Presenting a live 90-minute webinar with interactive Q&A Anti-Corruption Compliance in China: Minimizing FCPA and Chinese Anti-Bribery Law Violations Compliance Strategies Given China's Unique Cultural and Governmental Intricacies

WEDNESDAY, JANUARY 25, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Today’s faculty features:

Nathan G. Bush, Partner, DLA Piper, Singapore

Michael S. Diamant, Partner, Gibson Dunn & Crutcher, Washington, D.C.

Cindy Hong, Partner, K&L Gates, Shanghai, China

Michael Li-Ming Wong, Partner, Gibson Dunn & Crutcher, San Francisco

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ANTICORRUPTION RISK FACTORS IN CHINA

Nate Bush, Partner, Singapore [email protected] January 2017

www.dlapiper.com 1203542327 January 2017 5 China's Anti-Bribery Regime

Rules Enforcement Authority CRIMINAL OFFENSES (PRC Criminal Code) Public Security Bureau ("PSB")

Offering & Acceptance of Bribery Involving State People’s Procuratorate Functionaries (State Personnel) (Art. 385, 389) Serious Offering & Acceptance of Bribery not involving Criminal Tribunals of People’s Courts State Functionaries (Arts. 163, 164) Offering & Acceptance of Bribery of Entities (Arts. 387, 391, 393) Facilitating Bribery (Art. 392) Offering & Acceptance of Indirect Bribery by Close Relatives and Associates of State Functionaries (Art. 388, 390-1) Bribery of Foreign Officials (Art. 164) ADMINISTRATIVE VIOLATIONS State Administration for Industry and Anti-Unfair Competition Law (Art. 8) Commerce (SAIC) Provisional Regulations regarding Prohibition of Acts of Commercial Bribery

COMMUNIST PARTY OF CHINA DISCIPLINARY RULES Central Commission for Discipline Inspection (CCDI) INTERNAL AGENCY & WORK UNIT RULES Ministry of Supervision Internal supervision & audit www.dlapiper.com 1203542327 January 2017 6 Chinese Legal Text in Context

 Party over State: Leadership of (CCP) Enshrined in Constitution  Chinese legal system blends Marxist, Civil-Law, and Traditional Chinese legal principles and practices – Discretion & flexibility vs. predictability & transparency

– Rule by Law vs. Rule of Law – Opaque policymaking, political, & enforcement processes – Weak judicial oversight of bureaucracy  "Polycentric" political system – Factionalism, Decentralization, & Local Protectionism – Formal vs. informal channels of influence  Cycles of Leadership Change & State Reorganizations  Indirect public feedback matters, but democratic checks absent  Politics Significantly Drives Policy and Law Enforcement www.dlapiper.com 1203542327 January 2017 7 's Agenda in Slogans

"Chinese Dream" "Four Comprehensives" "Great Rejuvenation of •Comprehensively build a moderately Chinese Nation" prosperous society

"Moderately Prosperous •Comprehensively deepen reform Society" by 2020 •Comprehensively govern the nation Give Market "Decisive" Role according to law "Peaceful Rise" •Comprehensively strictly govern the "One Belt, One Road" Party.

www.dlapiper.com 1203542327 January 2017 8 Anticorruption Campaign Continues

 Tigers & Flies: Senior Official & Junior Cadres  Mixed Motives

– Genuine Discipline & Reform: "Don't Be Corrupt" The Economist – CCP Legitimacy & Credibility: "Don't Look Corrupt"

– Consolidation of Xi Jinping's Power: "Who's the Boss?"  "Fire Chief" & CCDI's Ascendance  New State Supervision Commission planned for 2017 – Consolidating state discipline and supervision offices with

CCDI  ongoing enforcement as "new normal" China Daily  Procurement Blacklists  Gauging the Impact  After initial surge, fewer new cases South China Mornign Post www.dlapiper.com 1203542327 January 2017 9 Eight-point Regulation of the Centre

