Corruption has been a deep-rooted problem in Asia for many years. Local governments have tackled this issue with renewed vigour in recent years, and are fast developing and enforcing existing anti-corruption laws. Meanwhile, extraterritorial regulations from Europe and the U.S. are increasingly affecting how businesses operate in Asia. The U.S. Foreign Corrupt Practices Act (FCPA) is one such law. The FCPA has been in place since 1977, but actions under it have been prolific over the past few years as foreign investment and businesses flow into Asia at lightning pace. Kanishk Verghese reports

In today’s fast-paced and interconnected world, global corporations without a presence in Asia – particularly in China – are few and far between. As the geographical scope of businesses widens and the volume of transactions increases, companies are under more pressure than ever to navigate increasingly complicated and fast-evolving local regulatory environments, and to ensure compliance with the extraterritorial arms of global legislation. The U.S. Foreign Corrupt Practices Act (FCPA) is one such piece of legislation that has been flexing its muscles in Asia in recent years. The FCPA, which has been in existence since 1977, prohibits the bribery of non-U.S. public officials and sets requirements for record-keeping and internal accounting controls at companies that are publicly traded on U.S. securities exchanges. 

A big year for FCPA enforcement

Both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are clamping down on FCPA violations in Asia, with China the primary source of investigations. According to a Herbert Smith Freehills Asia-Pacific Anti-Corruption Report, which was released in September 2014, one in four FCPA enforcement actions between May 2013 and April 2014 were generated in the Asia Pacific region. Allegations relating to China, India and Indonesia amounted to nearly 90 percent of these actions. “The trajectory of effort on the part of the U.S. regulators is continuing without any kind of slowdown,” says Mini vandePol, a partner at Baker & McKenzie in Hong Kong, and the global head of the firm’s compliance group. “If companies were taking the FCPA more seriously, we would be seeing a correlation in the extent of enforcement by the U.S. regulators. We are not really seeing that correlation, and that’s likely because many companies have not made FCPA compliance a priority,” says vandePol.

Indeed, the rise in the number of investigations and the increase in the average corporate fine and settlement figures in recent years suggest that companies need to be taking FCPA compliance more seriously. According to the FCPA Blog, an online source for white-collar crime enforcement and compliance news, ten companies paid $1.56 billion to resolve FCPA cases in 2014. Comparatively, companies paid $731.1 million in 2013 and $259.4 million in 2012. Last year also saw sizeable fines and penalties levied. In January, aluminium producer Alcoa World Alumina agreed to pay $384 million to settle charges under the FCPA, in what is the fifth largest FCPA penalty of all time. The year ended with French multinational Alstom pleading guilty in December to bribing officials in Indonesia, Saudi Arabia, Egypt and the Bahamas, resulting in $772 million in penalties – the second biggest FCPA enforcement action ever.

Also in December, cosmetics company Avon paid $135 million to resolve FCPA violations in China. However, the size of the penalty Avon had to pay pales in comparison to the cost of the investigation, which stood at more than $340 million, says Kelly Austin, partner and head of Gibson, Dunn & Crutcher’s Hong Kong office. This is the case not only in the big-ticket cases like Avon, but also in smaller investigations. For example, scientific instrument maker Bruker Corporation paid $2.4 million last December to settle FCPA violations, but the company disclosed that its investigation costs were more than $24 million, says Austin.

In addition to increasing enforcement efforts by regulators worldwide, lawyers and compliance professionals have observed a greater level of cooperation between Asian and U.S. regulators in recent years. “The DOJ and SEC are far more active in communicating and collaborating with regulators in the Asian region, which enhances their ability to follow the money trail and find individuals who are caught up in allegations,” says vandePol.

Multi-dimensional chess

For her part, Austin says that while companies are concerned about FCPA risk, some are not as focused as they should be on local risk and enforcement action in Asia.  From an investigation perspective, multinationals with subsidiaries in Asia need to think on multiple levels, she says. “It’s like playing multi-dimensional chess, because you have to think about the local authorities and their focus, but also about the implications in your home jurisdiction and listing jurisdictions. If you are a global MNC, a local matter can blossom into something that potentially covers a host of jurisdictions,” says Austin. The investigation of multinational GlaxoSmithKline (GSK) last year serves as a fitting example of a local issue turned global. The pharmaceutical company first came under investigation by local authorities for alleged bribery in the southern Chinese city of Changsha, which was then expanded to include investigations by the UK authorities under the UK Bribery Act, and by the DOJ and SEC under the FCPA. In September 2014, GSK was fined a record 3 billion yuan ($489 million) for paying bribes to doctors to use its drugs, and former GSK China chief Mark Reilly and four other executives were handed jail sentences. According to Reuters reports, the company’s overseas practices in Poland, Syria, Iraq, Jordan, Lebanon and the UAE, are also being investigated by the U.S. and UK authorities.

The GSK scandal in China underscores the need for businesses to spend more time on due diligence and ensuring that their compliance policies are up and running. However, regulators nowadays expect companies of all sizes to have a compliance programme in place, and corporations venturing into Asia need to do more to avoid regulatory scrutiny, lawyers say. The question being asked in many enforcement actions is whether the company is living and breathing its compliance programme, and how well the programme is understood by the commercial side of the company when they conduct business in high risk jurisdictions. 

