Lead the people by laws and regulate them by penalties, and the people will try to keep out of jail, but will have no sense of shame. Lead the people by virtue and restrain them by the rules of decorum, and the people will have a sense of shame, and moreover will become good.
The Analects of Confucius
During the “Cultural Revolution” from 1966 to the death of Mao Zedong in 1976, the law and judiciary were essentially disregarded in China. This resulted in China’s exclusion from Western economies, particularly the U.S. After Mao’s death, the Communist Party began a policy of reform that culminated in a Constitution and a series of laws ultimately directed to the implementation of a “Socialist System of Laws with Chinese Characteristics.”
As part of this process, and in an effort to comply with the U.N. Convention Against Corruption, the National People’s Congress in February 2011 enacted the “Eighth Amendment to the Criminal Law,” which included an amendment to Article 164 of the Criminal Law providing that:
Whoever, for the purpose of seeking illegitimate commercial benefit, gives property to any foreign public official or official of an international public organization, shall be punished (by up to 10 years’ imprisonment and fines).
Prior to the Eighth Amendment, Chinese law did not address bribery outside of China. As expected, the scope and reach of the new law are the subjects of considerable commentary and, unfortunately, uncertainty. Multinationals doing business in China will likely struggle with the new law and its interaction with other anti-corruption legislation, particularly the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010.
This is of particular concern to companies that have Chinese subsidiaries or participate in Chinese equity joint ventures. For example, the new Chinese law criminalizes payments or offers to pay money or property made in furtherance of “illegitimate commercial benefits,” yet that term is undefined. What may be “legitimate” to one, may not be to the other, particularly in light of globalization and the many differences between conducting business in China and in other countries.
Complicating this is the nonprofit Transparency International’s recent ranking of the Chinese as some of the world’s most likely supply side bribe payers in its 2011 Bribe Payers Index.
Another potential stumbling block to ensuring compliance is that the new Article 164 does not define “foreign public official” or “official of an international public organization,” whereas the U.N. Convention Against Corruption defines these concepts with particularity, and the Foreign Corrupt Practices Act has expanded definitions to include candidates for public office. It’s unclear whether China will follow the U.N. definitions or a broader interpretation of its new law, as the U.S. has done in FCPA enforcement, or whether some other standard will apply.
Perhaps the most worrisome aspect of the new Article 164 is that it’s unclear whether a foreign company (or its management) could be found liable for the acts of its Chinese subsidiary or affiliate (or their respective employees, agents or representatives). The U.K. Act has expansive jurisdictional provisions, and the extraterritorial reach of the FCPA, although limited by the U.S. Constitution, is far reaching as well.
Questioned in 2007 about transparency in foreign investment, Li Ruogu, head of the Export-Import Bank of China, referenced a Chinese saying: “If the water is too clear, you don’t catch any fish.” The amendment to Chinese law, and increased enforcement of other anti-corruption legislation worldwide, may signal a trend that the waters are clearing.
So how is an international business expected to avoid the pitfalls of new laws and increased enforcement and yet still “catch fish?” It should go without saying that companies should not pay bribes, but the realities of international business aren’t always so clear or controlled when considering what is a legitimate business expense versus an illegitimate conveyance of value.
A consensus seems to be emerging that engendering cultures of compliance, with robust anti-corruption policies and procedures, is the best starting point.
Policies and procedures should be reviewed and updated periodically, especially if a company’s operations are affected by recent interpretive or legislative developments.
Because anti-corruption policies should be implemented according to the risks of corruption specific to the company, the uncertainties of the new law may need to be considered by any company conducting business in or through China. Although there are apparently no exceptions or affirmative defenses to liability under China’s new law, enforcement under the FCPA and the U.K. Act takes the existence of strong anti-corruption policies and procedures into consideration. China may follow suit in its own future enforcement actions under the new law.
Additional measures to minimize the risks of corruption and potentially disastrous enforcement actions should include periodic training of employees on all anti-corruption laws affecting a company’s business, including specific examples of permitted and prohibited conduct. Good recordkeeping, including periodic certifications and audits, and thorough, ongoing, due diligence on prospective and existing business partners also should help to minimize the risks.
Although China has increased enforcement actions recently against corruption within its own ranks, how its new law ultimately may be enforced remains to be seen because there have been no reported enforcement actions. Nevertheless, there should be no doubt that China is following other jurisdictions so that its own people will “become good.”
Justin Renshaw is an attorney in the Houston office of Vorys, Sater, Seymour and Pease. He regularly counsels clients on anti-corruption issues in the U.S. and abroad. Contact him at email@example.com.