In China, You Better Watch Out

Staying out of the Foreign Corrupt Practices Act penalty box requires a vigilant prevention program.

Think it’s easy to stay out of jail? John MacLellan doesn’t. He is the regional finance director of Microsoft for Asia, and responsible for ensuring watertight compliance with the U.S. Foreign Corrupt Practices Act (FCPA) in China, a law that exacts strict penalties for giving or taking bribes in overseas operations.

Microsoft boasts a robust internal compliance program and conducts frequent internal audits. Under extraordinary circumstances, MacLellan can call in an accounting ‘black ops’ team to blow through any office in the Middle Kingdom with impunity, seizing hard drives and riffling desks. Yet recent cases have marked a new urgency in the U.S. government’s enforcement of the law, and this keeps him up at night.

“In the U.S., there’s a very clear definition of who the government is,” he says. “But in China, when you’re elected, your family could be in power, too.” You might find yourself treating a customer to a business dinner, he says, without knowing that the old guy at the end of the table is really representing the government. Under the FCPA, this might constitute bribing a public official — a sure way to end up in the corporate penalty box, a very costly place to be. “We face a large number of very complex deals in China,” MacLellan says, “and because of the size and influence of the government, we’re exposed from the start.”

Adventures in Draconia

The FCPA may well be America’s legislative draconian sleeper. Enacted in 1977, the law has yielded just four convictions in the past 29 years. But prosecutions by the Department of Justice (DoJ) are accelerating.

What’s changed is not the law itself but the environment surrounding it. The increasing dependency of U.S. companies on foreign profits to boost growth is putting executives under pressure to do whatever it takes to hit targets. The Sarbanes-Oxley law, with its risk-control provisions and reporting requirements, has also made it more likely that an uncovered bribe or kickback will end up on a material weakness report, damaging a company’s reputation. Another feature of the new environment is an increased aggressiveness by prosecutors and regulators. According to Owen Pell, partner with White & Case, the New York-based international law firm, the number of reported investigations into possible violations, both government-initiated and self-reported, has increased since 2002, with 22 new investigations launched between 2004 and 2005. “These increases can be explained by more robust U.S. regulatory enforcement in the wake of U.S. domestic corporate scandals,” says Pell, “some notable problems at large non-U.S. companies, and increased efforts at coordinated international actions to combat corruption generally.”

The dearth of convictions can be misleading, because most cases end up in settlement. Since 1990, Pell says, the DoJ has prosecuted 49 individual defendants and corporations. Of those, 27 were resolved though plea agreements. Of the 38 dispositions handed down by the Securities and Exchange Commission since 1990, most resulted in agreements to avoid future violations, while some have ended in fines and disgorgements of profits. Disgorgement is an appropriately nasty legal term for a monetary penalty based on an estimation of the profits that resulted from a bribe to gain business.


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