1. Leaders must maintain close contact with the members; on most occasions, there is no grassroots. They must understand the real need to mobilize a reception by Chinese situation facing society through in-depth expatriates, institutions and students at the visits at the grassroots level. Greater airport. attention should be focused on places where 5. There should be fewer traffic controls when social problems are more acute, and leaders travel by car to avoid unnecessary inspection tours must be carried out more inconvenience to the public thoroughly. Inspection tours which are a 6. The media should seek to reduce the mere formality should be strictly prohibited. number of news reports related to members Leaders should work and listen to the public of the Politburo, their work and their and lower level officials; the most practical activities. The media should also seek to problems facing ordinary people must be reduce the amount of time spent on these tackled. For official visits, there should be no news pieces and minimize their scope. Such welcome banner, no red carpet, no floral stories should only be reported depending on arrangement or grand receptions for officials. work needs, news value, and potential social 2. Meetings and major events should be strictly impact. regulated, and their efficiency improved. 7. Leaders should not publish any works by Politburo members are not allowed to attend themselves or issue any congratulatory ribbon-cutting or cornerstone-laying letters in their own name unless an ceremonies, or celebrations and seminars, arrangement has been made with the central unless they get approval from the Central authorities. Official documents without much Committee. Official meetings should be meaningful content and without much actual shortened, be specific and to-the-point, and importance should be withheld. Publications be free of empty-talk and blather. dedicated to senior officials' work and 3. The issuing of official documents should be activities are also restricted. reduced. 8. Leaders must practice thrift and strictly follow 4. Officials' visits to foreign countries should relevant regulations on accommodation and only be arranged when absolutely cars. necessary, with fewer accompanying www.dlapiper.com 1203542327 January 2017 10 Enforcement Trends – China: Campaign Against "Big Tigers"

, former  , former Vice  , former general of the People's Politburo Standing Committee Chairman of the Central Military Liberation Army (PLA) of China and Vice- member, was sentenced to life Commission, was sentenced to Chairman of the Central Military Commission imprisonment for bribery, life imprisonment for bribery, (CMC). Xu was under investigation for among others, in June 2015. among others, in July 2016. accepting bribes. The charges were dropped after he died of bladder cancer in March 2015.

, former Minister of  , former Vice Chairman  , former member of the Central the Central United Front Work of the Chinese People's Political Politburo and former secretary of the Deptment of CCP, was Consultative Conference, was Communist Party's Chongqing branch. sentenced to life imprisonment expelled from CCP in May 2015. In September 2013, Bo was found guilty for bribery, among others, in Procuratorate prosecuted against of corruption, stripped of all his assets, July 2016. him for bribery in July 2016. and sentenced to life imprisonment.

www.dlapiper.com 1203542327 January 2017 11 Enforcement Trends – China: Campaign Against "Big Tigers"

Gu Junshan, former Deputy Director of , a former Chinese oil the PLA General Logistics Department executive and senior Communist Party and , former Mayor (GLD). In August 2015, he was economic official. In October 2015, he was of . In October 2014, sentenced to death penalty with a two- expelled from the Communist Party, and he was sentenced to lifetime in year reprieve for bribery, embezzlement, was sentenced to 16 years in prison for prison for bribery. illegally moving public funds, and abuse bribery and abuse of power. of power

Liu Zhijun, former head of the , former Director of the , former Vice-Chairman Ministry of Railways. In July 2013, National Energy Administration. In of People's Political consultative he was sentenced to death December 2014, he was sentenced to life Conference. In December, 2016, he penalty with a two-year reprieve. in prison for bribery. was sentenced to1 2.5 years in prison for accepting bribes. www.dlapiper.com 1203542327 January 2017 12 Enforcement Trends – China: Downfall of SOE Executives

Xu Jianyi (徐建一), former Chairman Cui Jian (崔健), former Vice General of Board of FAW Group, was Manager of Baosteel, was investigated by CCDI on March 15, investigated by Shanghai Supervision 2015 for suspicion of accepting bribes. Bureau of CCDI on March 31, 2015 On August 13, 2015, Xu was expelled for suspicion of accepting bribes. On from the CCP and officially investigated May 8, 2015, Cui was officially by the Supreme People's Procuratorate investigated by Shanghai People's (SPP) for criminal bribery. Procuratorate for criminal bribery.

