New Law or Regulations

State level:

(1) Regulations on the Management of Governmental Affairs

On July 9, the Chinese Sate Council promulgated the new Regulations on the Management of Governmental Affairs (the “Regulation”), which focuses on major government issues of public concern such as the disclosure of information regarding government spending on official receptions, vehicles, and overseas trips, government procurement, and conference management.

According to the Regulation, government agencies are explicitly prohibited from purchasing luxury items, goods or commodities or constructing elaborate office buildings. Further, enhanced supervision is placed over the “three kinds of official consumptions”, i.e. use of government spending on official receptions, vehicles and overseas trips, which have been determined to be major sources of corruption in the past.

As the country’s first administrative regulations to deal with governmental affairs, the Regulation will be implemented on October 1, 2012.

Local level (Beijing & Shanghai): No developments

Communist Party Rules: No developments

Upcoming law or regulation

None Identified

China Enforcement Actions

(1) On July 2, 2012, Liu Zhuozhi (“Liu”), the former Vice Chairman of the Inner Mongolia Autonomous Region in North China, was sentenced to life imprisonment by the Beijing No. 1 Intermediate People’s Court for taking over RMB 8.17 million (US$1.29 million) in bribes.

During Liu’s term as government head and Party chief of the Xilingol League in western Inner Mongolia and vice chairman of the autonomous region’s government between 2002 and 2010, Liu took advantage of his position and power to grant favors to 21 companies and individuals by improperly approving business and mining credentials and promoting officials. In exchange for these favors, Liu reportedly accepted bribes exceeding RMB 8.17 million (US$1.29 million).

(2) On July 3, 2012, Yan Limin (“Yan”), the former General Manager of the Hangzhou-based Juhuasuan website, a group-buying website and subsidiary of Taobao.com, China’s largest online retailer, was detained by Hangzhou police on suspicion of accepting bribes. The amount of bribes that Yan allegedly accepted has not yet been disclosed.

Juhuasuan.com’s transaction volume reportedly reached more than RMB 10 billion (USD1.6 billion) last year, accounting for approximately half of the market share in China. The previous investigation revealed that some unqualified business owners, purportedly through offering bribes, conspired with certain Juhuasuan employees to cheat customers by removing negative feedback posts and raising their credit ratings to promote sales.

Yan continues to remain in Hangzhou police custody as the investigation continues.

(3) On July 6, 2012, Tian Xueren (“Tian”), the former Vice Governor of Jilin Province, was expelled from the Communist Party of China (“CPC”) for allegedly taking substantial bribes. The case has been submitted to the prosecutors for further investigation.

(4) On July 11, 2012, Guangdong Province Higher People’s Court affirmed the trial court’s sentencing of Zhong Xinming (“Zhong”), the former Executive Deputy Mayor of Longgang District of Shenzhen, to death with a two year reprieve for taking bribes in the amount of RMB 5.19 million (USD 820,000) and HK dollar 35.9 million (USD 4.6 million).

Zhong was found guilty of abusing his power and taking bribes while leading land requisition efforts for the construction of Longgang Sports New Town, and while overseeing the construction of Metro Line 3 and renovation of Shenhui Road, between 2007 and 2010. Zhong and his brother, Zhong Weiming, reportedly accepted bribes from a property developer in exchange for offering him the right to develop a piece of land and helping him get compensation for land requisition. Zhong Weiming was sentenced to 12 years in prison and the person who purportedly provided the bribes was sentenced to 11 years in prison.

(5) On June 20, 2012, Wang Lisheng (“Wang”), the former Director of the Demolition and Relocation Office of the Northeast city Qitaihei in Heilongjiang Province, was prosecuted for engaging in commercial bribery.

During Wang’s term as the Director of the Demolition and Relocation Office (a low-level official position in China but one that has historically proved to present opportunities for bribery), Wang allegedly abused his power by improperly assisting his friend’s company to obtain demolition projects netting high profits. Wang reportedly accepted substantial bribes in exchange for his official assistance. The case will be submitted to the applicable court for trial in a matter of days.

Other Enforcement Related Developments

(1) On June 27, 2012, Liu Jiayi (“Liu”), the auditor general of the National Audit Office of the People’s Republic of China (PRC), disclosed in a report based on audits of 66 cities and counties that RMB 2.96 billion (USD 470 million) earmarked for affordable housing programs had been intercepted or embezzled last year..

In July, after Liu’s report, some misused affordable housing capital reportedly was recovered and persons allegedly responsible were placed under investigation by the relevant authorities.

(2) As of July 13, 2012, China reportedly has closed at least 89 websites since March of this year that allegedly falsely described themselves as anti-corruption portals. The websites, with names such as “corruption prevention website of China” and “corruption investigation and prevention research center of China,” were closed by the PRC State Internet Information Office for allegedly extorting  companies, government agencies and individuals by threatening to falsely post negative bribery news about the relevant persons or entities unless they acceded to their demands.

