U.s. Increases Scrutiny Of China Companies

American businesses with operations in China, especially technology companies

, are going to be under increased U.S. government scrutiny with the recent establishment of a dedicated FCPA office in San Francisco.

The U.S. Securities & Exchange Commission has become increasingly concerned about inappropriate behavior from technology companies in the area which has historically strong links with China. The office, which opened a few weeks ago, has already brought actions against a number of local companies. SEC officials are aware of the culture of gift giving, especially its prevalence in the technology field, in emerging markets such as China where guidelines over appropriate behavior in this regard remain lax.

This is especially important in China, where the codes of conduct around the FCPA guidelines of giving gifts to foreign officials are blurred more than normal due to the prevalence of government involvement in its state-owned enterprises. The Chinese governments continuing presence in many of its larger companies make the distinction of a foreign official that much more difficult, and transactions with Chinese SOEs in particular will attract attention.

Furthermore, the practice of guanxi the hosting of lavish events or the provision of gifts or favors to assist with relationships complicates matters further. Additionally, many U.S. businesses may not be aware of their risk in this regard. Liabilities can still come back to haunt them through the use of a third party whose government contacts and local know-how may seem an asset. If he/she is funded by your business and is using such tactics to secure business, your company may well find itself under investigation.

The San Francisco office has been concentrating on gift giving and entertainment expenses from businesses in California, especially with connections in China. The high risk aspect of China in this regard, coupled with the recent upgrade of FCPA interest in this area, determine the need for businesses operating in or with China to take internal measures to monitor and audit China compliance matters when it comes to FCPA. Businesses are advised to take appropriate actions to avoid expensive prosecutions. The SEC office is aware of small gift giving practices as well as percentage deals to encourage the provision of contracts. While middle men may be responsible, it is the U.S. parent, if hiring such personnel to undertake such activities, who will carry the can. The San Francisco office has already secured fines running into several millions of dollars for errant behavior, and has a low threshold for non-compliance. Prosecutions have been made for amounts involving less than US$5,000 in gift giving, and it is now appropriate to ensure your company is clean in this regard.

by: Dezan Shira & Associates

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