Who is a government official?
To the laymen this question may seem like a joke, but it is deadly serious for foreign companies operating in China – where there is an established custom of giving lavish gifts and fine-wining and dining in the pursuit of customers’ good will.
The US Foreign Corrupt Practices Act (FCPA) forbids American companies, as well as non-US firms with securities trading on US exchanges – from bribing foreign officials to gain an advantage in business dealings. What comes as a surprise to employees of foreign companies operating in China is its definition of what constitutes a foreign official.
China’s economy, which has been undergoing privatization since the economic reforms started by Deng Xiaoping in 1978, is dominated by massive state-owned enterprises. The FCPA views employees of these state-owned enterprises, regardless of rank, title, position as being foreign officials on the theory that state-owned enterprises are instrumentalities of the Chinese government.
FCPA actions related to China in recent years have included “foreign official” recipients of bribes who are doctors and administrators at state-owned hospitals, employees at government-run airports, and in state-owned oil companies – all of which would not traditionally considered employees of a government department.
It is obvious that in China it is important to understand whether a potential customer is purely a private firm – and therefore it is acceptable to give modest gifts and entertainment as a way of marketing products and services, or a “foreign official” as defined by FCPA. Getting it wrong could lead to FCPA probe by US authorities, which could result in hundreds of millions in criminal fines, and jail sentences for individual company executives.
To make the judgment call, consider a few good rules of thumb:
· Treat everyone in China as a foreign official, until it is proved otherwise. This may sound overly paranoid, but it is a guideline adopted by the majority of top foreign firms operating in China today. Many sectors of the Chinese economy are entirely state-owned, such as oil and gas, mining, healthcare, transportation, shipyards, airlines, banks, insurance, utilities, real estate, and the media. Where reasonable doubt exists – for example, in case of a joint venture established between a foreign company and a Chinese state-owned enterprise, companies should seek an opinion from the relevant anti-corruption authority (in most cases, this would be the US Department of Justice).
· When approaching new business contacts, read up on their company’s literature to see whether they have any connections with the government. Visit the company’s website, or get a copy of its annual report to see whether government officials or Chinese Communist Party members serve on its board of directors or in senior management. Search the internet for new articles on the sale or purchase of stakes in the companies’ shares. If all else fails, ask your main business contact if they know whether the government owns a stake in, or controls, the company.
· Never assume that just because a company is publically traded, that it is not a state-owned enterprise. This is especially so since many of the biggest state-owned enterprises in China (For example, Bank of China, Sinopec, and China Unicom, to name a few of the biggest names) have in the last two decades or so successfully floated their shares on stock exchanges, such as in Hong Kong, New York, as well as Shenzhen. Even if a listed company on the surface appears not to be state-owned, it is not unusual for Chinese Communist Party members to sit on its board of directors – especially for the biggest Chinese enterprises – and exert some degree of influence or control.