Empowering employees

One of the greatest risks associated with conducting business in Asia’s emerging markets is the use of third parties. A report on foreign bribery published in December 2014 by the Organisation for Economic Co-operation and Development (OECD), which analysed 427 foreign bribery corruption cases brought by OECD Member States between February 1999 and June 2014, found that almost three out of every four foreign bribery cases arose from third party conduct. Companies should spend more time on conducting thorough due diligence on their third parties to ensure they pick the right partners, says Austin.

The OECD reiterated in its report that company executives should lead by example in fighting foreign bribery. However, the report also found that 53 percent of the bribery cases analysed involved corporate management or CEOs – an unnervingly high figure for upper management, who are tasked with setting the right tone from the top. However, vandePol argues that for multinationals in Asia – where the CEO and board are often based in the head office outside the region – the tone from middle management is of more importance. Local middle management is often the key as they are the ones with their fingers on the pulse of their daily operations in the region, says vandePol.

In terms of how foreign bribery cases are detected, the OECD found that self-reporting was the most common (31 percent) method. In comparison, only two percent of the surveyed cases were alerted to enforcement authorities through whistleblowers. As a result, the OECD reinforced the protection of whistleblowers as part of greater efforts to tackle bribery and corruption. Although debate is ongoing at a government level, with countries like India considering introducing legislation to incentivise and protect whistleblowers, some lawyers believe that the issue can, and should, be tackled at a corporate level. “Most whistleblowers come forward for the right reasons. At a corporate level, if you can create an environment that enables people to improve the way business is done in a legitimate way, and where genuine whistleblowers can come forth and have their matters properly investigated internally, you will find that people will be willing to step forward. One of the ways to value that is to put compliance as a key performance indicator in your employment contracts and measure the way people are trying to promote ethical practices,” suggests vandePol.

Advisor or gatekeeper?

With the DOJ and SEC indicating that FCPA enforcement efforts are only likely to get even more aggressive, lawyers expect to see more investigations in Asia in the coming years, including in jurisdictions like Indonesia, Malaysia and Singapore. Navigating local laws and mitigating local risk while ensuring compliance with extraterritorial legislation will certainly pose a challenge for businesses as they continue to look towards Asia for growth. And with both the size of FCPA monetary settlements and the costs of conducting investigations expected to surge, corporations cannot afford to take the extraterritorial reach of the FCPA lightly. It is important for businesses to bear in mind that when it comes to implementing a thorough compliance programme, one size does not fit all. “The challenge is actually making that compliance programme work day in, day out in a host of different markets, and ensuring that the employees understand the way in which local cultural practices and local risk feature in the context of how they are going to market in a particular jurisdiction,” says Austin.

For her part, vandePol believes that in-house compliance and legal teams should be advisors and guides, rather than the gatekeepers for the company. “The cases we are involved in demonstrate that the risks need to be owned by the commercial folk within a business. This needs to be understood, appreciated, managed and mitigated by the people who are doing the deals, running the relationships and responsible for revenue growth and expansion,” says vandePol. This is especially the case in Asia, she says, where inorganic growth is the norm and where regular acquisitions of local businesses can unearth non-compliant, unethical or criminal dangers.

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Anti-corruption efforts in China and India

As U.S. authorities ramp up FCPA enforcement activity, two of Asia’s major players – China and India – are also upping their anti-corruption efforts. “China’s anti-corruption campaign for the last 12 to 18 months has been very much front and centre for President Xi Jinping,” says Gibson, Dunn & Crutcher’s Austin. President Xi has vowed to target high-flying “tigers” as well as lowly “flies” in an anti-corruption drive that has ensnared many high-ranking officials, including Zhou Yongkang, the former domestic security chief, and Jiang Jiemin, once the top regulator of state-owned enterprises.

However, the lack of transparency in China makes things more difficult for both multinationals and local businesses, lawyers say. “Companies don’t know where the Chinese authorities’ next move is coming from and which industries they will focus on, and it is hard to gain a good understanding of what would work in China to avoid the type of fine that GSK had levied against them,” says Baker & McKenzie’s vandePol. The heightened levels of enforcement in China is unlikely to show any sign of abatement in the coming years, as China seeks to clamp down on its endemic corruption problem – a move that is vital in order to be recognised as a world leader.

India stands as an interesting comparison. The country has struggled to tackle its deep-rooted corruption problems, and its democratic system means that it is often not able to enact legislative changes and establish stronger enforcement bodies as swiftly as China, says vandePol. However, a new government was elected in May 2014 under Prime Minister Narendra Modi, who has vowed to initiate sweeping anti-corruption measures and make India more attractive for investment. “Modi is very focused on trying to eliminate the bureaucracy involved in conducting business in India. It is a focus on making it easier to do business, but that is also going to have the benefit of addressing corruption,” says Austin.

For example, Modi has put a broom through the processes, and is trying to enhance e-governance and online approvals wherever possible, says vandePol. “It seems relatively minor, but it makes a huge difference. Processes are faster, more transparent, can be tracked, and don’t have hands reaching out for money in the way of bribes,” says vandePol. However, she adds, people will need to see large enforcement matters in India in coming years to drive that message home.