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China has been ranked the world’s most challenging jurisdiction for corruption risk, meaning the new year ahead promises to be another busy year for investigation lawyers.
In the first edition of the Risk Advisory Group’s Corruption Challenges Index, China was singled out as the country where businesses face the most severe corruption challenges, ranking top of 181 countries.
The report’s release coincides with Chinese New Year, when businesses face an extra layer of risk thanks to corporate hospitality and gift-giving forming a key part of business practices and culture.
But China’s high-risk environment hasn’t stopped foreign investment into the country. Last year, the country attracted RMB813.22bn (£94.5bn) of foreign direct investment, up 4.1 per cent on 2015.
Statistics on the enforcement of the Foreign Corrupt Practices Act (FCPA) show a clear upward trend in regulatory action against global companies for wrongdoing in China. Last year, the US Securities and Exchange Commission (SEC) initiated 26 FCPA enforcement actions – 14 of which involved business activity in China.
In one example, JP Morgan Chase & Co’s $246m payment to settle charges brought by the US Government over allegedly corrupt hiring practices in Asia was one of the most high-profile cases last year. The substantial penalty was for its role in a scheme to win banking deals by awarding prestigious jobs to relatives and friends of Chinese government officials.
Paul Weiss Rifkind Wharton & Garrison was instructed by the bank to act as the lead counsel in the investigation and negotiation, which lasted for three years. King & Wood Mallesons (KWM) and Herbert Smith Freehills (HSF) have also played support roles handling the PRC and Hong Kong matters respectively.
Among several sectors, the pharmaceutical industry was also heavily targeted. AstraZeneca, GSK (advised by Ropes & Gray) and Novartis AG (advised by Cravath Swaine & Moore) are among companies that have been investigated by the SEC for bribery allegations in China and given hefty fines.
In the UK, there has also been an increasing number of China-related bribery investigations by the Serious Fraud Office (SFO). In January, British engineering giant Rolls-Royce, advised by Slaughter and May, agreed to pay £671m in penalties to settle long-running corruption allegations of paying bribes to win contracts in six countries including China.
The Lawyer’s 2016 Litigation Top 50 report also highlights that regulatory and investigations work provides the bulk of the caseloads for international firms’ litigation practices in China.
Quinn Emanuel Urquhart & Sullivan’s Shanghai office, for example, is led by white-collar crime partner Samuel Williamson. There are eight lawyers, including three partners in the office, and Williamson estimates that about 60 per cent of the Shanghai team’s work relates to internal investigation and government enforcement issues. A large part of the investigation practice is anti-corruption-focused.
Hogan Lovells and DLA Piper, the third and fourth-largest international disputes practices in China respectively, both acknowledge there has been a marked increase in investigations work in China, focusing on anti-corruption and associated criminal and civil proceedings against both corporations and individuals.
Hogan Lovells, with 28 disputes lawyers in China including five partners, says compliance and anti-corruption investigations contribute the largest part of its contentious-related revenue in the jurisdiction.
Led by US-qualified litigator Eugene Chen, the team is frequently instructed by companies to conduct internal investigations, stress-testing and internal auditing, provide proactive compliance advice and training, draft policies and assist in responding to enforcement actions by the US and UK regulatory authorities.
With western companies continuing to invest in China in a huge way, the combination of corruption issues and an incredible level of investment lead to a much higher level of caseloads than other Asian countries.
While global firms will continue to prosper by defending global businesses in China, anti-corruption practices are still an emerging area in leading local firms.
Although firms like Jun He, KWM, Zhong Lun, Tian Yuan and JT&N house individual partners with relevant expertise, it is yet to become a standalone practice group among prominent firms.
Much of this slow progress has to do with the fact that China’s heightened anti-corruption campaign has been mostly driven by political agendas and so far has been mainly targeting graft and government officials. Investigations and arrests are conducted in a more secretive fashion instead of through transparent procedures and legal proceedings.
Chinese regulatory bodies have started enforcing on corporate misconduct, but most of the companies investigated and punished have been foreign multinational corporations with offices in China, and not Chinese companies themselves. State-owned enterprises are rarely prosecuted for regulatory offences.
This apparent “doubled standard” in Chinese regulation puts a greater burden on international companies operating in China and their internal compliance and investigation functions. This is good news for lawyers looking to advise companies in this space who have growing opportunities as more and more foreign companies expand in the jurisdiction.
But until the playing field between Chinese and international companies operating in the region is levelled, the risk for global business will remain high and China will continue to rank highly on the Corruption Challenges Index, which does not portray a healthy business environment for anyone.
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