(3) It was reported in early July that more than 1,000 officials across Guangdong province in southern China have been investigated for corruption as part of a year-long crackdown on economic crimes, including commercial bribery. In Shenzhen, authorities have arrested 146 party officials and civil servants since February, 2012 for corrupt activities involving RMB 150 million (USD 23 million). The campaign has extended to other second-tier cities within the province as well.

(4) China’s procuratorial organs also reportedly handled 13,870 criminal cases of embezzlement and bribery, and brought 18,856 suspects into lawsuits in the first five months of 2012. The figures were revealed by the Supreme People’s Procuratorate at a national conference held in the city of Dalian in northeast China’s Liaoning province in early July.

China Related U.S. Enforcement Action

(1) On July 17, the Nordam Group Inc. (“Nordam”), a provider of aircraft maintenance, repair and overhaul (MRO) services based in Tulsa, Okla., entered into an agreement with the Department of Justice to pay a USD 2 million penalty to resolve violations of the U.S. Foreign Corrupt Practices Act (FCPA).

According to the agreement, Nordam, its subsidiaries and affiliates paid bribes totaling USD 1.5 million to employees of airlines created, controlled and exclusively owned by the People’s Republic of China in order to secure contracts to perform MRO services for those airlines.  The bribes were paid both directly and indirectly to the airline employees. Several Nordam employees in the U.S. were aware of and approved the bribes which were referred to internally as “commissions” or “facilitator fees”.

Conduct

According to the NPA, from 1999 until 2008, Nordam, its subsidiaries and affiliates paid bribes to employees of airlines created, controlled and exclusively owned by the People’s Republic of China in order to secure contracts to perform MRO services for those airlines.  Several Nordam employees reportedly were made aware of and approved the bribes.  The bribes were paid both directly and indirectly to the airline employees.  In an effort to disguise the bribes, three employees of NORDAM’s affiliate entered into sales representation agreements with fictitious entities and then used the money paid by NORDAM to those entities to pay bribes to the airline employees.

Per the NPA, the bribes were referred to internally as “commissions” or “facilitator fees.” The facilitator fees were paid to “facilitators” who, in fact, were employees of customers. These facilitators were also referred to internally as “internal guys,” “internal ghosts,” or “our friends inside.”  The facilitator fees either were paid directly to the customer’s employee by wire transferring money to the employee’s bank account or were paid indirectly by first depositing the money into the personal bank accounts of Nordam’s Singapore based affiliate’s employees, who would then withdraw all or a portion of these fees to pay the customer employees in cash.

In all Nordam, its subsidiaries and affiliates “paid as high as $1.5 million in bribes to secure approximately $2.48 million in profits from state-owned and controlled customers in China.”

Penalties

Pursuant to the NPA, Nordam agreed to pay a $2 million criminal penalty to resolve the violations.  Additionally, Nordam agreed to cooperate with the DOJ, to report periodically to the DOJ concerning Nordam’s compliance efforts, and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations.  The DOJ commented that it “entered into a non-prosecution agreement with NORDAM as a result of NORDAM’s timely, voluntary and complete disclosure of the conduct, its cooperation with the department and its remedial efforts.”  In addition, the NPA recognized that “a fine below the standard range under the U.S. Sentencing Guidelines is appropriate because NORDAM fully demonstrated to the department, and an independent accounting expert retained by the department verified, that a fine exceeding $2 million would substantially jeopardize the company’s continued viability.”

The DOJ's press release is here.

China Enforcement Actions

(1) On June 5, Wu Xiaoli (“Wu”), former general manager of the Shanghai Gongxin Project Construction Supervision Center Ltd, a state-owned company, was sentenced to life in prison for allegedly embezzling RMB 42 million (USD 6.6 million) of the company's funds during her term from 1994 to 2010.

(2) On June 6, 2012, Hu Jianhua (“Hu”), former deputy chief of the environmental protection bureau of Tongzhou district of Beijing, was sentenced to 16 years in prison after being convicted of accepting bribes in the amount of RMB 1.2 million (USD 188,500) and embezzling more than RMB 400,000 (USD 63.492) in public funds. 

During Hu’s term, he allegedly used his influence to undertake construction projects in the name of a company under his control and then subcontracted the projects to other companies for a much lower price in order to profit from the price difference. In addition, Hu allegedly abused his powers to purchase real estate at a below-the-market price and helped a Beijing real estate developer to secure a bid for a construction project in exchange for bribes in the amount of RMB 220,000 (USD 349.21).

(3) On June 19, 2012, a court affirmed a prior court’s conviction of Man Man for bribery related offenses.  Man Man, a former county official in Northwest China's Gansu province was sentenced to life imprisonment for taking bribes exceeding RMB 6.57 million (USD 1 million) and his failure to explain the source of RMB 2.08 million (USD 330,159) in assets.

(4) On June 20, 2012, Feng Shiru (“Feng”), former deputy director of Yangjiang City Public Security Bureau in Guangdong Province was sentenced to life imprisonment for taking bribes exceeding RMB 7 million (USD 1.1 million) from local criminal organizations in exchange for his providing protection over their illegal activities.

