Analysis on Foreign Corrupt Practices Act and Governance of Commercial Bribery Committed by Multinational Enterprises

ZHAO Shu, TIAN Li-juan



Analysis on Foreign Corrupt Practices Act and Governance of Commercial Bribery Committed by Multinational Enterprises

ZHAO Shu1, 2, TIAN Li-juan1

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ObjectiveTo analyze the problems existing in the governance of commercial bribery in China and to put forward targeted suggestions by elaborating the legislative background, development history and contents of Foreign Corrupt Practices Act, and combining the commercial bribery cases committed by multinational enterprises. Methods The methods of case analysis, social investigation, literature review were adopted.Results and ConclusionMeasures are put forward to govern commercial bribery in China from the aspects of legislation, enforcing the law, perfecting internal system and strengthening global cooperation.

Foreign Corrupt Practices Act; multinational enterprise; commercial bribery; case; governance

According to statistics, the cases of commercial bribery committed by multinational enterprises have been on the increases in China in recent years, and China has investigated at least 500,000 cases of commercial bribery over the past ten years, among which, 64% are related to international trade and foreign merchant. With the arising of commercial bribery scandals committed by multinational enterprises in China, Foreign Corrupt Practices Act (hereafter referred to as FCPA) gradually comes into the sight of the Chinese, and it attracts attention of the public increasingly; meanwhile, this Act has also exerted increasingly important influence on the governance of the commercial bribery in China.

This paper will provide feasible advice and suggestions for China to govern the commercial bribery in various fields, especially the pharmaceutical field by giving a comprehensive understanding on the characteristics of commercial bribery committed by multinational enterprises by combining actual cases, and learning from the achievements obtained by the Foreign Corrupt Practices Act in the field of anti-commercial bribery.

1 Review on cases of international commercial bribery

In July 2013, the Ministry of Public Security reported that some senior executives of GlaxoSmithKline (China) Investment Co., Ltd. (hereafter referred to as GSK China) were investigated and charged according to law, for they were involved in serious commercial bribery and other problems. According to the Ministry of Public Security, to achieve the business goals of developing the sales channel for its drugs in China and raising the drug prices, etc., GSK China provided money and goods, high-grade tourism consumption, etc. for the officials of related government departments, pharmaceutical profession associations and foundations, hospitals and targeted doctors, etc. through travel agencies and other third party channels. The existing evidence has shown that some senior executives of GSK (China) and some senior employees of related travel agencies have been suspected of being involved in serious commercial bribery, duty encroachment, bribe-taking and bribe-offering and other economic crimes[1].

After the Chinese police arrested four senior executives of GSK China, the United States Department of Justice also set about investigating this case, to ensure whether this company is in violation of the Foreign Corrupt Practices Act. Although GlaxoSmithKline is incorporated in Britain, it is listed in American stock exchange, so the United States Department of Justice also has jurisdiction over this company. On April 14, 2014, the Guardian, a British paper, reported that GlaxoSmithKline was accused of offering bribe to doctors in Poland, which involved it in the overseas corruption scandal. After being accused of committing commercial bribery in China for offering bribe to doctors and officials last year, GSK Company had committed in public to “eradicating corruption”, but this year, they admit that they are facing new charges[2].

JNJ is one of the world’s most comprehensive and most widely distributed manufacturers of health care products and providers of health services. The company was incorporated in 1886, and the products manufactures and sells cover the fields of the care products, medicine products, medical equipment, diagnostic products etc. However, the company has suffered a lot since 2010; it not only recalled the drugs, contact lenses and other products, it was also prosecuted by the United States Department of Justice and Securities Exchange for violating Foreign Corrupt Practices Act.

On April 8, 2011, JNJ was prosecuted for being involved in offering bribe and kickbacks in exchange for signing the contract on selling drugs, and it paid a penalty of 70 million dollars to the United States law enforcement and supervision agencies to reach a reconciliation[3]. The United States Department of Justice and Securities and Exchange Commission pointed out that, from 1998, the overseas subsidiaries of JNJ were suspected of being involved in offering bribe, in the form of money and traveling, to hospital officials and doctors in Greece, Poland and Romania, in exchange for signing the contracts on selling drugs with the company, so as to “promote” the drugs, medical equipment, etc. manufactured by JNJ.

Besides, from 2000 to 2003, two subsidiaries of JNJ were suspected of being involved in providing 858,000 dollars kickback to Saddam Hussein Government, to exchange for signing 19 contracts on the United Nations deal of “Oil for Food”, with the total contract value of 9 million dollars.

Under the general background of economic globalization, the situation of anti-commercial bribery in various fields, especially the pharmaceutical field, is extremely severe, and there is still a long way to go.

