Date
17 September 2019
China has “little to no” history of enforcement against Chinese companies bribing overseas, according to a report published by Transparency International. Photo: Reuters
China has “little to no” history of enforcement against Chinese companies bribing overseas, according to a report published by Transparency International. Photo: Reuters

Compliance risk from Chinese firms’ overseas activities

While the world has seen a steep decline in outbound foreign direct investment from China in 2018, it remains a major player in the developing economies of Southeast Asia and Sub-Saharan Africa. China has also begun opening its domestic market to foreign investment.

Western investors more used to vetting their Chinese partners’ probity at home are in danger of paying insufficient attention to their activities abroad. In other words, growing awareness of domestic compliance risks within China has not been matched by an appreciation of the growing threat of sanctions violations and foreign bribery by Chinese companies. “China compliance” experts need to develop a more global perspective in order to fully understand the risks associated with their counterparties from the Middle Kingdom.

Sanctions

Banks and corporates in the West are no strangers to US and EU sanction regimes, which have so far slapped heavy fines against well-known Western entities including BNP Paribas and Schlumberger for breaching sanctions.

By contrast, China does not appear to be willing to fully comply with US sanction regimes. China is the biggest trading partner of Iran, which is also designated by Beijing as part of its Belt and Road investment initiative. While Western companies have quit the Iranian market following the reinstatement of US sanctions against Iran in August 2018, various Chinese companies remain.

In fact, Ji Kaiyun, director of the Center for Iranian Studies at Southwest University in Chongqing, described the withdrawal of Western companies as bringing Chinese companies a “natural advantage”, allowing them to fill the void in key industries such as Iran’s automobile sector.

Nevertheless, in recent years, sanctions enforcement has begun to extend to Chinese companies. The hammer fell first on low-profile local Chinese banks and entities, including Bank of Dandong and Dandong Zhicheng Metallic Materials Co. Ltd., which were effectively banned from the US financial system, but US enforcement actions have since targeted companies of high significance to the Chinese national economy.

The highest-profile cases have been punitive actions and investigations against ZTE and Huawei for breaches of the Iran sanctions program. US lawmakers have gone further by introducing bills to ban sales of chips or other components to Chinese telecommunications companies that violate the US sanctions and export controls.

Some have suggested that these recent enforcement actions have a geopolitical angle, as the US resists a perceived threat from China to its international standing. Be that as it may, these actions suggest that the US is likely to continue proactively pursuing Chinese companies that breach sanctions.

With an increased appetite for sanctions enforcement on the US side, and a willingness to capitalize in sanctioned markets on the Chinese side, Western companies must show some discernment when choosing their Chinese partners. Engaging with a business partner with ties to sanctioned parties runs the risk of damaging one’s own business and reputation.

For instance, stocks of Acacia Communications, a Nasdaq-listed fiber optic components supplier to ZTE, dropped 36 percent following the US government’s decision to punish ZTE in June 2018 for breaching the Iran sanction program. In the worst-case scenario, a US firm could be held liable for indirectly violating US sanctions if its engagement with a Chinese company is found to involve exposure to sanctioned parties.

Overseas corruption

China is known to have a high incidence of corruption. It is ranked 87 out of 180 countries in the 2018 Corruption Perception Index, compiled by Transparency International (TI), a Germany-based anti-corruption NGO, alongside Serbia.

Less appreciated is that China is also an exporter of corrupt practices. Driven by the government’s “Going Out” policy – a strategy to encourage its entities to invest overseas – and the Belt and Road initiative, Chinese companies have proactively expanded their investment footprints around the world, often bribing foreign government officials in countries such as Bangladesh, Ethiopia, Kenya, Sri Lanka, and Zambia.

China has in fact outlawed overseas bribery, but despite this, in September 2018, a report published by TI found that China has “little to no” history of enforcement against Chinese companies bribing overseas. This stands in contrast to China’s ambitious domestic anti-bribery campaign.

The US, meanwhile, has vigorously pursued individuals accused of bribing foreign officials – some of the alleged bribers targeted by the US authorities have little by way of connection to the US – one Hong Kong former senior government official and businessman was recently charged because he allegedly used the US financial services system to facilitate the payment of bribes.

The Foreign Corrupt Practices Act, a US law banning companies and individuals from giving “anything of value” to influence foreign officials, hangs over the heads of investors around the world, not just those located in the US.

Lax Chinese enforcement of corrupt payments by its citizens overseas presents a major risk to US and EU partners of Chinese companies operating in Africa, Latin America and elsewhere. Even if the Chinese government isn’t taking action against its citizens for bribing foreign officials, the US government can and will take action against those who participate in or facilitate Chinese bribery overseas.

What we can do

“Mountains are high, and the emperor is far away”. This Chinese saying vividly reflects the fact that a company’s overseas activities could be a lot more problematic than its domestic deeds. Indeed, most foreign investors already do background checks on their Chinese business partners. But they don’t always check on their Chinese partners’ behavior overseas.

Where a Chinese partner is identified as having business engagements in other high-risk jurisdictions or with sanctioned parties, investors should also have policies in place for ongoing monitor of their Chinese partners for risks brought by these operations.

– Contact us at [email protected]

RT/CG

The writer is a partner of Wallbrook, a global intelligence and compliance risk consultancy. He specialises in Asia with a focus on political and economic developments in the region.