How to deal with the corruption crackdown

The Chinese government has put pressure on corporations – especially foreign-invested enterprises – to improve compliance. Risks, fines and criminal liabilities for non-compliance have been increased, prompting businesses to construct internal training programmes and guidelines for staff against illicit behaviour as well to be more careful when targeting investments and pursuing transactions.

This peaked with the recent GlaxoSmithKline scandal. While speaking at the panel on Anti-corruption at the asialaw In-house Counsel Summit this week, Sasha Kalb, senior compliance counsel of 3M, and Stanley Lui, general counsel of Nobel Biocare Asia, shared their experiences on how to implement the necessary controls, programmes and strategies to limit corruption risks.

The two companies are involved in the healthcare industry. 3M, having a highly diverse product base ranging from consumer products and electronics/energy to healthcare and industrial safety and graphics, implemented a compliance program to encompass all bases when working with business partners. “Our policy provides that any third party undergoes due diligence, but the level of necessity and applicability varies so we take a risk-based approach,” said Kalb.

“We created an algorithm to determine the level of scrutiny we should afford to each partner and to determine whether we need outside support to conduct due diligence. The result is we offer lower level review to, for instance, a retail provider of sponges than to a government tender for traffic infrastructure,” she explained.

3M also placed compliance staff strategically in higher risk markets, as well as in higher risk business groups. Andy Soh, an international counsel at Debevoise & Plimpton who used to be at GE, agreed with Kalb: “We similarly had a core set of principles across the board but had to tailor specific principles and programmes according to the specific region and line of business.” “The onus is on our part as legal professionals to educate, since risk is always carried,” he added.

Lui, who has dealt with the blurred line between gift-giving and bribing in the dental industry, explained the importance of educating staff that, in order to build and maintain relationships they must learn how to show gratitude while also obeying the limits set by local authorities.

He highlighted the Sunshine Act in the US, where money spent on medical professionals is put online for everyone to see which companies have given what to doctors and hospitals. This transparency in sponsorship and gift-giving allows clients to see the potential incentives behind professionals selling a particular product to patients. Such a provision in China would be useful, though enforcement could be difficult.

Philip Rohlik, also an international counsel at Debevoise & Plimpton, advised clients to set strict limits and centralise gift purchases as nobody knows what the right amount or the right gift is in China: “If you document your reasoning on why a gift is legitimate then it's hard for investigators to say you're corrupt or that this is wrong. Documenting the process well is important.”

“There is a tension between the needs to discipline and encourage employees to comply, in other words, maintaining relationships without bribing. It's a difficult issue that's only getting more difficult,” added Rohlik.

The bigger picture

Due diligence goes beyond compliance and day-to-day functioning. The issues regarding corruption have grown to affect businesses' expansion opportunities; the recent charges have also raised stakes in M&A, since correctly addressing historical liabilities uncovered during the due diligence process is critical.

Buyers of existing assets or companies will have to take on the financial and compliance liabilities of the target, and regulators are no longer allowing lack of awareness as an excuse.

“Under the FCPA analysis, a successful buyer has limited room to excuse himself for the target company's liabilities prior to acquisition,” explained Lawrence Guo of Global Law Office to China Law & Practice in a separate interview. “In China, compliance liabilities for investigations are becoming much more real, and investigations in China will become much more likely, to an extent similar to those of US authorities.”

The increased evidence of and regulatory crackdown on corruption have shifted priorities in due diligence. Assessing the target company's compliance situation used to be only one component of the due diligence process, but now this requires much more time, care and effort.

“A Chinese company may have given bribes to local government officials for whatever reason, and this was either not disclosed during pre-acquisition due diligence, or, if it were discovered, the buyer probably let it go and didn't seriously consider the historical liabilities associated with such past practices,” said Guo.

He advised buyers to be more serious about these liabilities and conduct careful reviews on the amount given and the period of time over which these acts were committed in order to properly assess the severity of illegal behaviour, as well as pay close attention to recent government investigations.

Such illegal practices are most prominent in the pharmaceutical industry, where companies' key clients are state-owned enterprises (SOEs), government-affiliated entities or even the government itself. It is not uncommon for them to receive a kickback for completing a transaction; the difficulty in securing a contract with SOEs and the government prompts businesses to get “creative”.

However, the new government's reforms allowing strategic and private investors to engage with SOEs may open up stable and long-term investment opportunities, as third-party investors can diversify the corporate governance of SOEs and provide incentives for improved management.


By Katherine Jo