Chang Xiaobing (常小兵), former Wu Zhenfang (吴振芳), former Vice Chairman of Board of China Telecom, General Manager of China National was investigated by CCDI on Offshore Oil Corporation, was December 27, 2015 for suspicion of investigated by CCDI on April 2, 2015 severe disciplinary violations. On July for suspicion of severe disciplinary 11, 2016, Chang was expelled from violations. On June 25, 2015, Wu was the CCP and will face prosecution for officially investigated by the SPP for corruption. criminal bribery.

Leng Rongquan (冷容泉), former (司献民), former Chairman General Manager of China Telecom, of Board and General Manager of was investigated by CCDI on April 17, , was 2015 for suspicion of severe investigated by CCDI on November 4, disciplinary violations. 2015 for suspicion of severe disciplinary violations. On February 3, 2016, Si was expelled from the CCP. Si was found to accept bribes. www.dlapiper.com 1203542327 January 2017 13 Enforcement Trends – China: Downfall of SOE Executives

Zhu Fushou (朱福寿), former (廖永远), former General Manager of Dongfeng Motor, General Manager of China National was investigated by CCDI on Petroleum Corporation, was November 12, 2015 for suspicion of investigated by CCDI on March 16, severe disciplinary violations. On 2015 for suspicion of accepting bribes. January 29, 2016, CCDI announced On June 15, 2015, Liao was expelled that Zhu was expelled from the CCP from the CCP and officially investigated and was demoted. by the SPP for criminal bribery.

Wang Tianpu (王天普), former (宋林), former Chairman of General Manager of Sinopec, was Board of , was investigated by CCDI on April 27, investigated by CCDI on April 17, 2015 for suspicion of corruption and 2015 for suspicion of corruption and bribery. On September 18, 2015, bribery. On September 11, 2015, Wang was expelled from the CCP Song was expelled from the CCP and and arrested by the SPP. officially investigated by the SPP.

Deng Qilin (邓崎琳), former (孙兆学), former Chairman of Board of Wuhan Iron general manager of Chinalco, and Steel, was investigated by CCDI resigned in 2014 after the on August 29, 2015 for suspicion of government started to investigate severe violations of disciplines and him for potential corruption issues. In laws. On January 8, 2016, Deng was expelled from the CCP. 2016, he was sentenced to 16 years imprisonment for accepting bribes. www.dlapiper.com 1203542327 January 2017 14 Fugitive Recovery: From "Foxhunt" to "Skynet"

Six fugitives accused of economic crimes are taken back to China under escort from Indonesia in June 2015. (image source: Xinhua)

(Data and Image source: Huanqiuzixun)

www.dlapiper.com 1203542327 January 2017 15 High Stakes for MNCs

• Heightened Enforcement Risks: Be Careful What You Wish For… • Silver Linings? ― Reduced Grease Payment/Gratuitous Hospitality Requests ― Trends in State Ownership ― Improvements in Corporate Governance Practices • Bribery linked to other public policy and political issues • Target Selection: ― Industrial Policy, Economic Nationalism, & Impacts on Laobaixing ― Killing Chickens to Scare Monkeys--or Monkey Hunting? • Bureaucratic Paralysis & Personal Risks of Concessions to Foreign Interests • Over deterrence? • The Trump Factor

www.dlapiper.com 1203542327 January 2017 16 Frequent bribery vehicles

• Kickbacks – Red Envelopes, Gift Cards, & Coupons • Tangible Gifts - Antiques, Jewelry, Watches • Consumables – Maotai, Marlboros • Abusing Tradition: Luxury Mooncakes/Fruitbaskets with "extras" • Entertainment on Demand—Dinner, Karaoke & Worse • Sham Transactions, Investments, Personal Service & "Gambling to Lose" • Sham "Training" & "Inspection" • Diverted Rebates & Off-the-Books Expense Accounts • Intermediaries: Agents, Consultants, Finders, Fixers • Payment Screens– Travel Agents & Event Companies • Internships, Jobs, Education (the qualified princeling quandary) • Design Institutes, Experts & Certification Procedures • Fraudulent Reimbursement & the Fungible Fapiao • Delayed Post-Retirement Benefits • Soliciting Bribes Upstream • Regulatory Extortion www.dlapiper.com 1203542327 January 2017 17 Bribing Entities: Antitrust or Anticorruption?