Feng also reportedly invested in casinos run by the organized crime in Macau and abused his police powers by allowing convicted criminals to serve their respective sentences outside of jail.

(5) On June 20, 2012, Hu Jun (“Hu”), former deputy director of the Shanghai Planning, Land and Resources Administrative Bureau went on trial for taking bribes exceeding RMB 7 million (USD 1.1 million).

During Hu’s term first as the director of Shanghai Jing’an district’s urban planning administration, he allegedly abused his power to help Zhongkai Corporate Group (“Zhongkai”), a residential complex developer in Jing’an district, to win planning approvals. In exchange, Zhongkai sold Hu two apartments in Jing’an area for a price that was RMB 2 million lower than market price.

During Hu’s subsequent post as the deputy chief of Chongming District in charge of urban planning affairs, Hu received bribes from local real estate developers in change for his issuance of approvals. Hu admitted taking bribes in the amount of RMB 5 million (USD 0.79 million) in the past 10 years. Hu reportedly has returned RMB 4.8 million of the bribes, and the court took has not yet imposed a sentence on Hu for the aforementioned offenses.

In a case similar to Hu’s last year, Tao Xiaoxing, former deputy director of the Shanghai Housing, Land and Resources Administrative Bureau, was sentenced to life imprisonment for taking RMB 10.45 million (USD 1.65 million) in bribes.

In 2008, Yin Guoyuan, Tao's predecessor, was sentenced to death with a two-year reprieve for taking RMB 35.55 million (USD 5.63million) in bribes in addition to other crimes.

(6) On June 25, 2012, Huang Sheng, former vice governor of Shandong Province was expelled from the Communist Party of China (CPC) for allegedly taking bribes of a significant amount. The case has been submitted to the prosecutors for review.

China Enforcement Actions

(1) On April 26, 2012, Jiao Baohua ("Jiao"), municipal party secretary of Yining City, Yili Kazak Autonomous County, Urumqi Municipality was sentenced to death with a two year reprieve for receiving bribes exceeding RMB 34.65 million (USD 5.5 million) and for abusing his powers as a government official. A death sentence with a two-year reprieve is usually reduced to life in prison if the convict behaves well while serving the term. Jiao's conduct allegedly led to public losses totaling RMB 53.72 million (USD 8.53 million).

(2) Following an internal anti-corruption investigation, Alibaba Group Holdings Ltd (“Alibaba”), China’s e-commerce giant, announced on May 4, 2012 that the company had taken legal action against some of its staff members working for Taobao.com (“Taobao”), Alibaba’s wholly owned subsidiary, and China’s biggest B2C doc.com company. 

Reportedly, the internal investigation revealed that several Taobao employees had helped some of its online vendors remove negative comments posted by customers for their products in order to elevate the vendors’ performance ratings. In exchange for improperly providing access to the comment site, the employees received unlawful payments from the vendors.

By the time of the issuance of the announcement, Alibaba had already closed nine online shops that were thought to be involved in the improper conduct.

(3) On May 9, 2012, Wang Jiping (“Wang”), the former chief of Beijing’s local taxation bureau, was sentenced to death with a two year reprieve for accepting bribes and embezzling over RMB 14 million (USD 2.2 million).  

During Wang’s term as head of the local taxation bureau, Wang purportedly abused his power by manipulating the bidding process for government construction tenders and arranging employment for the son of a top government official. Meanwhile, Wang allegedly conspired with Zhao Yun, legal representative of Beijing Yulin Tianyuan Science and Trade Co., Ltd. (“Yulin Tianyuan”), to form a joint venture with Beijing’s local taxation information center, a government entity affiliated to Beijing local taxation bureau. Afterwards, Wang directed Yulin Tianyuan to sell tax-controlled passcode machines to the joint venture at a price substantially over market. Zhao Yun was sentenced to 13 years in prison for his role in the scheme.

(4) On May 15, 2012, Zhu Yuying (“Zhu”), former vice director of the Standing Committee of the Municipal People’s Congress of Maoming City, Guangzhou Municiplity, pleaded guilty to awarding government contracts and government positions in exchange for bribes amounting to nearly RMB 18 million (USD 2.86 million).

From 2006 to 2011, Zhu purportedly helped 57 officials secure higher positions in local government in exchange for bribes totalling RMB 16.2 million (USD 2.57 million). In addition, Zhu admitted accepting bribes exceeding RMB 1.7 million (USD 269,841) in return for helping the payor of the bribe secure a contract for the construction of a drug-rehabilitation center.

(5) On May 16, 2012, Bei Yujie (“Bei”), former director of Central National Song and Dance Troupe, was sentenced to 15 years in prison for taking bribes totaling RMB 310,000 (USD 49,206) and embezzling payments to performers in the amount of RMB 90,000 ($14,200).

Following the 2006 award of a stage construction contract for the Central National Song and Dance Troupe to Zhejiang Defeng (a Zhejiang-based engineering company), Bei allegedly accepted RMB 300,000 (USD 47,619) from the manager of the company. The same company then paid Bei an additional RMB 10,000 (USD 1,587) in 2010 as a purpoted "gift" during Bei’s son's wedding.

