The Network Lecture Series: Nathan Bush’s Corruption and Fraud in China Part I

On August 29th, 2011, Nathan Bush, Partner at O’Melveny & Myers, Beijing, delivered a lecture titled “Corruption & Fraud in Contemporary China: Challenges for U.S. Companies & Investors.” Mr. Bush’s lecture addressed two equally important questions:

(1) What pressures do U.S. companies face when operating in China, and

(2) What challenges do Chinese companies face when listing on American stock exchanges?

In answering the first of these queries, Mr. Bush took the lecture attendees through a brief history of Chinese political and social culture, Chinese anti-bribery laws, the Foreign Corrupt Practices Act, Dodd-Frank’s strengthened whistleblower protections, and the U.K. Bribery Act. In tackling the second question, Mr. Bush focused on reverse- takeover mergers of shell U.S. companies listed on American stock exchanges by Chinese companies and the recent intensification of investigations into those companies’ dealings.

Challenges Facing U.S. Businesses in China

Mr. Bush emphasized the importance of focusing on anti-corruption laws because corruption, be it private or public, distorts markets, drains public resources and results in outcomes that are neither efficient nor representative.In his view, addressing corruption will lead to a number of benefits. First, a direct benefit of stopping the instant case of corruption accrues to society. Second, enforcement acts as a deterrent to corrupt acts by some malefactors. Finally, greater enforcement leads to more enforcement by other countries.

China already has instituted a large number of extremely complex and detailed anti-corruption reforms ranging from general criminal and administrative penalties to disciplinary regimes and penalties for Communist Party members to the standard adjudication process. Despite these reforms, in 2010, China still ranked 78 out of 178 on Transparency International’s Corruption Perceptions Index. However, statistics show that progress is being made: in 2010, the Communist Party punished 146,517 officials in connection with bribery.

Mr. Bush identified a number of social, economic and institutional factors that contribute to corruption in China. First, traditional Chinese social and commercial norms blur the line between personal and business relationships. Secondly, the unparalleled number of commercial opportunities and the “expectation of graft” pave the way for corruption. Finally, institutional factors play a large role in Chinese corruption. China has historically preferred discretionary administrative policy to predictability, opacity to transparency, and decentralized enforcement of the law. Furthermore, China is still dealing with the remnants of its central planning system blurring the line between state-owned enterprises (SOEs) and private business. Lastly, both the public and private sector provides incentives for rent-seeking behavior.

Bribery of all forms takes place in China: kickback payments, gifts, and selling valuable property at well below its market value, among others. In an attempt to curb corruption among party officials, the Central Committee of the Communist Party (CCP) issued Several Rules on Service by Leaders and Officers of CCP, which applies to CCP members at the director level and above and those managing SOEs. This document acts as a guide to what constitutes corruption by outlining 52 unacceptable practices for applicable CCP members. In addition, the last two years have seen updated rules regarding party officials’ families and expanding reporting cadres to ensure oversight over government officials.

Working parallel to China’s anti-bribery regime stands the United States’ Foreign Corrupt Practice Act (FCPA). The FCPA has three parts: (1) anti-bribery provisions, (2) books and records provisions, and (3) internal controls provisions. The anti-bribery provisions prohibit causing “an act in furtherance of … a corrupt payment to take place within the territory of the United States.” The FCPA does allow for genuine, reasonable promotional expenses, and allows, but disfavors, “grease payment” – though some commentators see this exception as quickly dwindling.Finally, the internal controls provision requires companies to maintain “reasonable” accounting

In addition to stepping up enforcement of FCPA provision domestically, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ), the two agencies authorized to enforce FCPA provisions, have increased enforcement against foreign companies, such as Siemens, Daimler, and Alcatel-Lucent. If a foreign company issues securities on a U.S. exchange, has a principal place of business in the United States, or has officers, directors, employees or agents in the United States and makes use of any facet of interstate commerce then it can be subjected to FCPA liability. This jurisdictional nexus is a very low threshold that, as Mr. Bush pointed out, can be satisfied with as little as using e-mail or making a telephone call.Furthermore, the SEC and DOJ have been stepping-up enforcement against foreign subsidiaries, agents and employees, and using new, more aggressive theories of prosecution, including Section 20A of the Securities Act and alternate charges, to reach foreign defendants.

Some very recent changes both here in the United States and abroad have sought to strengthen anti-corruption protections worldwide. As reported earlier this year, the year-old Dodd-Frank Act enacted a new set of whistleblower provisions aimed at increasing reporting of corporate malfeasance. The final rules cover any person, not just U.S. citizens, and do apply to FCPA violations. This may give rise to greater reporting of FCPA violations by Chinese workers at multinational corporations operating in China but subject to FCPA liability. In addition to these new domestic policies, the United Kingdom recently enacted the UK Bribery Act 2010, which aims to be an even stronger anti-corruption act than the FCPA. Finally, in May of this year, China enacted its own version of the FCPA and for the first time prohibiting bribery of foreign officials. Though there seem to be few concerns about the applicability of this Chinese FCPA to developed nations, questions remain about its enforcement in developing nations.

While many herald the FCPA as a model for anti-corruption statutes, some groups believe that the Act is too harsh and should be amended. In 2010, the Chamber of Commerce Institute for Legal Reforms proposed a number of amendments including adding a compliance defense and limiting the liability that a company faces for the corrupt acts perpetrated by an acquired company before the acquisition. Mr. Bush stated that it is hard to know whether such amendments will be adopted in the near future.

To view Mr. Bush’s lecture and accompanying slideshow, please visit

Michael Perez, The Network Lecture Series: Nathan Bush’s Corruption and Fraud in China Part I, Berkeley Bus. L.J. Network (September 5, 2011),