2 The characteristics of commercial bribery committed by multinational enterprises

With the vigorous development of China’s market economy and the increasingly improved investment environment, a growing number of multinational enterprises participated in the competition in Chinese market, and the cases of commercial bribery committed by them in China were growing, which not only damaged the reputation of Chinese market, but seriously affected the image of China in the international community; China has now been regarded as an area severely afflicted by commercial bribery in Asia.

In order to sell goods or obtain project approval, etc. in the areas and countries outside the home country, the multinational enterprises and other economic subjects may offer bribe to the public officials of the above-mentioned areas and countries, and those bribery practices constitute multinational commercial bribery. In addition to the basic characteristics and constitutive requirements of general commercial bribery, the multinational commercial bribery also has the following characteristics:

According to the survey data of United Nations Conference on Trade and Development, as of now, China remains one of the most attractive countries for multinational investment. More and more multinational enterprises entered the Chinese market, and the commercial bribery extended to various fields, such as pharmaceutical sales, engineering construction, government procurement, bank credit and many other industries; it involved every link of commercial activity, such as: material purchasing, business negotiation, project bidding and other links.

In recent years, there are many commercial briberies exposed in the pharmaceutical field, including JNJ, Pfizer, Eli Lilly, Sanofi, the solely-invested health care company of Danone−Nutricia, the wholly-owned subsidiary of Novartis AG−ALcon and other multinational pharmaceutical companies are involved in the bribery in China, among which, Pfizer was even penalized 2.3 billion yuan by the United States Judicial Branch for commercial bribery.

Since the multinational enterprises have huge financial strength and a wide range of social resources, their means of bribery change unceasingly, in addition to paying for valuables directly, it is often seen that the multinational enterprises adopt the means of funding the offspring of the bribe-taking party to study abroad or arranging work for them, etc.[4], the bribery means implemented under the name of sponsor, consulting and R&D, etc., event sexual bribery are common. Take the GSK case occurred in China last year as an example, the company adopted the means of offering bribe directly or sponsoring projects, etc. through the travel agencies and other channels to offer bribe to individual government officials, a few pharmaceutical profession associations and foundations, hospitals and doctors.

The diversity of bribery means contributes to its concealment, so it is difficult to obtain evidence through investigation. The bribe-offering party and the bribe-taking party constitute a community of interests, where they conceal and cover each other, in general, and it is hard to “break through the fort internally”; therefore, this kind of close interest relationship also adds difficulties to investigating commercial bribery.

Mr. Wang, the former senior manager and insider of Eli Lilly, said that in order to cope with the increasingly stringent compliance inspection of the superior departments, Eli Lilly had changed its bribery means of “offering bribe through feedback card” that overwhelmed in previous years, they adopted the method of transcribing the information in the patient prescription to the paper to substitute feedback card, and then destroyed the paper after a certain period, which has higher concealment. “To cope with the routine inspection and unannounced inspection of the administration for industry and commerce, etc., the foreign-funded companies will be equipped with a set of coping styles that advance with the times. Unless they are investigated as special cases, it is difficult to discover their sticking points[5].”

3 Reference significance of Foreign Corrupt Practices Act on anti-corruption in China

3.1 Overview of Foreign Corrupt Practices Act

Foreign Corrupt Practices Act (hereafter referred to as FCPA) was issued in 1977, and this act suffered numerous criticism and controversies in the formulation stage. The reasons are, on one hand, there are some fuzzy words, unclear legislation and other problems in this Act, which means the possibility of violating laws for each activity of American corporations; on the other hand, also the more important point, in order to observe the related provisions of Foreign Corrupt Practices Act, the American corporations lost the competitive advantages they deserved in overseas markets.

To solve the above problems and to ensure the overseas interests of American corporations, the United States amended it several times in the subsequent practice process of more than 30 years. The two amendments in 1988 and 1998 played an important role in perfecting and improving this Act, and added some exception clauses such as the daily performance of government and grounds for defense. Besides, the United States also popularized the legislation concepts and relevant provisions of Foreign Corrupt Practices Act internationally, so as to expand the influence of FCPA, and make FCPA serve as the template for all the countries to govern the commercial bribery in overseas business, lest that the American corporations would be in a disadvantageous position in the international business competition for the restriction of this Act. Due to the unremitting efforts of the United States, Organization of American States passed the Inter-American Convention against Corruption in 1996; in 1997, the United States together with the other 33 countries of Organization for Economic Co-operation and Development (OECD) signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions jointly; in 1999, Council of Ministers of Council of Europe passed the Criminal Law Convention on Corruption. By the spring of 2001, most member countries of European Union and OECD countries had adopted the concept of FCPA. Some used it for enacting new laws, and others modified and supplemented the original Penal Code. The process culminated at the end of 2003, with 43 countries signing the United Nations Convention against Corruption in Merida of Mexico, Article 16 of which defines “offering bride to foreign public officials and the officials of international public organizations” as criminal act. At the same time, it also stipulates detailed content of jurisdiction, judicial cooperation, extradition and other clauses. China became one of the first signatories of this Convention.