(6) On May 18, 2012, Lai Changxing (“Lai”) was sentenced to life in prison by the Intermediate People’s Court of Xiamen for bribery and smuggling related criminal offenses.

The ruling reflected a previous agreement between the Chinese and Canadaian governments guaranteeing that Lai would not be put to death upon his repatriation to China. Before Lai fled to Canada, he purportely ran the nation’s largest smuggling operation, involving scores of government officials. From 1991 to 1999, Lai used this operation to evade import tariffs exceeding RMB 13.99 billion (USD 2.22 billion). Lai reportedly paid bribes of approximately RMB 39.13 million (USD 6.21 million) to government officials to facilitate his smuggling operation.

(7) On May 22, 2012, Ying Guoquan (“Ying”), former chairman of Wenzhou Cailanzi Group (“Group Company”), a state-owned food enterprise was sentenced to death with a two year reprieve for graft involving more than RMB 370 million (USD 58.5 million). Most of the money was reportedly transferred to a majority-owned company of Ying’s son. In addition, Ying was convicted of illegally distributing State assets by fabricating the number of company employees and the amount of total wages paid to the Group Company’s employees from 1998 to 2007.  In fact, most of the money was not paid to line employees, but rather improperly distributed to senior executives. In addition to Ying, 15 other former senior executives of the Group Company were sentenced to prison, serving terms ranging from 3 to 13 years.

(8) Seven years after Li Yimin (‘Li”), former vice-chairman of Guangzhou Pharmaceutical Holdings Ltd (the “Company”) was found guilty of illegally licensing the Company’s trademark “Wanglaoji” to Hong Kong-based JDB group (“JDB”), the China International Economic and Trade Arbitration Commission (“CIETAC”) has restored the Company’s full rights to the brand.

Li, during 2001-2003, accepted bribes totalling HK$ 3 million (USD 586,400) from the then Chairman of JDB, Chan Hung To, in return for illegally entering into agreements licensing the “Wanglaoji” brand to JDB for a term of 10 years, from 2010 to 2020.  Based on this conduct, Li was sentenced to 15 years in prison by the Guangdong High People’s Court in 2005. The license granting JDB the right to use the "Wanglaoji" trademark out of the illicit deal, however, remained in effect at that time.  

In April 2012, Guangzhou Pharmaceutical filed a protest with CIETAC challenging the validity of the license to JDB.  CIETAC did not take long reviewing the challenge, and, in early May revoked the licensing agreements signed between 2001 and 2003 by JDB and Guangzhou Pharmaceutical. CIETAC's ruling also required JDB to immediately cease any and all use of the “Wanglaoji” mark.

China Enforcement Data

According to the People’s Procuratorate of Chongqing Municipality, in the first four months of 2012, 473 people were prosecuted locally for duty-related crimes. Of those, 71 were officials at the county level or above, and most were charged with taking bribes.

Cosgrove was previously scheduled to stand trial on June 26^th of this year, but changed his plea following U.S. District Court Judge James V. Selna’s denial of his motion to suppress evidence two weeks ago.  In the motion, Cosgrove and his co-defendant David Edmonds unsuccessfully had argued that statements they made to CCI’s outside counsel (Steptoe & Johnson) during the course of Steptoe’s investigation on CCI’s behalf should be suppressed on the grounds that Steptoe’s attorneys purportedly qualified as state actors because they had acted on the Government’s behalf during the course of the company’s investigation.  In rejecting defendants’ motion, Judge Selna found that the facts at bar did not support that “Steptoe’s actions were so intertwined with the Government” as to render them de facto state actors.  

Conduct

• In 2009, CCI pleaded guilty to a three-count criminal information that charged two counts of violating the antibribery provisions of the FCPA and one count of conspiracy to violate the FCPA and Travel Act.
• CCI violated the FCPA by making corrupt payments totaling approximately US$4.9 million to officers and employees of state-owned enterprises (SOEs) - "foreign officials" under the FCPA – in China, South Korea, UAE and Malaysia for the purpose of obtaining or retaining business. CCI generated approximately US$31.7 million in net profits as a result of these corrupt payments.
• Cosgrove served as CCI’s head of worldwide sales from 1997 to 2007 and also as its Executive Vice President from 2002 to 2007. 
• Pursuant to the plea agreement, Cosgrove admitted that, in 2003, “CCI bid on an order to provide a valve to Sichuan Chemical in China” and that Cosgrove “approved via email the payment of $7,500” to a third party conduit which then redirected the payment to the SOE Sichuan Chemical in order for CCI to obtain business.  Cosgrove further admitted that “[a]s a result of this payment, CCI earned profits of approximately $5,625 in connection with the sale of the valve.”

Penalties

• Under the plea agreement, the Government and Cosgrove agreed to make a joint sentencing recommendation to the Court of no more than 15 months imprisonment, three years supervised release, and a fine of $20,000.  This recommended sentence is substantially less than the statutory maximum punishment of 5 years imprisonment and a $100,000 fine per count of violating the FCPA that Cosgrove could have faced had he proceeded to trial.  Sentencing is set for August 27, 2012.

