How important is due diligence on those with whom you are doing business? Why does it matter if a company is owned or controlled by a foreign government or a political party member of a foreign government? Under the Foreign Corrupt Practices Act (FCPA) such persons are covered persons and any US entity which pays bribes to such covered persons violates the FCPA. This issue is particularly true in China. Moreover, a couple of recent developments have shown just how hard it is to know whether you are doing business with a covered person when doing business with a Chinese corporation.

Recently Raymond Zhong touched on this in a New York Times (NYT) piece, entitled “Who Owns Huawei? The Company Tried to Explain. It Got Complicated”. This article gives some interesting hints as to why corporate ownership can be so murky in China and why any US company doing business in China must begin with the assumption that any Chinese business is owned or, at the very least, controlled by the Chinese government, making any business transaction in China subject to the FCPA.

Zhong began by citing to a recitation made by Jiang Xisheng, the chief secretary of Huawei’s Board of Directors, to a small group of reporters on Thursday. The goal was to help explain the company’s ownership after two American researchers wrote a report accusing Huawei of being misleading about the issue. Zhong reported, “Mr. Jiang’s explanation boiled down to this: On paper, he said, Huawei is owned by a labor union that solicits donations from employees when their colleagues have health problems and the like. The union also supervises the company basketball club”.

Just like that, one of the world’s largest hardware companies is owned by its employees. Sounds like a good old Employee Stock Ownership Plan (ESOP). But it got even better from there, as “Huawei showed reporters on Thursday what it described as evidence of its independence: a big blue book, kept behind glass and under lock and key in a drab white room at the company’s headquarters in Shenzhen, a southern Chinese city. Within its 10 volumes are said to be the names of all the Huawei employees who hold “restricted phantom shares” in the company — proof, the company says, that no piece of Huawei is owned by the Chinese government.”

First of all, anyone who believes that bald-faced statement should probably Not Pass Go and go directly to the jail of supreme inanity. Xisheng went on to state, “The union has no influence over the company’s business operations. It does, however, supervise after-work activities for employees. That basketball club, for instance. The badminton and table tennis clubs, too.” While “Huawei’s union is registered with the Shenzhen city government’s union and pays dues. But the municipal union has no influence over the Huawei union’s operations or the company, Mr. Jiang said.” Of course, since the Union has no influence over the company there is no need for such messy paperwork as Board meeting minutes or other indicia that a true corporation exists.

All of this double speak and obstruction came after two researchers who wrote a report “questioning Huawei’s ownership — Christopher Balding, a professor at Fulbright University Vietnam, and Donald C. Clarke, a Chinese law expert at George Washington University — say Huawei’s virtual stock program “has nothing to do with financing or control” and is “purely a profit-sharing incentive scheme.”” So, if you sign a contract with Huawei, just whom are you doing business with going forward?

Another NYT story, reported by Li Yuan and entitled “Jack Ma, China’s Richest Man, Belongs to the Communist Party. Of Course”, reported that the Chinese Communist Party itself had identified Ma as a party member. That’s right, the founder of Alibaba Group and the richest Chinese is a card-carrying member of the proletariat. Last November, “The party’s official People’s Daily newspaper included Mr. Ma, executive chairman of the Alibaba Group and the country’s most prominent capitalist, in a list it published on Monday of 100 Chinese people who had made extraordinary contributions to the country’s development over the last 40 years.” One can almost hear him leading the chant, “Workers of the world unite! You have nothing to lose but your chains.”

Clearly under the FCPA, Party member Ma qualifies for FCPA coverage as the FCPA specifically incorporates politicians, political parties and candidates for political offices as foreign government officials for purposes of the Act. In the 2012 FCPA Guidance it states, “The FCPA’s anti-bribery provisions apply to corrupt payments made to (1) “any foreign official”; (2) “any foreign political party or official thereof ”; (3) “any candidate for foreign political office”; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories. Although the statute distinguishes between a “foreign official,” “foreign political party or official thereof,” and “candidate for foreign political office,” the term “foreign official” in this guide generally refers to an individual falling within any of these three categories.”

Additionally, politicians and political parties are incorporated into the FCPA through the accounting provisions of the FCPA. As further stated in the FCPA Guidance, “Additionally, individuals and entities can be held directly civilly liable for falsifying an issuer’s books and records or for circumventing internal controls. Exchange Act Rule 13b2-1 provides: “No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to [the books and records provision] of the Securities Exchange Act.” And Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5)) provides that “[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account ….”. The Exchange Act defines “person” to include a “natural person, company, government, or political subdivision, agency, or instrumentality of a government.”

The opaqueness of Chinese corporate structures is more than simply the inscrutable Far East. When presented with such answers as those from Huawei, there is simply no way for a US company to know precisely the ownership structure to ascertain if even doing business with such persons is legal or violates some sanctions or other rule. Of course, believing there is no government control, ownership or party membership can also lead to violating the FCPA.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2019

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