FCPA is mainly composed of two parts, clause relating to anti-bribery and accounting clause.

A. Clause relating to anti-bribery

Mainly includes:

(1) Basic injunction

1) Subject of bribery

①Issuers (refers to a legal person who has registered in the USA or who is required to submit report to the U.S. Securities and Exchange Commission);

② Domestic concerns (refers to the U.S. citizen, the U.S. national or the natural person living in the U.S., etc.);

③ Other people committing bribery practice in the territorial scope of the U.S., whether it is a U.S. citizen or a company incorporated in the contiguous U.S.

2) Subject of bribe-taking

The subject of bribe-taking stipulated in FCPA is foreign public officials, referring to the officials and employees of any foreign government or department and agency, or whoever serves the above institutions or departments or the international public organizations. The standard to decide whether it is the subject of bribe-taking is whether it performs the public duty.

3) Bribery intention

All payments performed for gaining commercial profit, maintaining the transaction or transferring the transaction to anyone. And there is no necessity to gain related profits, as long as it performs forbidden behavior for the intention to gain the profit, it shall be deemed as in violation of laws.

4) Unlawful act

According to FCPA, it is forbidden to pay, provide or promise to pay or authorize the third party intermediary to pay or provide money or any valuables.

(2) Third party payment

Also referred to as payment through intermediaries. That is, the payment for corrupt paying through the supplier, sales representative, travel agency, counselor and other third party intermediaries is also forbidden.

(3) Exceptions and grounds for defense: in response to the domestic critics and also to eliminate the barriers brought by FCPA for the American corporations to conduct business in overseas market, this Act adds some exceptions and grounds for defense by revising it.

1) Exceptions (acceleration expenses)

FCPA explicitly stipulates that the acceleration expenses paid for accelerating or guaranteeing some kind of daily government behavior of foreign officials and governments are not included in the bribery practice stipulated in FCPA.

2) Grounds for defense I

Lawful act that is recognized by foreign law. According to the provisions of the law applicable to the place where the foreign officials and party officials have their domicile, if payment, gift, offer, or promise of anything of value are legal, the defendant has the right to raise a plead against the Foreign Corrupt Practices Act.

3) Grounds for defense II

Refers to reasonable and actual expenditures, if the payment, gift, offer, or promise of anything of value are reasonable and actual expenditures, and there is evidence that the payment relates to the demonstration, promotion and commentary, etc. of the company’s products or services, or relates to fulfilling the contracts signed with foreign countries or institutions, the defendant also has the right to raise a plead against the Foreign Corrupt Practices Act.

(4) Legal sanction

According to the relevant provisions of FCPA, whoever commits corrupt practices shall be sentenced to criminal sanction, civil sanction and other adverse consequences.

B. Accounting clause

Accounting clause is an important part of FCPA, and it starts with strengthening the intra-company control and brings forward the defensive line for governing corruption through focusing on the company’s off-balance payment, false record and statement and other methods for hiding corrupt practice.

FCPA requires the company to make and keep reasonable, detailed and accurate account books, records and accounts, to truly and clearly reflect the company’s transaction process and the disposal of assets, etc. Meanwhile, it also requires the company to design and maintain a set of internal control system to convince others of the accuracy of its record, the legality of its transaction and the rationality of its assets disposal.

The laws relating to anti-commercial bribery in China have hysteresis and a lot of “fuzzy regions”, and there are a lot of difficulties in recognizing and punishing some unlawful acts. In China, there are legal provisions on commercial bribery stipulated in Anti-unfair Competition Law and Interim Provisions on Prohibiting Commercial Bribery, but the above mentioned laws and provision came into force in 1993 and 1996 respectively; until today, they still cope with the commercial bribery behaviors in new forms and new patterns with their high generalization and low operability. Of all the provisions, the penalty provision of 10,000 to 200,000 yuan leads to the negative effect of low unlawful costs.

In the existing judicial practice, the main clues for investigating commercial bribery cases come from the reporting of the masses, confession of parties involved and the information from other cases processed by relevant departments. The factors of limited approaches and means, etc. also caused difficulties in detecting commercial bribery cases. Therefore, the commercial bribery behavior is not investigated timely, the best opportunity to fight it is missed, and let it escape from legal sanction.

