Guanxi And The FCPA

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Chinese business culture creates potential ethical and legal challenges for US businesses. Imperative to understand and navigate the ethical minefield in China for all doing business there.

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Guanxi And The FCPA

  1. 1. John Elms
  2. 2. • Introduction • Guanxi defined • Its uses in Chinese business culture • How it can go wrong • Foreign Corrupt Practices Act (FCPA) • Recommendations
  3. 3. • John Elms, Managing Director, Elms & Company, LLC • Hong Kong Resident 1995-1998 • Entrepreneur Tianjin, China 2001-2003 • CEO SpectraLink Corporation 2003-2007 • CEO Azalea Networks, Beijing 2007-2009 • Chinese language skills at upper- intermediate level
  4. 4. • Relationships between individuals creating and reinforcing obligations for the continued exchange of favors • Strength based on time establishing, depth of favors, and mutual benefits derived • Deep personal trust and reliability are at the core • Closest western comparison would be the “good old boy” network
  5. 5. • Established through personal favors, most often entertaining and gift giving, but also introduction to intermediaries for other assistance, hiring of offspring, etc. • Personal and not transferable • Basis is personal trust and mutual benefit in a system otherwise lacking – West relies on contracts, East relies on personal relationships • Often how things get done where the rule of law is lacking
  6. 6. • Provides access to new customers and political guardian angels • Perpetuates and deepens existing client relationships • Facilitates business operations: political, regulatory, legal, etc. – Speed of government approvals and time to market – Avoid scrutiny and over-regulation – Develop competitive intelligence – Secure purchase contracts
  7. 7. • The Guanxi relationship trumps all other affiliations and is protected at all costs leading to: – Paying inflated prices to help a “friend” – Pushing deals to preferred distribution partners to help a “friend” – Sharing confidential company information to help a “friend” – Disclosing competitive bid information to help a “friend” • Because the guanxi relationship is bilateral, the “friend” always reciprocates the favor creating linkage between the acts and therefore an FCPA challenge.
  8. 8. • Enacted 1977 • US Firms doing business in foreign markets must be familiar with and ensure compliance • DOJ is chief criminal enforcement agency, SEC provides civil enforcement for public companies • Provides for up to $2 million in fines for businesses, $100 thousand plus 5 years imprisonment for individuals • 120 companies currently under investigation at May 26, 2009 per DOJ spokesperson [ref. WSJ]
  9. 9. • Who: any individual, firm, officer, director, employee or agent of a firm and any stockholder acting on behalf of the firm. • Corrupt intent: payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or any other person. • Payment: paying, offering, or promising to pay (or authorizing to pay or offer) money or anything of value
  10. 10. • Recipient: Must be a foreign official, foreign political party, or party official or any candidate for foreign political office. – Employees of China state owned enterprises would be considered “foreign officials” under the FCPA • Business purpose test: Payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. – DOJ interprets obtaining or retaining business broadly
  11. 11. • Unlawful to make a payment to a third party while knowing that all or part of the payment will go directly or indirectly to a foreign official. – Conscious disregard or deliberate indifference do not relieve the individual of his/her obligations • Third parties may include, and often do, joint venture partners and/or agents – Local JV partners carry risks for US firm – Agents do not obviate the risks
  12. 12. The burden is on the accused to demonstrate that payments made were not in violation of the FCPA Know what is going on in China at all times
  13. 13. • Unusual payment patterns/financial arrangements • History of corruption in the country or industry • Unusually high commissions or discounts • Lack of accounting transparency • Lack of qualifications to perform the work contemplated • Fulfillment partners that have been selected by government officials
  14. 14. For more information and recommendations on ensuring compliance, contact: John Elms john@elmscompany.com

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