Tag: China

Real Estate, China and the FCPA

China is hotbed for violations of the Foreign Corrupt Practices Act. The real estate industry is not immune from the dangers. In February of 2009 Morgan Stanley’s real estate group reported an employee based in China in an overseas real estate subsidiary that appeared to have violated the Foreign Corrupt Practices Act.

My company has significant business relationships with CB Richard Ellis so it saddens me that they are the latest to report a problem under the FCPA.

As a result of an internal investigation that began in the first quarter of 2010, the Company determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non-business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. Nonetheless, the Company believes that the payments may have been in violation of the U.S. Foreign Corrupt Practices Act or other applicable laws. Consequently, the Company voluntarily disclosed these events to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) on February 27, 2010 and has continued to cooperate with both the DOJ and the SEC in connection with this investigation. The Company engaged outside counsel to investigate these events and has implemented thorough remedial measures.

In addition, in the third quarter of 2010, the Company began another internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business. This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information.

The real estate industry should be just as concerned about bribery of foreign officials as any other industry. Perhaps even more so. Real estate is inherently local and you undoubtedly need to deal with government officials to get building permits, occupancy permits, zoning approvals and a myriad of other interactions.

Sources:

Avery Dennison and the Pitfalls in China

Don Lee of the Los Angeles Times has a great story about the pitfalls encountered by Avery Dennison when it was trying to build its road and traffic business in China: Avery Dennison case a window on the pitfalls U.S. firms face in China.

It highlights the gray area between building relationships and corrupt transactions, especially in an economy like China’s where corruption is more pervasive and accepted.

Avery Dennison ended up under a federal investigation for violations of the Foreign Corrupt Practices Act.

Avon Fall-Out

We are starting to see some of the fall-out from the Avon FCPA investigation [Ding Dong, FCPA Calling]. The Wall Street Journal [Regulators Detained by China in Probe] and Reuters [China probe may curb foreign deals: sources] are both reporting the detention of two officials from the Commerce Ministry.

The Wall Street is reporting that there is an investigation of Zhang Yudong, a “well-known” attorney at a Beijing law firm that helps companies get licensed in China. Reuters is reporting the detention and investigation of two lawyers at eh Chines Law firm Seafront (known as Si Feng in Chinese).

Reuters is also investigating at least two other U.S. law firms.

FCPA Opinion Procedure Release 08-03

FCPA Opinion Procedure Release 08-03 was a request from TRACE International, Inc. on paying expenses for journalists from China to attend a press conference being held by TRACE in Shanghai. Most of the media outlets are wholly-owned by the People’s Republic of China.

The opinion finds the stipend and expenses that TRACE intends to pay into the promotional expense affirmative defense because the expenses are “reasonable under the circumstances and directly relate to the promotion, demonstration, or explanation of [TRACE’s] products or services.”

Walking The Fine Line Of Compliance In China

Jeffrey M. Rawitz and Erica L. Reilley of Jones Day published an article in Mondaq: China: The Foreign Corrupt Practices Act: Walking The Fine Line Of Compliance In China.

Four Suggestions for Avoiding FCPA Complications in China

Any company seeking to avoid potential FCPA problems in China, or elsewhere, should start by developing a rigorous internal compliance program. A good compliance program will include clear standards and procedures and will provide thorough training for all employees that have business dealings with China or any other foreign nation. Compliance materials and training should be targeted to the employees receiving them; thus, employees in China should be trained by local staff that understand the FCPA and can take into account the likely cultural issues—e.g., the long-standing Chinese tradition of gift giving—that may have an impact on proper compliance.

In addition, companies can limit exposure to potential FCPA problems through vigilant adherence to corporate due diligence. As noted above in the section on successor liability, U.S. enforcement authorities do not always view a merger or acquisition as extinguishing liability for past unlawful conduct. Thus, a company planning to merge with or acquire a company that has done business in China will need to do its due diligence on the target company’s business dealings, including those of its partners, agents, and distributors, to ensure FCPA compliance.

A third suggested practice to limit FCPA exposure is to negotiate and draft contracts that minimize FCPA risks. A company can do this by incorporating standard representations, warranties, and covenants in contracts with agents and distributors wherein they affirm their understanding of the FCPA and their commitment to comply with its requirements. Appropriate oversight of these agents and distributors, via inspection of business records and financial reports, may also prove helpful to ensuring a company’s overarching compliance with the FCPA.

Finally, a company’s potential FCPA liability can be minimized by forming an investigative team that can respond quickly when potential FCPA issues arise. The first part of this process requires that employees feel comfortable raising potential issues as they come up—compliance training can be particularly helpful here in assuring employees that the company wants to know of these concerns. Typically it is best for in-house counsel to be responsible for receiving such reports and for managing the resulting investigations. Lawyers usually can best assess the potential for liability (and thus the need for a complete and thorough investigation), and they can take appropriate precautions to keep the identity of the reporting employee confidential. Where notice of potential FCPA liability comes from U.S. enforcement authorities, it often is best to have in-house counsel work closely with outside counsel to provide a certain level of independence and objectivity throughout the investigation as well as to cooperate with enforcement authorities, if needed.