How to Sleep Soundly and Avoid Bribes: Mitigating Chinese and American Corruption Risk in the Context of EB-5

By Andrew Bisbas and Doreen Edelman

While the United States' Foreign Corruption Practices Act (FCPA) prohibits U.S. entities from paying bribes to foreign officials abroad, China's Anti-Unfair Competition Law and Criminal Law together cover bribery of both public and private individuals by foreign or domestic actors in China.

At a time when both countries' governments are prioritizing the fight against corruption, one cannot ignore the many potential bribery-related pitfalls presented by the numerous trans-Pacific exchanges that drive the EB-5 process. The first step in addressing the issue is understanding one's role in the EB-5 industry and the unique compliance challenges it presents.  Additionally, a comprehensive anti-corruption compliance program to mitigate such risks can help ensure that you are protected from costly government fines, possible prison sentences, and sleepless nights. 

The behavior of the agents, brokers, issuers, and investors you work with will make or break your EB-5 business. As with all investments, you can protect yourself by understanding what risks are associated with doing business with each entity involved. This article explains the corruption risks and government concerns, and provides six proactive steps you can take to minimize such risks in your EB-5 business.

A Spotlight on the EB-5 World

In China, the government has made it clear that it will not hesitate to prosecute foreign and domestic players alike for making illicit payments. The Chinese president recently vowed to crack down on “tigers and flies” alike, meaning that no matter how high or low the post of a Chinese official is, the individual's actions have the potential to embroil Chinese and Western partners in governmental investigations.

On the other side of the Pacific, the U.S. Department of Justice (DOJ) has targeted specific industries for FCPA enforcement. The aerospace, oil and gas, pharmaceutical, and financial services industries are among the classic targets of the U.S. government's FCPA enforcement actions. Since the United States Customs and Immigration Service (USCIS) and Securities and Exchange Commission (SEC)  are jointly overseeing EB-5 activities, it is likely that the EB-5 industry will join the list of industries subject to FCPA investigations. EB-5 projects with Chinese investors involve Chinese emigration agents who are arguably foreign officials under the FCPA. Thus paying these agents' commissions could be a violation of several laws.

Trends We Can No Longer Afford to Ignore

Global anti-corruption efforts have come a long way since the passage of the FCPA in 1977, making the United States one of the first countries to expand its prohibitions against bribery to all corrupt payments made by its citizens abroad. In the late 1970s, most viewed the FCPA as a hopeless effort to combat the seemingly insurmountable problem of corruption. Yet in the 40 years since,  more than 40 countries, including world powers such as China, Britain and Brazil, have followed suit by embarking on their own legislative reforms and cracking down on corruption by targeting illicit payments made by foreign and domestic firms alike.

The British government passed the Bribery Act 2010, which is stricter than the FCPA and has become the basis for the 'global standard' compliance approach discussed in the final section of this article. In 2014, a Chinese court fined multinational pharmaceutical company GlaxoSmithKline (GSK) nearly $500 million in criminal penalties and handed out suspended jail sentences to multiple GSK executives after a probe revealed that the company paid cash bribes to doctors and altered associated financial records. As the largest bribery-related punishment ever, the recent GSK fines make clear that the Chinese government intends to continue his crackdown on corruption. 

In the current environment, all parties involved in EB-5 investment must assess corruption risks on both sides of the Pacific or even the most well-intentioned Chinese or U.S. players may fall victim to these broad, punitive, and zealously-enforced anti-corruption laws.

Risks in the EB-5 Context

Commissions: Any time a transaction involves multiple parties from differing cultural backgrounds, the potential for deal-breaking misunderstandings is magnified. As a result, companies and individuals that do business in foreign countries tend to tread lightly and give their foreign agents the benefit of the doubt by honoring requests for commissions or payments that they may not fully comprehend. From an anti-corruption perspective, honoring exorbitant or inexplicable fee requests is exactly the type of action that should be avoided as it can implicate both the agent and principal in a corruption investigation under the laws of China, the United States, or both.

