Businesses in China Cautioned on Foreign Corrupt Practices Act

By Allen Smith, J.D. Nov 2, 2007

CHICAGO—Employers that fail to build the right relationships with reputable firms in China face legal risks under the Foreign Corrupt Practices Act (FCPA), cautioned Susan Frank, deputy general counsel with Science Applications International Corp. (SAIS).

The FCPA applies to dealings with state-owned entities and public officials within the meaning of the act. Many entities and individuals in China fit within the FCPA’s definition of “public officials,” Frank explained on Oct. 29, 2007, at the Association of Corporate Counsel annual conference held here.

FCPA Prohibitions

In her presentation, Frank noted that the FCPA:

  • Criminalizes bribery as a means of getting business overseas.
  • Prohibits payments or promises to pay directly or indirectly to government officials.
  • Puts the burden on U.S. companies and citizens to hire only reputable foreign agents/consultants/subcontractors.
  • Imposes personal liability for those who participate in misfeasance or conduct sham transactions.

Frank noted that failure to follow company procedures can be evidence of bad faith in the eyes of the U.S. Department of Justice (DOJ).

The reach of the FCPA has been “greatly expanded by U.S. prosecutors” at the DOJ, according to Frank, who said that “few will go to court over this. This is a prosecutor-driven law.”

Frank noted that Schnitzer Steel Industries and its Korean subsidiary, SSI Int’l Far East, have been fined $15.2 million for alleged improper payments to managers of wholly and partially government-owned companies in China and commercial bribery to induce purchases of scrap steel.

Of course, the FCPA applies to more than just certain transactions in China. Frank said that on June 7, 2007, Christian Sapsizian, a former Alcatel executive, pleaded guilty to participating in the payment of more than $2.5 million in bribes to Costa Rican government officials to obtain a mobile phone contract from Costa Rica’s state-owned telecom authority. Sapsizian faces a maximum of 10 years in prison, a $250,000 fine and $330,000 in forfeiture.

Training on FCPA Protocols

Nevertheless, any SAIS employee sent to China is trained on the FCPA and the company’s FCPA protocols, Frank noted.

“The DOJ is pushing the boundaries” in enforcing the FCPA, she said. The DOJ fraud section chief said at the March 28, 2007, FCPA conference that prosecution of individuals responsible for FCPA violations was a priority, she noted. Highlighting the risk of personal liability is a good way to get the attention of a company’s top businesspeople, Frank observed, because it signals that “you’re trying to protect them as well as the company.”

She said employers doing business abroad effectively must:

  • Know what they are paying to whom and for what.
  • Have strict accountability in international business.

SAIS “vets all intermediaries” when doing business in China, including agents, subcontractors, distributors, consultants and even law firms. She recommended that freight forwarders be scrutinized particularly closely in light of recent DOJ enforcement.

Expansive Export Rules

The FCPA isn’t the only compliance concern for employers doing business in China. Businesses, particularly in the technology sector, must ensure compliance with U.S. export laws to the satisfaction of the U.S. Department of State Directorate of Defense Trade Controls. China is under an arms embargo, so no U.S. military or military-related goods or technology can be exported to it, she explained.

In addition, the U.S. government has “substantially expanded” the China Military End-Use Rule, making it a “pretty broad rule” that is difficult to meet, Frank observed.

Under the so-called “China Rule,” exports, re-exports or transfers in China of U.S. items that fall into one of 31 export control classification numbers require a license from the U.S. Bureau of Industry and Security if sold to a “military end use.” The rule is interpreted so broadly that SAIS decided not to pursue at least one business opportunity in China after concluding that the legal risk outweighed the benefit, Frank noted.

SAIS naturally conducts due diligence as to the identity and activities of customers to ensure compliance with the rule in its existing business activities in China, checking international employees against a table of denial orders quarterly, she added.

“These are big risk areas for high-tech in particular,” Frank cautioned, saying they require “good systems and processes.”

Allen Smith, J.D., is SHRM’s manager of workplace law content.

Related Article: 

Export Codes of Conduct, Not Employee Handbooks, SHRM Legal Report, January/February 2007

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