The Justice Department’s press release on this matter can be found here. 

China Enforcement Actions

(1) On March 31, 2012, Li Ping, former Party chief of Futian District committee, was sentenced to six-and-a-half years in prison for accepting bribes totaling HK$4 million (US$515,082).

During Li Ping’s term as Party chief of Futian District, Guangzhou City, Guangdong Province between 2008 and 2009, he was found to have abused his power by helping a local real estate developer obtain a government contract for a Huaxin Village urban renovation project in exchange for bribes in the aforementioned amount.

On the same day,  Li Lin, the former director of the Shenzhen Financial Development Office, was sentenced to seven years in prison for taking bribes of RMB 1 million (US$158,805) and HK$1.6 million (US$210,000). Li Lin was found to have abused his power as the city’s top official and to have offered improper aid to local enterprises in exchange for bribes during Shenzhen’s urban development period.

Cao Zhongjiao, former chairman of Shenzhen Road and Bridge Construction Group, was sentenced to ten years for offering projects to contractors in exchange for bribes exceeding RMB 420,000 (US$ 66,666).

Wen Pengfei (“Wen”), certifying engineer for Shenzhen Zhongxing Kingxun Electronics Co., was sentenced to one year for taking bribes as a non-state functionary during his term between 2006 and 2008 on the grounds that Wen provided fake certificates to suppliers applying for certification.

From 2011 to March 2012, courts in China’s Guangdong Province have intensified enforcement of bribery related offenses, investigating more than 720 commercial bribery cases and concluding 601 such cases, during that time. 474 state functionaries were among those convicted.

(2) On April 20, 2012, the Supreme People's Court (SPC), China’s highest court, overturned the death sentence previously given to Wu Ying, who was previously convicted of fraudulent fundraising of in amount exceeding several hundred million yuan. The case was remanded to Zhejiang Higher People’s Court for resentencing. Wu previously admitted bribing government officials.

(3) On April 21, 2012, Dai Weizhong, the former vice president of state-owned Shanghai Lingang Economic Development Group was sentenced to life in prison for taking bribes exceeding RMB 8.1 million (US$ 1.28 million).

During Dai’s term as the group's vice president and chairman of Shanghai Lingang Construction and Development Co., he purportedly abused his power to help a construction company win 18 construction projects with a gross aggregate contract value of over RMB 397 million (US$ 63,015,873). Dai also purportedly helped a subcontractor to win projects valued at more than RMB 200 million (US$ 31,746,031) and received US$20,000 in improper commissions to send his son to study abroad.

The sentence took into consideration the fact that Dai cooperated with authorities by confessing to many bribes prosecutors were unaware of and assisted in facilitating the confiscation of all of his ill-gotten gains.  Despite this cooperation, Dai received a very harsh sentence.

(4) Following a two-month trial starting in February at the Shanghai No. 2 Intermediate People’s Court, on April 24, 2012, Chen Meng (“Chen”), former chief deputy official of Putuo District, Shanghai was sentenced to death with a two-year reprieve for taking bribes in excess of RMB 15,000,000 (US$ 2,380,952).

Chen was found guilty by the court of abusing his position as deputy chief of Songjiang District, Shanghai where he improperly helped others win construction contracts.

(5) On April 25, 2012, following the trials of Yang Yiming (“Yang ”), former deputy chief of the Chinese Football Association (“CFA”), and Zhang Jianqiang (“Zhang”), former chairman of the China Football Association Referee Commission, the trial of Xie Yalong (“Xie”), former chief of the CFA took place.  Xie was accused of taking bribes of RMB 1.7 million (US$ 273,000). Unlike Yang and Zhang, Xie was accused as a non-state functionary.

Among the 12 counts of illegal interests alleged to have been accepted by Xie, one was a gift of RMB 170,000 (US$ 30,000) paid by Tony Li who, at that time, was the marketing director for Nike China in connection with the sponsorship of the Chinese Super League.

China Related FCPA Enforcement Actions

On April 25, 2012, Garth R. Peterson, a former executive of Morgan Stanley’s real estate investing operation in China pleaded guilty to violating the U.S. Foreign Corrupt Practices Act in a case involving alleged bribes to a Chinese official in exchange for business.

According to charges brought by the U.S. Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”), Peterson exploited his secret business relationship with a Chinese government official to steer business to the real estate investment funds managed by his employer, Morgan Stanley, as well as to “secretly acquire” millions of dollars worth of real estate investments for himself and the official. The Chinese official was the former Chairman of Yongye Enterprise (Group) Co., a Chinese state-owned entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district.  Peterson also reportedly paid himself and the Chinese official illegal “finder’s fees” in an amount totaling $1.8 million.