In the EB-5 context, the danger posed by commissions paid to emigration agents is especially high due to the close relationship between Chinese immigration agents and the Chinese government's Public Security Bureau (PSB), which arguably renders every Chinese emigration agent a "foreign official" under the FCPA; and the fact that paying commissions as large as 20 percent to 25 percent of the total investment value to Chinese emigration agents has become a normal requirement for U.S. issuers seeking to remain competitive in the Chinese EB-5 investor market. 

If the U.S. government determines that such payments are improper bribes paid to Chinese officials to gain a business advantage over competing issuers, the U.S. parties involved, including any participating U.S. regional centers or any U.S. brokers could be prosecuted for violating the FCPA, as well as the Chinese agent to the extent the payment is sufficiently connected to the United States for jurisdictional purposes. Additionally, all parties involved could be prosecuted under Chinese law for both giving and receiving a bribe in China.

Payments Made by Emigration Agents: What an emigration agent does with his or her commission is yet another source of potential trouble, as the Chinese agent and U.S. issuer or broker can be held accountable for improper payments or gifts made by the agent to other Chinese officials in return for a favorable exit visa determination, exclusive marketing rights, or actual appearances and endorsements at EB-5 marketing events. Investors themselves can even be implicated in the situation depending on how such payments are structured and distributed.

The danger of inadvertently implicating oneself in an FCPA violation is especially high in China, due to long-standing traditions of distributing seasonal gifts such as moon cakes or red envelopes containing money to colleagues in order to cement and maintain commercial and political relationships. Completely refraining from participating in such traditions may make it difficult, if not impossible, to develop and maintain the personal relationships necessary to successfully do business in the country. However, if companies do not carefully monitor their participation in such gift-giving customs they could end up inadvertently violating both Chinese and U.S. anti-corruption laws.

Six Ways to Avoid Corruption in the EB-5 Context

Having established that the governments of both China and the United States have no intention of slowing down efforts to weed out corruption, and that the EB-5 industry is particularly rife with potential anti-corruption land mines, the following list outlines six proactive steps that members of the EB-5 industry can take to minimize risk for themselves and their business partners:

1.      Screen all parties - early and often.

The presence of a potential business partner on a government prohibited parties list is usually a good indication that the party will present an unreasonable risk of implicating your business in unlawful activity. In the context of the FCPA, it is especially important to avoid associating with questionable parties because the unlawful actions of an agent can result in FCPA liability on the part of the principal.

In addition to list-screening tools offered by various U.S. government agencies, private vendors offer software that is able to quickly perform comprehensive screenings of current government prohibited parties lists. Regular screening protocols should be written into compliance manuals and checklists and ideally should include an initial screening of the business entity, owners, and key employees when contact is first made in addition to periodic screenings of each party thereafter to account for subsequent additions to prohibited parties lists.

As an agent, taking the proactive step of obtaining a screening for your business and its managers can attract further business by evidencing your company's commitment to compliance and its willingness to participate in the due diligence effort.

2.      Distribute questionnaires and certifications to your business partners.

While it can be difficult to ask a potential foreign business partner to provide information regarding past violations of the law or relationships with government officials without appearing rude, the benefits of obtaining, reviewing, and documenting an anti-corruption questionnaire are significant. This initial activity can alert your company to potential red flags that can be addressed before they become insurmountable problems. It is also smart to have legal counsel review the questionnaire responses to protect your company against the possibility that a lucrative business deal overrides red flags found in the questionnaire.

To minimize the negative effects of burdening a potential partner with a questionnaire or an anti-corruption compliance certification, it may be useful to explain that the forms are required by your attorney (an often useful scapegoat for unpalatable requests for paperwork) and that such documents protect the partner under the laws as well. Another option is to provide potential partners with a short, broad questionnaire and only follow up with a more detailed version if the responses trigger additional questions.