 Criminal Code and AUCL prohibit commercial bribery of entities—not just individuals

 Tension with U.S. notions of bribery as exploiting/creating conflict of interest between individual servant and master

 Most past "entity bribery cases" targeted improperly documented or off-the-books rebates, discounts, and commissions

 Recent cases target properly documented incentives as entity bribery based on fairness or competitive effects  Possible displacement of antitrust rules?

 In 2016, Shanghai AIC fined Bridgestone 150,000 RMB and confiscated 17 million RMB in illegal income on grounds that promotional programs offering retailers gift cards and other benefits as incentives for tire purchases constituted commercial bribery.

 "The purpose of Bridgestone offering rewards is to promote the sales of products and to increase its market share. Bridgestone offered additional benefits to influence the downstream market retailers' selection of trading objects and goods, excluding the chance of other competitors to make transactions. Enterprises can achieve this goal by improving the quality of goods, improving supporting services, adopting more reasonable price or using other allowable methods of competition. However, Bridgestone bribed the purchasers by offering additional benefits and such benefits was large enough to exert material effect on market competition order. The bribery infringed the rights of other sellers that observed the order."

 Due diligence & Disclosure: False Positives for Commercial Bribery www.dlapiper.com 1203542327 January 2017 18 Nathan Bush Head of Investigations, Asia Head of Antitrust & Competition, Asia

Nathan (Nate) Bush is a partner in the Litigation and Regulatory Practice of DLA Piper. Nate focuses on internal investigations, regulatory actions, compliance matters, and disputes involving antibribery and anticorruption, antitrust and competition, and trade matters in Asia. Nate practiced in Beijing from 2004 through 2012, and has covered Asia from Singapore since 2013. As Head of Investigations for Asia, Nate draws on over a decade of investigative fieldwork and compliance counselling throughout Asia. He represents companies and individuals in internal investigations and enforcement actions involving violations of antibribery and anticorruption laws (ABAC) such as the US Foreign Corrupt Practices Act (FCPA), as well as securities fraud, market misconduct, money laundering, export controls, and sanctions violations. He has conducted investigations in China, Indonesia, India, Malaysia, Japan, South Korea, Thailand, Vietnam, Cambodia, and other jurisdictions, and routinely advises on compliance aspects of capital markets, M&A, private equity, and venture capital transactions in Asia. As Head of Antitrust and Competition for Asia, Nate advises clients regarding merger notifications, compliance strategies, and enforcement risks under Asia’s evolving competition regimes. He leads innovative multijurisdictional approaches [email protected] to antitrust regulatory inquiries, litigation, and policy advocacy, and represents clients in US antitrust matters. T: +65 6512 6065 Nate is experienced with the specific regulatory risks of diverse industries in Asia, F: +65 6512 9500 including the life sciences, semiconductor, media, telecommunications, energy, M:+65 9660 8713 aviation, manufacturing, and retail sectors. He frequently publishes articles and speaks on competition policy and compliance issues in Asia. www.dlapiper.com 1203542327 January 2017 19

DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com. This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as "Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Copyright © 2016 DLA Piper. All rights reserved. www.dlapiper.com 1203542327 January 2017 20 INTERSECTION OF FCPA AND CHINA ANTI-BRIBERY LAWS

Cindy Hong [email protected]

© Copyright 2017 by K&L Gates LLP. All rights reserved. China Anti-Bribery Legal Framework

. Criminal law . Anti-Unfair Competition Law . The State Administration for Industry and Commerce Provisional Regulations on Prohibition of Commercial Bribery . Supreme People’s Court and Supreme People’s Procuratorate Interpretations . Communist Party regulations targeting at communist party members (mostly officials) . Industry specific regulations from various government departments, such as the China Food and Drug Administration

22 China Anti-Bribery Legal Framework

. Official Bribery . Bribery of state functionaries . Bribery of foreign officials prohibited pursuant to the eighth amendment to the Criminal Law which came into effect on May 1, 2011

. Commercial Bribery

23 Recent Updates on China Anti-Bribery Laws

Amendment Draft of The 9th Amendment of PRC Anti-Unfair PRC Criminal Law Competition Laws