The SEC’s complaint charged Peterson with violations of the anti-bribery, books and records and internal control provisions of the FCPA, and with aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. Peterson agreed to a settlement with the SEC in which he will be permanently barred from the securities industry, disgorge more than $250,000, and relinquish his interest in the valuable Shanghai real estate with a current value of approximately $3.4 million that he acquired through his misconduct.

In the related DOJ criminal action, Peterson pleaded guilty to a criminal information charging him with conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.  At sentencing, scheduled for July 17, 2012, Peterson faces a maximum penalty of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense. 

After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the DOJ and SEC declined to bring any enforcement actions against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed the matter and cooperated throughout the government’s investigation.

Enforcement Actions

On March 28, 2012, Wu Shundi (“Wu”), former deputy party secretary of Meilong Town, Minhang District, Shanghai was jailed for life by the Shanghai No. 1 Intermediate People’s Court following his conviction for taking bribes and embezzling money in an amount totaling over RMB 28 million (US$ 4.45 million). Between 2002-2003, as the chairman and general manager of a village-converted company, Shanghai Longxing (Group) Co., Ltd, Wu purportedly concealed more than RMB 3 million by claiming reimbursements for various fabricated expenses, including utility bills, rental payments, employee bonuses, and others. At the same time, Wu allegedly abused his power by aiding real estate developers to develop collectively-owned land in exchange for bribes.

New Laws or Regulations

Communist Party Rules: On March 26, 2012, Interpretation of the Application of Chinese Communist Party Disciplinary Regulations on Breach of Several Rules on Integrity of Leadership Members of State-Owned Enterprises (Circular Zhong Ji Fa (2012) No. 3) was released by CPC (Central Committee of the Communist Party of China) Central Commission for Discipline Inspection providing the rules for the application of punishments provided in the Communist Party Disciplinary Regulations (Circular Zhong Fa (2003) No. 18) on conduct in breach set out in the Several Rules on Integrity of Leadership Members of State-Owned Enterprises (Circular Zhong Ban Fa (2009) No. 26).

Other Developments

On March 11, 2012, Cao Jianming (“Cao”), procurator general of the Supreme People’s Procuratorate (“SPP”) said at an annual session of the National People’s Congress that the Procuratorate at all levels nation-wide should make greater efforts to intensify the punishment of commercial bribery and to establish an anti-corruption system among all levels of Procuratorates. Additionally, according to Cao’s speech, bribery prosecutions increased 6.2% last year compared to the previous year.

Enforcement Actions

(1)  On February 8, 2012, Chen Meng (“Chen”), former chief deputy official of Putuo District, Shanghai, went on trial at the Shanghai No. 2 Intermediate People’s Court for taking bribes exceeding RMB 15,000,000 (US$ 2,380,952).

In exchange for the foregoing bribes, Chen is alleged to have abused his power during his term as the deputy chief of Songjiang District, Shanghai to secure construction contracts for the bribers and provide illegal assistance in connection with the company registration and the land trading business of the bribers.

(2)  On February 11, 2012, the dismissal of Gu Junshan (“Gu”), senior officer of People’s Liberation Army was confirmed by an official source.

Gu, a former lieutenant general, was reported to have abused his powers by purchasing up-market real estate in downtown Shanghai for a price significantly lower than the market price and later selling the same property to private real estate developers in exchange for a tidy profit.

(3)  On February 19, 2012, Yang Yiming (“Yang”), former deputy chief of Chinese Football Association (“CFA”), was sentenced to 10 years and 6 months in prison for allegedly taking bribes of RMB 1,254,000 (US$ 200,000). On the same day, Zhang Jianqiang (“Zhang”), former chairman of China Football Association Referee Commission, was sentenced to 12 years in prison for allegedly taking bribes of RMB 2,730,000 (US$ 433,000).

Both Yang and Zhang were exempted from facing the more serious charge of taking bribes as state functionaries, despite earlier debate that their positions in the CFA may have qualified them as state staff members. Under PRC law, state functionaries face much tougher penalties for taking bribes than those who are not civil servants. Officials taking bribes can be sentenced to death for the most serious offenses, while the maximum sentence for non-state officials committing bribery is five years plus set prison terms.

The owner of the football club, Xu Hongta, that purportedly offered the bribes to the convicted, received a one year suspended sentence.

(4)  On February 20, 2012, Liu Yuncai (“Liu”), vice mayor of Xiangxiang City in China’s Hunan province was sentenced to 15 years in prison for allegedly taking bribes worth approximately RMB 1,940,000 (US$ 318,000). Liu was also fined RMB 150,000 (US$ 23,810) and was required to forfeit all of his ill-gotten gains.

The charges alleged that during Liu’a term as a state official in charge of urban construction and utilities supply, he sought kickbacks from contractors and real estate developers in exchange for improper benefits.

(5)  Li Bingchun (“Li”), former bailiff of Liqiao County, Shunyi District, Beijing, was arrested on February 23, 2012 for allegedly taking bribes and embezzling money in a total amount exceeding RMB 38,700,000 (US$ 6,142,857).

During Li’s term as the bailiff of Liqiao County, he purportedly fabricated demolishing property to obtain demolition compensation exceeding RMB 20,000,000 (US$ 3,174,603).

