This article was reprinted with permission
from FCPA Professor
A collection of recent China-related developments and
issues.
First, a recent U.S. Chamber of Commerce report titled
"China's Approval Process for Inbound Foreign Direct Investment" which details
a number of trade barriers and distortions (which can serve as breeding grounds
for harassment bribery) when doing business in China.
Second, U.S. developments which demonstrate that trade
barriers and distortions are a two-way street. A recent House
Intelligence Committee report recommending that the U.S. block acquisitions
or mergers involving two Chinese telecom companies and President Obama's recent
Executive Order directing the divestiture by a U.S. company (owned by
Chinese nationals) of its investment in Oregon wind farms and a
subsequent lawsuit brought by the company.
China's Approval Process for Inbound Foreign
Direct Investment
Why do Foreign Corrupt Practices Act violations occur?
To be sure, certain violations have occurred because
a company has a corrupt culture and has used bribery and corruption as a
short-sighted business strategy. However, such occurrences -
as evidenced by actual enforcement actions alleging such egregious
facts - are rare. Rather, as I argue in "Revisiting a Foreign
Corrupt Practices Act Compliance Defense" (here)
many FCPA violations occur because companies are subject to various trade
barriers and conditions in foreign markets.
In short, trade barriers (ranging from customs
procedures, licensing and certification requirements, foreign government
procurement policies, etc.) create the conditions in which harassment
bribes flourish as companies are funneled into an arbitrary world of low-paying
civil servants.
As relevant to China (a jurisdiction in which many recent
FCPA violations have occurred and in which many companies are
currently the subject of FCPA scrutiny), the U.S. Chamber of Commerce recently
released an extensive report titled "China's Approval Process for Inbound
Foreign Direct Investment: Impact on Market Access, National Treatment
and Transparency" (see here).
The report, based on research conducted by Covington & Burling at the Chamber's
request, should be must read for practitioners advising clients on FDI in China
as well as others generally interested in the topic of trade barriers.
Although the report does not contain the words bribery or corruption, it is
very much on topic.
The report draws on interviews conducted with foreign
companies doing business in China and discusses, among other topics, the
following.
How China's Foreign Investment Catalogue requires
"different levels of approval scrutiny or tougher application requirements" for
non-Chinese prospective investors and how the Catalogue "may require that
investment take certain forms and/or that the foreign shareholder's proportion
of investment in the enterprise be limited."
Various project and regulatory approvals needed to do
business in China and how various characteristics of the approval process have
resulted in "application of vaguely written or unpublished rules in ways that
restrict or unreasonably delay market entry by foreign companies" and how in
other instances "approval authorities have orally communicated deal-specific
conditions for investment approval beyond those required by written law."
As to China's licensing regimes, the report notes that licenses are required
for more than 100 business activities in China and that government approval is
also needed for certain modifications to an enterprise "such as change of
registered capital, change of shareholders, amendment of business scope,
merger, or the acquisition of a company in a restricted industry."
As if the various Chinese governmental approvals were not
enough, the report also notes that obtaining certain governmental approvals is
exacerbated by the fact that in certain Chinese - foreign joint ventures, the
local partner may serve in certain instances as the applicant and "control the
communications channels between the foreign investor and the government
approval authorities ...".
House Intelligence Committee Report
As noted in this recent
Wall Street Journal article, the House Intelligence Committee has
concluded that two Chinese companies (Huawei Technologies and ZTE Inc.) pose
security risks to the U.S. because their equipment could be used for spying on Americans,
The House Committee recommended that the U.S. block acquisition or mergers
involving the two companies through the Committee on Foreign Investments in the
U.S. ("CFIUS").
The report (here)
also accuses Huawei of bribery and corruption. Page 35 of the report
states as follows. "[Huawei] employees have alleged instances [of] fraud
and bribery when seeking contracts in the United States." The
apparent lack of a "foreign official" may take this alleged conduct
outside the scope of the FCPA, but the Travel Act may remain relevant.
President Obama's Executive Order and
Subsequent Lawsuit
As noted in this recent
Reuters article, President Obama recently issued an Executive Order ordering
Ralls Corp. (a U.S. company owned by two Chinese nationals) to sell off four
planned winds farms in Oregon due to national security threats. As noted
in the article, President Obama's recent order is the first time since 1990
that a President has formally blocked a business transaction.
The Executive Order (here)
states that "there is credible evidence" that Ralls Corp. "might take
action that threatens to impair the national security of the United
States." President Obama's order followed a recommendation by CFIUS (see here)
recommending the divestiture.
In response, Ralls Corp. filed this lawsuit
against President Obama, CFIUS and others. In pertinent part, the suit
alleges as follows.
"At no time has Ralls ever had any opportunity to view,
review, respond to, or rebut any evidence that CFIUS, the President, or any
person or entity acting on their behalf has obtained, reviewed, or relied upon
in reviewing the transaction in question, concluding that the transaction
raises national security concerns, issuing the aforementioned orders, and
imposing the foregoing extraordinary prohibitions and restrictions. In
issuing their respective orders, CFIUS and the President acted in an
unlawful and unauthorized manner. By exceeding the powers granted to it [by
law] and failing to provide any evidence or reasoned explanation for its
decision, CFIUS violated the Administrative Procedure Act. By imposing
restrictions far beyond the limited scope of the powers specifically granted to
him [by law], the President has committed ultra vires acts in violation of the
law. By failing to provide Ralls with sufficient notice and opportunity to be
heard prior to prohibiting its acquisition of the windfarms and imposing
extraordinary restrictions on the use and enjoyment of its property interests,
CFIUS and the President have unconstitutionally deprived Ralls of its
property absent due process. And by unfairly and unjustly singling out Ralls
for differential treatment compared to similarly situated parties, CFIUS and
the President have violated Ralls's right to equal protection of the law."
Former U.S. Solicitor General Paul Clement (here)
represents Ralls. For additional analysis, see this recent
Covington & Burling alert and this
recent Mayer Brown client alert.
Read more articles on the FCPA by Mike
Koehler at FCPA
Professor.
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