Anti-Bribery and Anti-Corruption Law Update

To get an overview of the major anti-bribery and anti-corruption-related developments that occurred in 2014 and an overview of likely trends and legislative developments for the remainder of 2015, we reached out to lawyers at Kobre & Kim, King & Wood Mallesons and DLA Piper Hong Kong.

Can you give us an overview of major anti-bribery and corruption-related developments that occurred in 2014?

Joshua Cole, a partner in King & Wood Mallesons’ Hong Kong office who specialises in cross-border mergers and acquisitions and joint ventures, noted that there has clearly been a significant focus on anti-corruption initiatives in the PRC.

“The increased awareness of these issues and the PRC initiatives, coupled with the extra-territorial application of foreign legislation such as the US FCPA and UK Anti-bribery legislation, has resulted in this ABC due diligence and compliance being a significant factor in a number of transactions during 2014 (including being the key factor in certain investors deciding not to pursue potential investment opportunities),” Mr. Cole explained.

William F. McGovern, partner with Kobre & Kim’s Hong Kong office, who focuses his practice on Government Enforcement Defense, Investigations and Mentorships, International Judgement and Enforcement and Offshore Recovery, Class and Derivative Actions, noted that “2014 saw a concerted effort in China to tackle corruption with sweeping nation-wide anti-graft probes dominating the agenda.”

At an international level, Mr. McGovern said the APEC forum in Beijing and the G20 Summit in Brisbane were noteworthy developments in 2014.

  • APEC forum in Beijing: In August, Beijing held the first Asia-Pacific Economic Cooperation (“APEC”) Network of Anti-Corruption Authorities and Law Enforcement Agencies (“ACT-NET”) meeting to enhance informal cross-border law enforcement cooperation between agencies in the region. The agreement proposed by China, commits the 21 member economies in the Asia-Pacific region (including the US), to deny safe haven to those engaged in corruption, including through extradition, mutual legal assistance and the recovery and return of proceeds of corruption. In December, the anti-corruption declaration was signed by APEC members at the Beijing meeting.
  • G20 Summit in Brisbane: The Brisbane Summit in November of 2014 saw the G20 leaders including China incorporate anti-bribery initiatives into the agenda to raise global growth to deliver better living standards and quality jobs for the global community, the Summit’s highest priority.

On a national level, Mr. McGovern explained that Beijing’s Operation Fox Hunt and the GlaxoSmithKline and Avon Products Inc. cases took centre stage:

  • Operation Fox Hunt: In July, Beijing launched an operation to pursue officials accused of wrong-doing and other economic criminals at large overseas, including setting up a coordinating team to seize fugitives, with a focus on cooperation with the US, Canada and Australia which are popular fugitive destinations. Reports estimate that the operation has nabbed between 500 to 680 fugitives abroad who were brought back to China to face investigations by the end of last year, along with over RMB 3 billion (HK$3.8 billion) obtained by illegal means.
  • GlaxoSmithKline case: Throughout 2014, China continued to ramp up its nation-wide anti-graft campaign in the pharmaceutical sector, resulting in a record RMB 3 billion fine against the British pharmaceutical giant, involving an almost year-long investigation that ended in September 2014. This highlights China’s increased emphasis on enforcing its local anti-corruption laws against non-Chinese companies and individuals who offer or pay bribes.
  • Avon Products Inc. case: on 17 December 2014, the Chinese subsidiary of Avon Products, Inc. pled guilty to charges of conspiring to violate the FCPA, resulting in corporate resolutions with the DOJ and SEC amounting to US$135 million. Avon was noted for its cooperation with the DOJ in conducting an internal investigation, voluntarily making employees available for interviews and providing voluminous evidence, and highlights China’s cooperation with US enforcement agencies.