In China, the law enforcement agencies that have jurisdiction over commercial bribery include the courts, procuratorates, public security organs and departments of industry and commerce; although the law enforcement team seems huge, it may cause disorder in law enforcement due to the unclear division of duties and the different scales of law enforcement.

Some governmental departments are short of adequate awareness of the damage of commercial bribery, taking it as the normal commercial customs, and even think that investigating commercial bribery will directly affect the local fiscal revenue; it is because of this kind of idea that they turn a blind eye to the improper commercial behaviors of the companies and enterprises, and then indulge the wanton development of commercial bribery behaviors[7].

In China, there is high degree of administrative monopoly on certain industries, such as telecommunications, bank and petroleum industry, etc., which defers the development of market environment, so the theory of power rent-seeking is practiced effectively, namely, to obtain economic benefit, the power owners will look for opportunities to rent out their power, and those who own money but no power need to exchange money for certain amount of power. The benefit brought by power rent-seeking is the motive power for power corruption, and this also provides broad space for the growing of commercial corruption.

From the ethical considerations, many countries and international organizations adopt the provisions of “expelled” or banning the operation, but China is short of the strict specifications on this aspect, and short of supervision and punishment on bribery activities committed by the multinational enterprises in China, which contributes to the low costs of commercial bribery in China.

FCPA attracts more and more attention of Chinese people, not only because of its extraterritorial effect, but because that it puts forwards new ideas for governing corruption under the background of economic globalization−i.e. defining the behavior of offering bribe to the public officials of foreign governments or officials of international public organizations as a crime. The concept of FCPA and its 30 years of practical experience provide new ideas and methods for the ongoing governance of commercial bribery in China.

(1) Perfect legislation and provide legal support

Anti-unfair Competition Law, executed since 1993, could not meet the needs of the development of market economy, and the hysteresis of law brings great difficulty to law enforcement, so the revision of the law should be scheduled. Meanwhile, the Interim Provisions on Prohibiting Commercial Bribery, executed since 1996 by the State Administration of Industry and Commerce, should be transferred into legal provisions from administrative rules and regulations. Therefore, accelerating the perfection and updating of anti-commercial bribery law is essential for governing the crime of commercial bribery.

(2) Expand the scope of the crime of commercial bribery

Expand the subjects of commercial bribery, break the division of jurisdiction on the investigation of the subjects of commercial bribery (the state-owned subjects are investigated by procuratorial organ and non-state-owned subjects are investigated by public security organ), and diminish the gap of illegal punishments on the commercial bribery behaviors committed by the subjects with “different ownerships and company types”. Specify the forms of bribery behaviors to expand the defined scope of commercial bribery.

(3) Fight against the bribe-offering and bride-taking with the same strength

In criminology, bribe-offering and bribe-taking are corresponding in relationship, based on the understanding on the nature of bribery, and many countries refer to bribe-offering as “positive corruption” and refer to bribe-taking as “negative corruption”, both crimes sharing the same nature and suffering the same punishment. A growing number of cases show that, most bribers are voluntary “rent-seekers” and “injurers”, so when we severely punish the bribe-taking behavior in our country, we should impose a necessary punishment on the bribers. We should guard against the possible offense while punishing the ascertained offense[8].

(4) Intensify and diversify the methods of punishment

Since the purpose of the crime of commercial bribery is obtaining more business interests, raising the crime cost, making it unprofitable and even suffering greater losses, may curb the “rent-seeking behavior” to some extent.

(1) Stipulate the responsibilities of law enforcement agency explicitly

Stipulate the responsibilities of law enforcement agency explicitly to avoid the phenomena of passing the buck or fighting for the jurisdiction in the process of law enforcement and to ensure that the commercial bribery could be processed in effective, timely and accurate manners[9]. For example, the FCPA stipulates explicitly that the Department of Justice is responsible for the clauses in the civil part relating to the domestic concerns of this Act, and the Securities and Exchange Commission is responsible for the clauses in the civil part relating to the issuer of this Act.

(2) Establish specialized law enforcement agency

Law enforcement agency bears the important task to fight against the crime of commercial bribery, which should be endowed with necessary executive power to ensure the smooth operation of the law enforcement work. As mentioned in the above paragraph, there are many subjects of law enforcement in China. In addition, the effective communication mechanism between the law enforcement agencies is insufficient, which may cause missing the good opportunity to fight against commercial bribery. Therefore, China should set up specialized law enforcement agencies or designate the department of industry and commerce as the specialized law enforcement agencies for fighting against commercial bribery so as to improve the law enforcement and crack down on commercial bribery.

