Saturday, August 27, 2005
The Washington Post has an extensive article (here) about the problem U.S. companies have in gaining a foothold in China while avoiding violations of the Foreign Corrupt Practices Act (FCPA). The clash is inevitable because any company with a global presence views China (and India) as crucial to building market share, lest a competitor take the business. The business and regulatory culture in China, however, is much more akin to the "Wild West" than more developed markets. It is a place in which payments to government officials and middlemen are expected, and favors must be granted to gain access to lucrative contracts and the necessary licenses to conduct business. That is a recipe for an FCPA investigation by the SEC and DoJ, particularly in the years since the adoption of the Sarbanes-Oxley Act. For publicly-traded companies, the CEO and CFO must certify the company's financial statements, and any hint of an improper overseas payment to secure business means that those financial cannot be certified, or the executive runs the risk of a criminal prosecution. After being dealt a setback in the Scrushy/HealthSouth prosecution on the criminal certification provision of Sarbanes-Oxley (18 U.S.C. Sec. 1850 here), I suspect the DoJ is itching to find an easy case to bring to show that the law can have a real impact, and an FCPA case may be a prime one to use the provision if a CEO turned a blind eye to foreign bribery.
A recent example of a company having to deal with an FCPA investigation related to sales in China involves Schnitzer Steel Industries Inc. The company disclosed (here) that the SEC had issued a formal order of investigation involving possible FCPA violations related to transactions in Asia:
On August 23, 2005, the Company received from the Securities and Exchange Commission (the “SEC”) a formal order of investigation relating to the Company's previously announced independent investigation of the past practice of paying improper commissions to purchasing managers of customers in Asia in connection with export sales of recycled ferrous metals. The Company had voluntarily notified the Securities and Exchange Commission and the U.S. Department of Justice of the independent investigation; and instructed its outside law firm to provide those agencies with the information obtained as a result of the investigation; and continues to cooperate fully with those agencies. The previously announced investigation is being conducted by an independent law firm working under the supervision of the Audit Committee of the Company's Board of Directors (the “Board”).
For those interested in this area, an outstanding book published recently is The Foreign Corrupt Practices Act and the New International Norms, by Stuart H. Deming (who also sent along the Washington Post story). The book is published by the International Law Section of the ABA (here), and is the most current treatment of the subject. (ph)