2015/11/01 2016/04/28 2016/11/23

Interpretations on the Application of Law in Handling Criminal Cases involving Corruption and Bribery

klgates.com 24 Recent Updates on China’s Anti-Bribery Laws

9th Amendment of Amendment Draft of The PRC Anti- PRC Criminal Law Unfair Competition Laws

2015/11/01 2016/04/28 2016/11/23

Interpretations on the Application of Law in Handling Criminal Cases involving Corruption and Bribery

• Changes the sentencing criteria from specific monetary thresholds to a more general standard based on severity of the circumstances • Introduction of monetary fines against individual bribe givers • No sentence reduction or release on parole for individuals who commit serious bribery offences • Raising the bar for bribe-givers to be exempted from punishments

klgates.com 25 Recent Updates on China’s Anti-Bribery Laws

9th Amendment of PRC Amendment Draft of The PRC Anti- Criminal Law Unfair Competition Laws

2015/11/01 2016/04/28 2016/11/23

Interpretations on the Application of Law in Handling Criminal Cases involving Corruption and Bribery

• Raising monetary thresholds for bribery prosecutions • Clarifying the element of corrupt intent for the crime of accepting bribes by state functionaries • Heavier sanctions for bribery offences

klgates.com 26 Recent Updates on China’s Anti-Bribery Laws

Amendment Draft of The PRC Anti-Unfair 9th Amendment of PRC Criminal Law Competition Laws

2015/11/01 2016/04/28 2016/11/23

Interpretations on the Application of Law in Handling Criminal Cases involving Corruption and Bribery

• Consultation draft released for public comments in early 2016 and State Council passed the amendment draft on November 23, 2016 • Definition of commercial bribery clarified codifying existing SAIC practices • Heavier sanctions for bribery offences • Stronger investigative powers of SAIC

klgates.com 27 China Anti-Bribery Enforcement Trends Continual active anti-bribery prosecution and enforcement

klgates.com 28 China Anti-Bribery Enforcement Trends Continual active anti-bribery prosecution and enforcement

klgates.com 29 China Anti-Bribery Enforcement Trends

klgates.com 30 China Anti-Bribery Enforcement Trends SOEs targeted

klgates.com 31 China Anti-Bribery Enforcement Trends In 2016, CCDI dealt with over 413,000 cases, which led to the discipline of almost 415,000 officials. Among those, 76 are high-ranking officials at provincial or higher level and 42 are high-ranking officials in military.

klgates.com 32 China Anti-Bribery Enforcement Trends

. Not only “tigers”, but the “flies” on the grass-roots level.

klgates.com 33 Intersection of FCPA and Chinese laws

Kickbacks to SOE employees:

1 set of facts could involve 2+ different offenses

“Official Bribery” under FCPA Commercial Bribery -PRC law

34 Gift or Graft

. Opinions of Supreme People’s Court and Supreme Procuratorate on Handling Criminal Commercial Bribery Cases (November 20, 2008) distinguish “gifts” and “bribes”: . “background for the property transaction, such as wither two parties are relatives or friends and the status and extent of their previous relationships” . “the value of the exchanged property” . “the cause, time, and method of the exchange, and whether the donor has made any requests for favors from the recipient related to the recipient’s position” . “whether the recipient has taken advantage of his position for any benefit to the donor” . Excluded: small presents given for promotional purposes according to business practices

35 Thank You [email protected] MITIGATING CHINA FCPA RISKS

Michael Diamant Michael Li-Ming Wong Gibson, Dunn & Crutcher LLP Gibson, Dunn & Crutcher LLP [email protected] [email protected] 202.887.3604 415.393.8333 650.849.5393 Mitigating China FCPA Risks

I. Compliance Program and Internal Controls II. Monitoring III. Education and Training IV. Due Diligence V. Responding to Noncompliance

38 Compliance Program and Internal Controls

• An internal compliance program lies at the heart of an effective corruption risk mitigation strategy. Further, if an FCPA violation occurs, the existence of a robust compliance program will be viewed as a mitigating factor by U.S. enforcement agencies in determining whether to charge an organization and, if so, the extent of any penalties. • But programs must be appropriately tailored to business and local risks. ― Risk Assessment. Consider how your organization goes to market in China (including the use of third-party intermediaries), the regulatory and other governmental touch-points, sector-specific risks, and even recent enforcement efforts. ― Understanding Context. It is important to consider and account for those risks that may be unique to the business in China.

