Anti-corruption compliance in outbound investment

By Sharon Shi, AllBright Law Offices
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For the past few years, apart from countries and regions with a low level of corruption such as the US, western Europe and Hong Kong, the destinations of Chinese overseas investment have included more and more countries with a high level of corruption. Even though anti-corruption compliance is not a major focus of concern, the consequence of stepping over the red line for overseas non-compliance will be severe. It is increasingly important for Chinese companies to reduce overseas anti-corruption risks and take action to ensure lawful and compliant operations.

史军 SHARON SHI 锦天城律师事务所 高级合伙人 Senior Partner AllBright Law Offices
史军
SHARON SHI
锦天城律师事务所
高级合伙人
Senior Partner
AllBright Law Offices

Extraterritorial effect of Chinese anti-corruption laws. The US Foreign Corrupt Practices Act (FCPA) has a global reach and its level of enforcement and penalty amount is high. Extraterritorial reach of the FCPA follows the principle of lex personalis, i.e., all US citizens (and US companies) are governed by US law no matter whether they violate the law within or outside US territory.

Even though the relevant Chinese laws were initiated relatively late, China also has anti-bribery laws with extraterritorial effect. Article 7 of the PRC Criminal Law stipulates that “this law shall be applicable to a citizen of the PRC who commits a crime prescribed in this law outside the territory of the PRC”. Article 29 of Amendment (VIII) to the Criminal Law provides that the crime of offering bribes to an official of a foreign country or an official of an international public organization, namely giving money or the like to an official of a foreign country or an official of an international public organization for the pursuit of any improper commercial benefit is subject to a penalty. The penalty could be, depending on the amount of the bribe, a fine and/or sentence of imprisonment up to 10 years or detention. This indicates that Chinese companies and individuals who offer bribes overseas will be governed by Chinese criminal law as well.

Anti-corruption laws of the host countries. Apart from complying with relevant Chinese laws, it is more important for Chinese companies to understand and comply with laws and regulations of a host country. If the company is punished in the host country due to bribery, the related losses will not be limited to legal aspects, and often the consequences will be magnified and dramatized by the press which may then irrevocably cause a negative effect on the company’s reputation.

In southeast Asia, Singapore has specific regulations on bribery, such as the Criminal Law and the Prevention of Bribery and Corruption Law. Its anti-corruption rules are comprehensive and rigorous. Governmental officials are broadly defined as “people who are at the service of [the] Singapore government, get remunerations and hold any position”. Companies are obligated to report crimes in addition to strict internal control obligations. Failure to perform such obligations may result in hefty fines.

The Criminal Law of Thailand provides that a corporate legal person, either on their own or through an agent, who offers property or other benefits to a governmental official for the official to exercise or not exercise a specific official duty, may be sentenced to imprisonment or be subject to a fine, or both.

South America is also a destination for many Chinese investments in recent years. Brazil, Chile, Argentina and other major countries in South America all have relatively comprehensive anti-corruption laws and regulations. For example, Brazil’s laws include: Anti-Inappropriate Administration Law, Anti-Corruption Law, Integrity Company Law, etc. Foreigners who offer bribes to a Brazilian official can be sentenced to imprisonment. The state treasury will confiscate illegal gains from companies involved in corrupt activities, and a company may be subject to a fine of a certain percentage of its total business turnover.

For countries without comprehensive anti-corruption laws, and as long as the host country has signed international treaties such as the United Nations Convention against Corruption Preamble and the OECD Anti-Bribery Convention, carrying out bribery in a signatory country will also have serious legal risks.

Recommendations for Chinese companies investing overseas. First, Chinese companies must conduct due diligence on the anti-corruption environment of the host country, especially for those with a high level of corruption, before making an investment overseas. In recent years, anti-corruption laws and regulations of developing countries, especially countries along the Belt and Road, are continually evolving. However, Chinese companies traditionally think little of anti-corruption compliance and may easily cross the line. Therefore, before making an investment, Chinese companies must engage a professional service provider to carry out a legal risk analysis on the investment environment relevant to the project particularly with respect to anti-corruption law requirements and bribery identification.

Second, Chinese companies must establish strict domestic and overseas anti-corruption compliance policies, regulations and rules. For payments of a sensitive nature such as fees for making an exception, gifts, donations, and so on, a detailed administration and compliance system must be formulated to strengthen control on them. Guidance for employees on how to deal with such payments must also be provided. In the meantime, Chinese companies must conduct compliance training for all expatriates and employees, encourage a compliant culture and develop compliance communication to make it clear to employees that there is a zero-tolerance attitude towards corruption from the top down.

In addition, Chinese companies must keep financial and accounting records to ensure authenticity, completeness, and clarity of their accounting statements. Without this, companies risk being investigated for accounting fraud. An example is the accounting clauses under the FCPA requesting companies to establish an internal financial control system that conforms to internationally recognized principles and accurately records sensitive payments such as gifts and donations.

Finally, Chinese companies must establish a corruption risk identification system for high-risk fields and personnel. Companies should give preference to those employees who have undergone overseas investment anti-corruption risk training and who will be sent overseas to carry out business that require communication with governmental officials in the host country. A the same time, records and any evidence regarding relevant contacts and payments must be retained so that the company is able to verify and use as proof if it is being investigated of corruption. Furthermore, Chinese companies may request potential joint venture partners, target companies, suppliers, distributors, etc. to provide statements on whether they have been subject to any anti-corruption investigations and to make a commitment on anti-corruption compliance so that risk assessments may be duly carried out and records kept.

Sharon Shi is a senior partner at AllBright Law Offices

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