｅｓ ｉｎ Ｃｈｉｎａ

ＣＨＲＩＳ　ＤＥＶＯＮＳＨＩＲＥ－ＥＬＬＩＳ＆ＲＡＹＭＯＮＤ　ＲＥＥＤ　ＢＡＫＥＲ

Bookkeeping and documentation provisions of the FCPA

To ensure proper paper trails are created, documented and retained, the Foreign Corrupt Practices Act (FCPA) requires that proper accounting and internal controls be established for foreign entities. These requirements are basic, and prudent organizations should maintain these provisions. The act specifically states companies should:

(A) make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that--

(i) transactions are executed in accordance with managements general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with managements general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

What are the potential penalties?

Corporations can be fined up to $2 million for bribery and up to $2 million for record-keeping violations. Individuals can receive up to a $100,000 fine and/or five-year incarceration for bribery and up to $1 million in fines and 10 years incarceration for record-keeping violations. Civil penalties will also apply and may include a $10,000 fine, per violation, along with penalties based upon expected/actual profits from the transaction. Additionally, the federal government may limit or bar corporations and individuals future trading activities and could seek further punishment under the Racketeer Influenced & Corrupt Organizations Act (RICO).

China check list

Certain actions may be indicative of illegal payments. If the U.S. Government becomes aware of such practices, it may result in further investigation. The following are a number of “red flag” items that should be reviewed if you are doing business in China:

-- Do you hold any shell companies with unclear business functions relating to your China operations;

-- Are payments being made with “cash” or through other untraceable means;

-- Do you engage in business with relatives/friends of high-ranking officials;

-- Do you have contracts with consultants or agents for unclear business purposes;

-- Do you extend unusual/very favorable credit terms for new customers or unusual/very favorable upfront payments to suppliers;

-- Numerous backdated or altered invoices;

-- Conducting business in countries where corruption is common;

--“Off the books” bank accounts or transactions.

Recently, the Chinese Government has been conducting audits of state-owned enterprises and other government organizations to crack down on unethical behavior. Although these crackdowns would not directly apply to U.S. corporations, the harsh penalties (which include capital punishment) are having a trickle down effect. The laws in China that apply to local and international organizations are the PRC Law Against Unfair Competition and the Interim Rules on Prohibition of Commercial Bribery.

The FCPA and Chinese regulations do not, however, mean that the building of honest and open relationships with governments and officials that can be developed over time are no longer worthwhile. Such relationships can be very valuable. However, care does need to be taken that they are not abused. Being a good corporate citizen, and actively involved in your community, is not something that should be limited to activities in the United States. There is no reason why similar policies should not be adopted here in China.

In closing, we would just mention that corruption exists everywhere. China has received quite a bit of media attention related to this and that cannot be ignored--it is at least in part because of the Central Governments own efforts to clean up the internal system. In this respect, Chinese policy and U.S. policy can complement and reinforce each other. At the end of the day, however, it is your organizations responsibility to make its internal policies clear and keep its hands clean.