In addition to the foregoing, Li allegedly received bribes in the form of pre-paid bank cards and gold bars and embezzled public funds in the total amount exceeding RMB 178,000,000 (US$ 18,253,968).

Other Developments

Further to a January 2012 announcement by the PRC's Supreme People’s Procuratorate (“SPP”) that it would intensify its investigation and prosecution of anti-corruption and anti-bribery cases, on February 16, 2012, the SPP announced the launch of a nation-wide online database recording individuals and companies convicted of bribery, which can be used for public inquiries and cross-regional investigations into bribery cases. Prior to this, there was no such national listing.

Enforcement Actions

(1)    On December 15, 2011, Chen Haibo (“Chen”), former minister of Agricultural Department of Hunan Province, was sentenced to death on 2 years’ suspension in his trial for the offense of accepting bribes worth nearly RMB 19,610,000. During Chen’s term as the deputy secretary and later mayor of Changde Municipality, Chen purportedly provided improper benefits to bribers by means of securing contracting projects, providing preferential policies and deducting certain fees charged by the governments, all in violation of applicable law.

Chen Haibo’s son, Chen Hailiang, and Chen Haibo’s brother, Chen Gao, were also prosecuted for reportedly using Chen Haibo’s position as a state functionary to receive bribes.

(2)    Lai Changxing, a former fugitive accused by the Chinese authorities of being responsible for one of the nation’s biggest corruption scandals, was indicted on January 6, 2012 after he was reported to have confessed to bribery and smuggling. The authorities have accused Lai Changxing of running a multibillion-dollar smuggling network out of Xiamen, in Fujian Province, in the 1990s, and say he was connected to some top officials in China. The smuggling operation was the largest of its kind since the Communist Party took over China in 1949, the authorities asserted.

(3)    Zhang Jianqiang (“Zhang”), former chairman of China Football Association Referee Commission was indicted for allegedly receiving bribes in the amount of RMB 2,730,000. Zhang was accused by the prosecutor of receiving bribes as a non-state functionary even though Zhang claims all the bribes were received without his providing or promising to provide any improper benefits to the bribers.

Other Developments

The People’s Supreme Procuratorate Anti-Corruption Bureau released a statement in January, 2012 wherein it announced its determination to further intensify its investigation and prosecution of anti-corruption and anti-bribery cases.

Back in 2007, Wooh previously entered into a cooperation agreement with the DOJ and pled guilty to conspiring with Schnitzer Steel to violate the FCPA based upon alleged improper payments from 1999-2004 by SSI Korea to Chinese government owned steel mills to induce scrap metal purchases.  (See original DOJ press release here.)  Based on these same alleged improper payments, in 2006, SSI pled guilty to violating the FCPA's anti-bribery and accounting provisions and agreed to pay a $7.5 million criminal fine, and Schnitzer Steel entered into a three-year deferred prosecution agreement with the DOJ, a cease and desist order with the SEC, and agreed to disgorgement of $7.7 million. 

Wooh’s sentencing was delayed multiple times over the last four years as he and the DOJ litigated numerous procedural issues in the investigation of the case and whether Wooh should qualify as a whistleblower.  DOJ’s October 14, 2011 motion to dismiss the criminal information against Wooh cited prosecutorial discretion as the basis for the dismissal. 

Conduct

• Between 2006 and 2009, Chang, on behalf of Watts's Chinese subsidiary, approved payments to employees of government-owned design institutes to obtain recommendations and establish design specifications that favored the company's products.  These payments were improperly recorded in the subsidiary's books and records (and subsequently incorporated into Watts's own books and records) as sales commissions.  Such payments generated in excess of $2.7 million in profits.
• The SEC alleged that Watts failed to implement a sufficiently rigorous FCPA compliance plan on its acquisition of the subsidiary, including deficient FCPA training for its Chinese employees.  Chang compounded the problem by refusing to allow the translation of the subsidiary's policy that generated these payments into English, thereby preventing the U.S. parent company from learning of the conduct at issue.

Penalties

• Watts has agreed to a payment of approximately $3.7 million, consisting of disgorgement, prejudgment interest, and a civil monetary penalty.  Chang agreed to a $25,000 civil penalty.

Notes

• On learning of the FCPA violations at issue, Watts took prompt remedial action, including eliminating commission-based compensation for employees of the Chinese subsidiary, retaining outside counsel to draft an enhanced anticorruption compliance policy, and conducting a global anti-corruption audit.
• Taken in conjunction with previous enforcement actions such as Rockwell Automation and ITT, this decision underscores the SEC's recent focus on Chinese design institutes for anti-bribery investigation.

Zhang Chunjiang, the former deputy general manager of China Mobile was sentenced to death by Chinese People’s Court on July 22, 2011 for the crime of bribery.  He was also the chief secretary of China Mobile’s CPC Committee and held senior positions at the Liaoning Provincial Postal Administration and China Netcom between 1994 and 2009.  The Court concluded that he took bribes totaling US$1.16 million (RMB 7.46 million).  The case was first tried by Changzhou Intermediate Court of He Bei Province where Zhang was given a death sentence with a two year reprieve, meaning he is given two years of life before his execution date, which may allow him to have the death sentence commuted to life imprisonment for good behavior.