39 Compliance Program and Internal Controls – Cont’d

― Training/Education. Officers and managers should clearly understand company policy and what would be considered violations of the FCPA (and relevant Chinese laws), and be able to effectively communicate the same to employees and agents. ― Compliance Policy. Develop and follow a good compliance policy and ensure that the policy is communicated to employees and agents and is updated on a regular basis. ― Gifts. Gifts should generally be nominal in value and, where possible, branded with your company’s name and/or logo, to allow the gifts to be considered promotional under the FCPA’s affirmative defense. All gift and hospitality expenses should be recorded and reported.

40 Compliance Program and Internal Controls – Cont’d

― Travel. Be particularly wary of paying for employees of Chinese SOEs to travel internationally. Companies have been subject to FCPA liability because they paid for employees of Chinese SOEs to travel to the U.S. ostensibly for product demonstration, training, or factory inspections, when the trips involved mostly tourist activities. ― Travel expenses for product promotion and demonstration should be reasonable; additional controls may prevent corruption. For example, it is helpful for payments to be made directly to travel providers, stopovers minimized, and travel expenses for spouses and families restricted. ― Entertainment and Meals. Avoid extravagant entertainment and meal expenses by setting guidelines. Require documentation such as fapiaos and business invoices. Set up strict approval and review mechanisms for such expenses.

41 Compliance Program and Internal Controls – Cont’d

― Importance of Local Resources. Having a strong local team that is engaged in the business and understands the basic requirements of the FCPA and relevant Chinese laws is an invaluable first-line of defense against corruption exposure. ― Internal Financial Controls System. Develop, document, and maintain a system of internal financial controls to help ensure that all payments are accurately recorded in the organization’s books and records in accordance with applicable regulatory requirements. ― Special attention should be paid to those areas that may directly affect the anti-corruption compliance program: procurement, onboarding of vendors, agents, consultants, and other third-party business payees, and gifts and entertainment.

42 Monitoring – Auditing

• Methods for monitoring compliance include auditing employee expense reports and establishing internal whistleblower mechanisms. ― Auditing ― Auditing can be conducted internally (by compliance officers, financial managers, auditing team members, etc.) or externally (by an outside firm). ― Auditors evaluate whether reported expenses match invoices and they ensure that compliance guidelines are observed. ― A unique Chinese challenge: Prevalent use of fake “fapiaos” (Chinese word for official tax invoices) ― Fake fapiaos are widely available in black markets. As explained by the New York Times, fake fapiaos are “so pervasive that auditors at multinational corporations are also being duped.” Fake fapiaos have become "the grease for schemes to bribe officials and business partners.” ― Auditing results may be used as a basis for updating company compliance rules, revaluating risk, identifying new challenges, and determining if more training and monitoring activities are needed.

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Monitoring – Whistleblowers

― Whistleblowers ― Proactive employee internal reporting of non-compliant activities should be encouraged. Internal reporting channels include compliance hotlines, web portals, and “open-door” policies. ― Robust internal whistleblowing mechanisms are crucial in light of Dodd- Frank’s whistleblower provision which has caused a spike in external whistleblowing to the SEC. ― FCPA is an offense covered under the Dodd-Frank Act whistleblower provision. ― The SEC’s Investor Protection Fund rewards individuals who assist the SEC in uncovering securities violations resulting in monetary sanctions of more than $1 million. ― In 2016 alone, over $57 million was paid out to thirteen separate individuals, and over $368 million sits in a fund created by the SEC, waiting to be distributed to any number of future applicants. ― The SEC received more than 4,200 whistleblower complaints in 2016 alone, 40% more than were received in 2012.

44

Monitoring – Whistleblowers

― The SEC received 35 tips from China last year, more than double in 2011. ― Plaintiffs’ law firms based in China and the United States widely advertise in China, seeking Dodd-Frank whistleblowers. ― The importance of an effective internal whistleblowing mechanism cannot be underestimated. ― A 2012 report by the Ethics Resource Center found that 84 percent of external whistleblowers first report internally to their organizations. ― Analogously, the National Whistleblowers Center issued a study of qui tam lawsuits between 2007 and 2010, and found that nearly 90 percent of whistleblowers first raised their concerns internally.

