Guanxi And The FCPA
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Transcript of Guanxi And The FCPA
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John Elms
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• Introduction• Guanxi defined• Its uses in Chinese business culture• How it can go wrong• Foreign Corrupt Practices Act (FCPA)• Recommendations
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• 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
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• 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
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• 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
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• 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
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• 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.
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• 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]
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• 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
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• 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
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• 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
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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
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• 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