• chinese lantern

A Company Abroad- International Business Relations, the Foreign Corrupt Practices Act, and You

By Bradley Stephens
Edited by: Noel Bagwell
for Executive Legal Professionals

April 2, 2015

There’s an old Chinese proverb, by this Mao fellow, that says a toad in a well only gets to see some of the sky. And if the toad came up, he’d see more of the world. — Karl Pilkington

Home Court Advantage

Today there are between 195 and 200 countries depending on who you ask. These countries employ a multitude of different legal systems from the rule of law to civil law to “statutory law” all of which are used to varying degrees of effectiveness around the world. What someone may have to prove with evidence, in a rule of law country, may be bribed-through in another. Bribes in developing and developed nations are fairly common. It’s the form and the context that matter (lobbying vs. quid pro quo bribery).

China is a perennial favorite with people looking to deal with foreign businesses. While China is a very good choice for business, it has warts. Contract disputes where you have already paid your Chinese business partner are nightmarish.

Contract disputes in China with the Chinese business are solved in Chinese and by Chinese courts. Rest assured that your business partner will bribe the court for a favorable decision, should you choose to show up. The system is called Guanxi. It isn’t fair but it’s how China works. Forum selection and choice of law clauses in a contract do nothing in China. You must have legal recourse when it comes to payment and not pay everything up-front no matter how enticing the business prospect might be.

To illustrate here is an example of corruption in Chinese Courts:

…Zeng Jinchun, the deputy chief of the Zhuzhou Party Committee, once had received a request from a  plaintiff, who pleaded for Zeng’s help to obtain a favorable court decision in a contractual dispute. After having received a bribe amounting to 20,000 yuan (~$2,888 adjusted for inflation), Zeng contacted the court-leader and passed on his concern about the case. Soon the court ruled in favor of the plaintiff. The defendant appealed. During the trial in the second instance court, the defendant also managed to establish contact with Zeng and thereafter asked for favorable treatment in the appeal. In the meantime, the defendant successfully landed a job for Zeng’s mistress. Pleased, Zeng contacted the vice-president of the appellate court, which was also under Zeng’s jurisdiction. The court reversed the decision of the first instance court and turned down all the claims of the plaintiff. Immediately after the decision was rendered, Zeng received bribes amounting to the sum of 200,000 yuan (~$28,555 adjusted for inflation)  from the defendant.

(Li Ling, The “Production” of Corruption in China’s Courts – The politics of judicial decision-making and its consequences in a one-Party state, Journal of Law & Social Social Inquiry, Vol. 37 (4), 2012, 848-877) (Currency translations added)

The Foreign Corrupt Practices Act

While we are on the subject of bribes, note that the U.S. enforces a law called the Foreign Corrupt Practices Act, which makes it “illegal” for businesses or individuals to bribe foreign officials, bureaucrats, or candidates. Enforcement of the Act falls to the Security and Exchange Commission and the Department of Justice.

The Foreign Corrupt Practices Act of 1977 serves as both a warning and a club to any business that gets caught with their hand in the bribery cookie jar. This law applies to all U.S. companies and individuals.

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The Security and Exchange Commission claims authority over violators caught who have issued a class of securities pursuant to 15 U.S.C. 78l. 15 U.S.C. 78dd-1. The Act also covers “domestic concerns” which are defined as any individual (citizen, national, or resident); or any business entity that has its principal place of business in the United States or that was organized under the Laws of any United States’ state, territory, possession, or commonwealth; or any such public international organization. 15 U.S.C. 78dd-2(h)(1). Finally a catch-all covers any natural person or business entity that is not defined by either subsection. 15 U.S.C. 78dd-3(f)(1).

The Foreign Corrupt Practices Act forbids any sort of offer of any gift or money to the following people:

  • Foreign Officials
  • Any foreign political party or official thereof or any candidate for foreign political office
  • Any knowledgeable intermediary (the person knows all or some of the money/gift is going to the official or foreign candidate)

For the following reasons:

(A)    (i) influencing any act or decision of such foreign official in his official capacity,
(ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or
(iii) securing any improper advantage; or
(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or  influence any act or decision of such government or instrumentality.

15 U.S.C. 78dd.

The Foreign Corrupt Practices Act does have an exception for payments or gifts that people might give to expedite routine governmental action. 15 U.S.C. 78dd. In plain English: the exception allows you to pay a foreign official to move your application to the front of the line and complete it more quickly, but not to approve the application. There are also affirmative defenses which allow for (1) payment or gifts that are lawful under that foreign country’s laws or (2) the  payment or gift was a reasonable and bona fide expenditure, such as travel and lodging expenses incurred by or on behalf of the foreign official for (A) promotion, demonstration, or explanation or products or services; or (B) the execution or performance of a contract with a foreign government or agency thereof.

Be sure not to run afoul of the Foreign Corrupt Practices Act, because violations carry steep fines. Note that even the mere settlements related to such fines are well into the millions of dollars.

How can we make it work?

You might ask: “Why do I want to go to a foreign country if there are all these problems?” The risk may be well worth the reward! China has one of the largest spending classes on the globe. It is one of the largest markets in the world; and if you become a household name with the avid consumers of that country, you will reap many rewards. China also houses a huge manufacturing-based economy. Making sure to pay when the product is approved, and only when it’s approved, is exercising good judgment. Make sure to keep immaculate records. Employ people to check on your foreign business interests from time to time. You also need an attorney who is versed not only in the culture, but also in dealing with the pitfalls involved in doing business abroad.