45 Education and Training

• Trainings should be periodic and up-to-date instead of “one and done.” • Trainings should be conducted in a language most easily understood by employees (Mandarin or Cantonese). • Appropriate employees should be identified for the training, including the following potentially high-risk employees: certain sales and marketing personnel; employees that interact with government officials; personnel charged with maintaining agency relationships; appropriate human resource personnel; and legal and finance personnel. • Importance of tracking training efforts and keeping records: ― When a former Morgan Stanley Managing Director pleaded guilty to a criminal violation of the FCPA, the effectiveness and thorough documentation of the bank's pre-existing anti-corruption compliance program convinced enforcers at DOJ and the SEC not to charge the bank itself.

46 Education and Training – Cont’d

• Most effective training regimes involve both in-person and electronic training. ― In-person Training ― Pros: More interactive; facilitates dialogue between compliance and business lines; allows for immediate feedback from attendees on various points of confusion ― Cons: Expensive; difficulty in finding local speakers with a nuanced understanding of the relevant anti-corruption laws (including FCPA) and the local business, who also speak fluent Mandarin ― Electronic Training ― Pros: Allows for greater coverage and permits standardization of the message provided to employees; allows for easier testing of employees’ understanding; trainings may be completed at employees’ leisure. ― Cons: Lacks many benefits of in-person training, notably, it is easy to ignore.

47 Due Diligence

• Company doing business in China through third parties such as agents, distributors, or channel partners should conduct appropriate due diligence on the third party prior to engagement. • A few examples of relevant due diligence questions are provided below: ― Is the third-party a SOE? ― The name, title, and nationality of all employees of the third party who will be acting on behalf of the company in China, including whether the employee is or has been an employee or official of a government entity. ― Is the third party related to a “foreign official” (keeping in mind the broad definition of that term) or does he maintain close social or business relationships with “foreign officials” or their family members?

48 Due Diligence – Cont’d

― Was the third party recommended by a “foreign official” or his or her family members? ― Does the third party place heavy reliance on political or government contacts versus knowledgeable/qualified staff and other market competitive edges? ― Has the third party ever been investigated, charged, or convicted on previous corruption allegations? • Existence of any of these FCPA “red flags” does not in and of itself suggest that the third party is corrupt or likely to violate FCPA's anti-bribery provisions; however, the existence of any one of these “red flags” should trigger concern and appropriate review.

49 Responding to Noncompliance – Investigation

• Upon discovering potentially non-compliant behavior, companies should initiate an internal investigation. • For less serious violations, such as expense irregularity, regional teams conduct investigations and report their findings. • For serious violations, involving large-monetary values or senior employees, a corporate-level team is usually brought in to manage the investigation. • A variety of investigation methods may be used: ― Assembling an internal investigative team comprising legal, internal audit, HR, local and global compliance representatives. ― Employing a third-party law firm to evaluate the issue. Third parties can also be useful in interviewing alleged infringers.

50 Responding to Noncompliance – Addressing the Issue

• Employee Noncompliance ― Many companies maintain a zero-tolerance policy for compliance violations; however, because Chinese labor law makes it difficult to fire an employee outright, it may be difficult to made quick and decisive decisions. ― Having a good labor counsel with in-depth understanding of Chinese labor laws and labor dynamics is crucial. • Third-party Noncompliance ― Companies should provide for FCPA violations as a triggering event for contract terminations with third-parties. ― Organization should consider including audit clauses in their third-party agreements; clauses that allow for periodic audits, however, should be employed periodically.

51 Contact Information

Michael S. Diamant Partner Gibson, Dunn & Crutcher LLP 1050 Connecticut Avenue, N.W., Washington, DC 20036-5306 Tel +1 202.887.3604 • Fax +1 202.530.9630 [email protected] • www.gibsondunn.com

Michael Li-Ming Wong Partner Gibson, Dunn & Crutcher LLP 555 Mission Street, Suite 3000, San Francisco, CA 94105-0921 Tel +1 415.393.8333 • Fax +1 415.374.8434 [email protected] • www.gibsondunn.com

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