As for Hong Kong, Mr. McGovern says the Government has also taken a more active role to combat bribery and corruption. Noteworthy investigations included:

  • On 19 December 2014, Hong Kong saw one of its biggest anti-corruption investigations by the Independent Commission Against Corruption (“ICAC”) conclude, resulting in former Chief Secretary for Administration Rafael Hui’s conviction by jury, of misconduct in public office and bribery in a highly publicized 128 day trial. Hui was sentenced to 7.5 years in prison and ordered to return bribery money of HK$11 million.
  • In addition, property tycoon and former joint chairman of Sun Hung Kai Properties, Thomas Kwok Ping-kwong, was jailed for 5 years and fined HK$500,000, whilst his younger brother Raymond Kwok Ping-luen was acquitted of his charges. The brothers were accused of providing Hui with rent-free accommodation. Their top aide, Thomas Chan Kui-yuen and ex-stock exchange official Francis Kwan Hung-sang, were also found guilty of bribery and sentenced to jail terms for their roles in acting as middlemen for the transactions. Thomas Kwok, Thomas Chan and Rafael Hui have recently filed appeals.

“These victories have marked a shift in Hong Kong’s historically passive anti-bribery stance to an active role, one which pursues ‘tigers’ or high-ranking officials, and is in line with big-brother China’s aggressive anti-graft campaign,” Mr. McGovern says.

What should expect to see in the remainder of 2015?

Mr. Cole of King & Wood Mallesons expects the Boards of investors to be even more focused on ABC issues in 2015 and as a result expects to see an increased prominence in such issues early on in negotiations as Boards and Investment Committees will need a clear view on these issues before proceeding too far with any investment opportunity.

Sammy Fang, partner and Head of Compliance & Investigations at DLA Piper Hong Kong, echoes Mr. Cole’s assessment. He anticipates anti-bribery, compliance and regulatory and internal investigations will be a strong area of interest throughout 2015. “This is a continuation from last year where we saw a marked increase in the number of regulatory enforcement actions undertaken in Asia, particularly in China,” he explains. “Compliance and effective anti-corruption procedures and programmes are playing a pivotal role in shaping Asian businesses, and we expect this to ramp up further in 2015.”

DLA Piper Hong Kong is now seeing an uptick in the number of companies committed to bolstering their compliance resources, including separate compliance functions specific to the Asia region. “As a result, companies are increasingly devoting more resources to due diligence as part of overall deal execution, which in some cases will lead to longer transaction windows. Companies will also be looking to devote more to compliance review resources as part of the post-completion integration process," Mr. Fang says.

“We do not view this as a temporary trend. This change occurs across countries and sectors throughout Asia and will further filter down to developing economies such as Malaysia, Indonesia and Vietnam, where we are already seeing some activity in the anti-corruption space” Mr. Fang added.

Mr. McGovern expects there to be increasing involvement by international organizations such as the G20, Organization for Economic Cooperation and Development (“OECD”) and World Bank in driving changes and engaging in discussions to increase the profile of anti-corruption issues, with China leading the way with the Beijing APEC declaration and its active role in negotiating and implementing the UN Convention Against Corruption. “There is likely to be a convergence of standards and best practices coming out of the involvement of these globally focused organisations, a prime example being the ACT-NET information sharing network in the Asia-Pacific region,” Mr. McGovern says.

So far as a global stance, Mr. McGovern believes that the OCED’s first Foreign Bribery Report, which measures the crime of transnational corruption based on an analysis of data of foreign bribery enforcement actions will likely be very useful for China in the development of its anti-bribery legislation and policy. Mr. McGovern said that the key takeaways from the Report included:

  • 75 percent of cases involved payments through intermediaries: this mechanism is often used in the pharma-medical or natural resources industries. Improper payments to travel vendors are disguised as travel and entertainment costs or general marketing expenses. Investigators are likely to focus on travel expenditures in the coming years, with increasing emphasis on reporting obligations and training for third-party business representatives.
  • 53 percent of cases involved corporate management or CEOs: Chinese and Hong Kong corporate anti-bribery compliance programs are expected to enhance training for upper-management personnel with increasing scrutiny on and reporting obligations by this group.
  • 57 percent of cases involved bribes to obtain public procurement contracts: there is likely to be continuing efforts in the region to closely monitor the tendering process for public projects and encourage transparency and fair competition, particularly in the energy and transportation sectors.
  • 80 percent of total bribes were promised, offered or given to SOE officials: China is paving the way for change in this arena, with President Xi Jinping expected to shift the focus of his corruption crackdown to factions and organized graft within the party’s ranks this year.