If a potential partner hesitates or refuses to respond to a questionnaire request or to sign a compliance certification request, such refusal is a serious red flag itself.  Conversely, if as an agent shows a willingness to honor such requests it will undoubtedly reinforce your confidence that you have likely chosen a reliable partner.

3.      Create and promulgate a conservative gifts and entertainment policy.

Since gifts play such an intricate role in business and politics in China, they present a serious corruption risk for companies involved in China-to-U.S. EB-5 investments. It is therefore imperative that your company's compliance program includes a clearly articulated and well-written gifts and entertainment policy that is understood and available in all applicable languages, and followed by all employees and agents. Additionally, because existing anti-corruption legislation fails to establish a bright line, and instead prohibits "unreasonable" entertainment and anything beyond a "modest" gift, a company's policy should establish hard limits on the appropriate value for any gifts. It is best to be conservative since terms such as "unreasonable" and "modest" are open to interpretation. 

4.      Maintain a committed "Tone at the Top" and train your staff and business partners regularly.

Simply having a comprehensive compliance program in writing is not enough.  To actually protect your company and you against potential violations you must ensure that all employees and agents/partners understand their compliance obligations and implement the procedures you develop on a daily basis. Training in local languages is crucial to your success. Having a comprehensive program and training your staff and partners are also mitigating factors if you inadvertently violate the law, and can help reduce potential penalties.       

Your compliance program must begin with an anti-corruption policy issued by your CEO. A successful policy is a clear and consistent commitment from senior management. This will ensure that everyone involved will know that your company takes anti-corruption compliance seriously. The Department of Justice considers this the number one factor in analyzing a company's commitment. Appoint a compliance officer and do not hesitate to investigate and address potential violations in a strict but evenhanded manner. Most government whistleblowers only report corruption to the government after they have tried to discuss such issues with management. Thus, don’t ignore internal reports. Have a process to report such concerns within your company. If you are too small for a dedicated hotline for reports, then have a reporting mechanism so concerns can be addressed by upper management.

Also, anticorruption training for employees and management alike should be narrowly tailored based on job function and occur on a periodic basis, at least annually. Since companies may be liable for actions of their agents under the FCPA, training of business partners and foreign agents is very important. A foreign business partner who takes the time to participate in such trainings will evidence a commitment to the business relationship.

5.      Accurately document all compliance efforts and transactions.

Without a written record outlining your compliance program and evidencing your due diligence efforts you will have no documentation to support your efforts in any investigation. A transaction that is inaccurately or incompletely recorded in your company's accounting records or those of your agent will suggest that the payment was improper and that company management knew of, and attempted to cover up a violation. Such actions will result in a more serious punishment for the entities and individuals involved. Thus consistent, accurate, and transparent recordkeeping practices should be written out and consistently implemented. Periodic internal or independent audits of your company's financial records will ensure proper recordkeeping and identify potential violations.

6.      Apply a 'global standard' to ensure compliance and cut costs; continuously review and improve on procedures.

Because U.S.-China investments implicate both countries' anti-corruption regimes, it is advisable to adopt a 'global standard' that satisfies the requirements of both countries' specific legislation.  Generally, the United Kingdom's Bribery Act of 2010 is used as the basis for a global standard, since it serves as the international high water mark for anti-bribery legislation with a strict liability provision. Establishing a global standard that satisfies the laws of every jurisdiction in which your company does business can save you the cost of establishing separate programs for each jurisdiction, and eliminate any confusion that may result from having multiple policies that apply in different parts of the world.

That said, a global standard does not eliminate the need for periodic reviews of your compliance program itself to identify weaknesses or holes in your procedures, and address new or newly-discovered industry or country-specific risks. Often, outside counsel is best able to provide an unbiased assessment of an existing program and propose recommendations for changes.

Doreen Edelman

Doreen Edelman