As a result of the rapid economic growth for Mainland China over the past few years, foreign invested companies operating in China have had to push their business to win contracts with the Chinese Government and large State Owned Companies. Winning this business is an essential piece of the strategy of any multinational company working in China.
However, in their eagerness some US companies have found themselves in contravention of the US Foreign Corrupt Practices Act (FCPA) which prohibits the payment of anything of value to a foreign government official in order to induce a business transaction. The most recent example of a large multinational coming unstuck in China is that of Lucent Technologies.
In April 2004, Lucent Technologies Inc. (Lucent), now part of Alcatel-Lucent, fired four top executives at their China Division after it had uncovered activities that could potentially violate the FCPA. The issue was brought to the attention of US Securities and Exchange Commission (SEC) and the US Justice Department (DOJ) following an investigation carried out by the Company.
According to material released from US DOJ, between 2000 and 2003, Lucent spent millions of dollars on business trips for Chinese government officials including the heads of state-owned telecommunications companies. These trips were requested and approved with the consent and knowledge of the most senior officials in Lucent China and were arranged with the assistance of employees in Lucent in the United States. The trips lasted up to 14 days each and cost between US$25,000 and US$55,000 per trip. The trips consisted primarily of sightseeing, entertainment and leisure activities. In many cases, little, if any, of each trip involved training, site visits, factory visits or meetings with executives.
Under the FCPA, unless payments of this type could be substantiated by falling within the very narrow exceptions or affirmative defences under the FCPA, it is likely that such activity would indeed be a contravention. In Lucent’s example, they have entered into an agreement with the US government regarding remedial actions and have agreed to pay a $1 million fine.
The situation experienced by Lucent is very common for multinationals in China and is certainly not limited to the telecommunications industry. In many sales contracts with state owned enterprises, there is an element of ‘overseas training’ where senior executives of the state owned enterprise are allowed to travel overseas at the company’s expense. The costs of such ‘overseas training’ are often embedded into the transaction so as to avoid any review by the travel, procurement, and legal or finance departments of the Company. It is often included as a ‘sweetener’ to the transaction to induce the signing of a deal.
The FCPA permits certain reimbursements for travel and related expenses of a government officials (and officials of state owned enterprises) when such costs are incurred to review and assess the products and services of a US company operating abroad. These costs might include legitimate travel costs to attend the company’s headquarters, conduct factory inspections, meet senior executives and to attend legitimate training. In circumstances where this arises, companies should be very careful to avoid any potential breaches of the FCPA, and stick to well drafted company policies that comply with the FCPA and meet the requirements of the narrow exceptions to the Act.
What measurements should a company take to prevent such corrupt practices from happening?
Written applications. Before a trip is arranged, the relevant department head or the person in charge should make a written application to an independent department. The agreement to provide company funded travel should not be embedded in a sales transaction where it cannot be correctly reviewed or analyzed by the right departments.
Purpose of the trip. An approval request should clearly show the purpose of the trip. If the trip is for ‘training’, then the application should include specific location and the syllabus for the training and at which locations(s) the training is being held.
Attendees. Good company policy should distinguish between those requests that have been initiated by the Official and those which have been initiated by the Company. A list of attendees (e.g. invitees) should be attached and the application should specify clearly their rank and role in the company. At no time shall the family members of the government official be invited or included in company paid travel.
Side Trips. No side trip should be funded by the company. If the attendee wishes to conduct a side trip they must be organized and paid for by the attendee.
Costs. Responsibility for the costs e.g. flights, transportation, hotel, estimate budget for meals, and other reasonable entertainment activities should be provided for in a Budget. The flights should be in an aircraft class that is commensurate with the level of seniority of the attendee. Flights should be booked by the Company and tickets should not be allowed to be changed by the attendee and refunded for lower class fares. If the company is paying for transfers, hotel accommodation and meals, it should also not pay for any per diem.
Meals & Entertainment. Meals and Entertainment should be minimal and should always be related to the training or business meeting that is being organized. Meals & Entertainment should be ancillary and never the main aspect of the travel.
Length. The length of the travel should be reasonable and reflect the travel distance and the number of meetings, factory tours and training. There can be reasonable time set aside for leisure, so long as this time is commensurate and not seen as a significant part of the travel.
Taking these steps is an essential way to reduce potential exposure under the FCPA and any legislation that prohibits paying anything of value to government officials.
Scott Lane is the Principal of The Red Flag Group. This article is a series of Articles previously published in The South China Morning Post.