(3) Improve the executive force of law enforcement personnel

Law enforcement agency must improve its ability of anti-commercial bribery. ① Improve the understanding on commercial bribery and pay attention to fighting against commercial bribery. ② In the process of law enforcement, we should seize the opportunity and take the initiative, and also be careful while taking the initiative. ③ Establish and perfect the accountability system. The dereliction of duty and the behavior of interfering and frustrating the governance of commercial bribery should be held accountable.

(4) Enforce the law strictly and encourage voluntary reporting

Due to the diversity of commercial bribery behaviors and the concealment of operation process, the investigation effects relying only on the investigation agencies is limited, thus, further improving the protection and reward system of informers, strengthening public supervision and reducing power rent-seeking opportunities have significant importance on fighting against commercial bribery. Keep the information of the informer confidential strictly, and whoever discloses the information of the informer and the informed clues shall be investigated for responsibility. Meanwhile, reward the person who provides true and effective clues. These measures not only raise people’s enthusiasm of reporting commercial bribery, but have a deterrent effect on the providers of commercial bribery.

An important legislative principle of FCPA is to strengthen the internal management of company. Firstly, the account of the company should reflect the actual situation of transactions and the asset disposal acts truly and accurately. Secondly, parent company and the administrative staff should take stringent regulatory responsibility, and their ignorance of the transaction that violates the FCPA can not constitute the ample grounds for exemption. Therefore, China should draw lessons from the legislation concept of FCPA, using accounting system to strengthen internal supervision, standardize industrial management and improve the enterprises’ self-discipline. Rigorous internal control system, strict accounting system and stringent responsibility of administrative staff are the effective means to curb and prevent the illegal activities.

Under the background of economic globalization, to further govern the commercial bribery, China should strengthen the international judicial cooperation against international commercial bribery, actively participate in the international anti-commercial bribery activities so as to form a unified international attitude, maintain fare competition in the international environment and promote the healthy and rapid development of global economy.

In conclusion, as a foreign law, Foreign Corrupt Practices Act exerts significant influences on the legislation, the operation of enterprises and companies and other aspects in various countries. As a part of the global economic system, the Chinese government and enterprises should recognize the importance and urgency of anti-commercial bribery internationally. Efforts will be made to establish a perfect and effective anti-commercial bribery system inside the companies and enterprises, improve the consciousness of abiding by rules and laws, establish a good credit image of China in the international economy and create a good atmosphere of international economic market.

[1] The “Bribery Case” of GlaxoSmithKline, More than 20 People were Caught and Four Senior Executives were Detained by the Police [EB/OL]. http://finance.ifeng.com/a/20130715/10163821_0.shtml, 2013-07-15.

[2] GlaxoSmithKline was Suspected of being Involved in Offering Bribe to Doctors in Poland [EB/OL]. http://jjckb.xinhuanet.com/2014-04/16/content_500430.htm, 2014-04-16.

[3] JNJ Reconciled with Supervision Department of the United States. Prosecuted for Suspected Offering Bribe in Several Countries [EB/OL]. http://news.xinhuanet.com/health/2011-04/11/c_121288594.htm, 2011-04-11.

[4] ZHANG Xia. Research on the Governance of Commercial Bribery Committed by Multinational Enterprises: A Case of Foreign Corrupt Practices Act [J]. Finance and Economy, 2011, (1): 20-21.

[5] Fermentation of the Kickback Case of Pharmaceutical Giant Elli Lilly: Being Reported after the Breakdown with Several Insiders [EB/OL]. http://news.hexun.com/2013-08-23/157354696_1.html, 2013-08-23.

[6] LU Jian-ping, ZHANG Xu-hui. Understanding on Foreign Corrupt Practices Act [M]. China Fang Zheng Press, 2007: 15-39.

[7] XIAO Ye-zhong. Analysis on the Governance of Commercial Bribery from the “GlaxoSmithKline Case” [J]. Journal of Sheng li College of China University of Petroleum, 2013, (3): 41-46.

[8] LU Jian-ping, ZHANG Xu-hui. The Enlightenment of Foreign Corrupt Practices Act on the Governance of Commercial Bribery in China [J]. Journal of Beijing Normal University (Social Science Edition), 2007, (2): 99-105.

[9] ZHOU Zhen-jie. Experience and Enlightenment of Anti-commercial Bribery of the United States [J]. Chinese Cadres Tribune, 2006, (6): 47-49.

Author’s information: ZHAO Shu. Major research area: Pharmacy administration. Tel: 18698806815, E-mail: zhaoshu1125@163.com