Mr. McGovern also noted that the G20 leaders including China endorsed the 2015-2016 G20 Anti-Corruption Action Plan that will support growth and resilience of global economies at the Brisbane Summit in November 2014. “This will involve building cooperation and networks, including enhancing mutual legal assistance, recovery of the proceeds of corruption and denial of safe haven to corrupt officials,” he explains. “As the G20 is committed to improve the transparency of the public and private sectors, 2015 should see this anti-corruption action plan continue to develop and the effects trickle down to China on a national level, with Chinese authorities continuing to pursue Chinese fugitives residing overseas and seeking to recover stolen funds through bilateral and multilateral extradition/ mutual legal assistance treaties,” he says.

Mr. McGovern also says China is set to increase the scale and reach of anti-graft probes and focus on the multibillion-dollar boom industries of recent years, namely the transportation, infrastructure and real estate industries:

  • Boeing forecasts that China will need more than 6,000 passenger jets worth US$870 billion in the next 20 years. In November, China’s biennial airshow in Zhuhai reportedly netted over 300 deals worth a staggering US$23.4 billion, with sales of 227 aircraft of different types ranging from defence fighter jets to commercial aircraft.
  • Increased spending on railway infrastructure (Beijing reportedly spent RMB 405 billion (HK$510.6 billion) in the first three quarters of 2014) makes it an area prone to graft and a prime target for anti-graft investigators this year.
  • China’s anti-graft campaign is already targeting the real estate industry, with the powerful Central Military Commission reportedly to send an anti-graft inspection team to the party committee of the China Armed Police Force, to scrutinise housing projects, personnel management and real estate.

Following on the heels of the ICAC’s victory in 2014, Mr. McGovern expects Hong Kong to continue its active role in anti-bribery enforcement.

He also predicts there to be continuing increased cooperation between the Chinese authorities and US enforcement agencies in anti-bribery investigations in 2015.

How do you anticipate the liberalisation of the practice of law in China will impact your practice and/or law firm?

Mr. Cole anticipates that the introduction of the Shanghai FTZ in 2014 and the proposed new PRC Foreign Investment Law, which was introduced as draft in January and is expected to be finalised later this year, will likely to result in a further investment opportunities in the PRC.

“However, the continued focus on anti-corruption initiatives in the PRC, together with the extra-territorial application of anti-corruption laws in other jurisdictions (eg the FCPA and the UK Anti-Bribery legislation), will continue to impact on investments in PRC,” Mr. Cole says.

“As a result, whilst King & Wood Mallesons expects to see a continued increase in investment opportunities in the PRC, we also expect to see an increased focus on due diligence in respect of corruption issues and that these issues will continue to be one of the major deal factors. Our firm would expect Boards and Investment Committees to require a high degree of comfort on these issues before proceeding with any investments,” Mr. Cole concludes.

Mr. McGovern expects “the liberalisation of the practice of law in China, together with the progressive developments in the Chinese anti-bribery legislation and enforcement, will continue to advance China’s anti-bribery profile.”

“It is expected in the coming years that foreign law firms and foreign lawyers will have increasing access to the Chinese legal market. Foreign law firms will also be able to work more closely with local Chinese law firms, including sharing of information, resources and legal know-how which will enhance investment and business opportunities. These changes have the potential to provide Kobre & Kim’s Hong Kong office and its team of native Chinese speaking lawyers with plenty of opportunities to work with Chinese clients requiring advice on anti-bribery, investigations and compliance matters, as well as allowing the firm to tap into the local Chinese legal market as a valuable resource. These changes will also enhance the firm’s global legal services presence in this key area,” Mr. McGovern says.