On March 18, the Berkeley Center for Law, Business and the Economy (BCBLE) hosted a lunch presentation by Gregory C. Wajnowski, GE’s Managing Director of Mergers & Acquisitions and Chief Supervisor of Joint Ventures for GE Energy in Greater China and Mongolia. Wajnowski’s lecture on the “Compliance Risks and Pitfalls in China” provided an overview of the U.S. Foreign Corrupt Practices Act (FCPA) and its implications for doing business in China. Wajnowski explained how companies could manage risk and compete effectively within the confines of the FCPA and other domestic regulations.
To start off, Wajnowski pointed out that China is around the middle of Transparency International’s corruption rankings, i.e., 80th out of 170. In 2013, China’s Corruption Perceptions Index put the country ahead of India, Indonesia, and Vietnam. Wajnowski challenged the notion that it is “too corrupt” in China to do business without engaging in improper practices when, in fact, most emerging markets present similar challenges in the area of corruption and anti-corruption.
Wajnowski proceeded with an overview of the FCPA because of its relevance to companies operating in China. The FCPA, which Wajnowski boiled down to a “thou shalt not bribe” law, exhorts essentially two things: (1) don’t bribe officials and (2) keep accurate books and records. Wajnowski described the FCPA as an “unusual piece of legislation” for how it deals with the use of third parties, e.g., sales agents, distributors, and customs brokers.
The anti-bribery provisions of the FCPA prohibit offers or promises to pay anything of value to a foreign official for the purpose of obtaining business. “Anything of value” can range from cold cash to kickbacks masquerading as fees to leisure activities like karaoke or golf. Moreover, a “foreign official” in the eyes of the U.S. government includes any employee of a state controlled enterprise, covering “basically everyone in China.” Thus, when you do business in China, Wajnowski explained, “You are immediately going to have to deal with the FCPA because almost everything you do is not going to be commercial in nature but government in nature.”
Wajnowski noted that there has been an increase in private companies in China, but that a company like GE had to err on the side of caution and treat any third party as an FCPA “foreign official” because the public-private divide is not sufficiently clear. Companies must be very careful about business related expenses that can be construed as illegitimate: “Can you order a bottle of wine at dinner? What about cigarettes? These are little things, and they can add up, and people have gotten caught.”
Wajnowski described a few cases of well-known companies that have fallen afoul of the FCPA in recent years but not always for conspicuous violations. For example, the SEC brought an action against Watts Water Technologies, Inc. for having inaccurate books and records that failed to capture improper payments made by a Chinese subsidiary to certain design institutes. An ongoing investigation of GlaxoSmithKline, a large British pharmaceutical company, has shaken the health care industry and will likely change the way people do business. The alleged misconduct was that GSK China used travel agencies to set up off-the-books slush funds and pay doctors in China in exchange for selling drug products.
The question remains: how should companies select third parties and manage those relationships in China’s dynamic economic environment? Simply eliminating third parties is not a realistic solution for most companies that need third parties to access sales channels. Instead, Wajnowski suggested companies should do a better job of scrutinizing the three stages of any third party relationship. First, companies must conduct comprehensive “desktop” due diligence. Whether the third party is an acquisition target, joint venture partner, or third party distributor, “there is no excuse for not getting [the information out there]” through basic internet searches, social media, investigation firms, court level searches or interviews and visits “the old fashioned way.” Second, a good contract should include compliance with anticorruption laws and rights to terminate in the event of a breach. Third, companies must adopt proper screening processes, timelines, and substantive frameworks for monitoring and auditing third parties.
Wajnowski emphasized the importance of walking away from business that cannot be done legally. The Chinese government is cracking down on corruption from its end, and as a foreign company, “you cannot afford to not worry about it…I think companies ignore at their peril.”