What is a death sentence with a two year reprieve and why was Zhang sentenced to death with a reprieve?

According to the People’s Republic of China’s (PRC) Criminal Law, when a criminal is sentenced to death with a reprieve, and the criminal does not commit any intentional crimes during the period of reprieve, upon expiration of the two-year period, the sentence will be commuted to life in prison; if, in addition to no intentional crimes, the criminal has performed any major meritorious service, the sentence will be commuted to 25 years.   Alternatively, if it is determined that the criminal has committed an intentional crime during the reprieve period, the death penalty will be carried out upon approval by the Supreme People’s Court.

Reports indicate that Zhang was granted a two year reprieve because he confessed to all his crimes, the content of his confession was consistent with evidence independently recovered by police, and he surrendered the bribe payments to the police that he had received.  

Was Zhang’s sentence supportable?

The verdict was made according to PRC Criminal Law Article 383, which stipulates, “Individuals who have engaged in graft with an amount of more than RMB100,000 are to be sentenced to more than 10 years of fixed-term imprisonment or life imprisonment and may, in addition, have their properties confiscated.  In especially serious cases, those offenders are to be sentenced to death and, in addition, have their properties confiscated”.  In China, a conviction for bribery will carry the same sentencing as a conviction for the crime of graft.  Because the amounts of bribes Zhang received greatly exceeded RMB100,000, the death sentence could have been imposed under the PRC law, but, in light of his confession and the return of the illegal gains, the commuting of the death sentence was permissible.

What is the public’s opinion towards the sentence by the court?

Most PRC citizens seem to consider this a fair outcome.  It reflects the Chinese government’s efforts to address corruption problems within the country even at such high levels as those occupied by Zhang.  The lawyer for Mr. Zhang, however, said he is considering an appeal to a higher court because, in his view, the sentence remains too harsh.

The PRC did not have any law addressing cross-border bribery before and this law will be the first law to condemn bribery of foreign officials. This amendment is the PRC’s effort to comply with the United Nations Convention Against Corruption to which the PRC is a signatory.

The amendment was made to Article 164 of the PRC Criminal Law prohibiting entities or individuals from offering bribes to employees of companies and enterprises who are not government officials. With the amendment, it is a criminal act to bribe foreign government officials or international public organizations.

According to this Article 164, if the payor is an individual, depending on the value of the bribes, he or she is subject to imprisonment up to 10 years; if the payor is an entity, criminal penalties will be imposed against the violating entity and the supervisor chiefly responsible and other directly responsible personnel may also face imprisonment of up to 10 years. Penalties may be reduced or waived if the violating individual or entity discloses the crime before being charged.

According to the PRC Supreme Procuratorate issued in 2001, individuals offering bribes of more than RMB10,000 and entities offering bribes of more than RMB 200,000 may be prosecuted under Article 164.

Unlike other bribery-related crimes in the PRC, which focus on the receipt by the briber of "illegitimate benefits," bribery of foreign officials or international organizations prohibits securing illegitimate business benefits. In advance of the release of judicial interpretation of what may be "illegitimate business benefits," the current legal understanding of what is "to secure illegitimate benefits" means in other briberyrelated crimes may provide a reasonable basis for understanding this amendment.

The law refers to "officials of foreign countries and international public organizations," but does not define these terms. For example, it is not clear whether international public organization includes foreign nongovernmental organizations.

As of this post, no judicial interpretation or administrative regulations regarding the implementation of this provision has been promulgated. It is not clear whether foreign companies may also be subject to jurisdiction under the PRC Criminal Law with respect to this new amendment. We will continue to closely monitor future development related to this amendment.

Conduct

• The SEC alleged that from 2003 to 2006, RAPS-China employees paid approximately $615,000 to Design Institutes which were typically state owned enterprises for design engineering and technical integrations services that can influence contract awards by end user state owned customers. The payments were made through third party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director with the expectation of influencing the state owned companies to purchase RAPS products. RAPS-China recorded these payments as “cost of sales.” These inaccurate books and records were then incorporated into Rockwell’s books and records for the purposes of preparing financial statements filed with the SEC.
• During this same period, the SEC alleged that RAPS-China also paid about $450,000 for sightseeing and leisure travel for employees of Design Institutes to destinations including New York City, Washington D.C., and Hawaii.  According to the SEC, “some trips appeared to have no direct business component, other than the development of customer good will.” For example, the SEC stated, “RAPS-China arranged for so-called design meetings in New York City despite the lack of any Rockwell facility there because ‘everyone likes New York.’“
• In connection with the aforementioned payments by RAPS-China to Design Institutes, the SEC alleged that Rockwell “failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act” and “failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”
• Rockwell discovered the violations as part of its normal financial review process and global corporate compliance and internal controls program.  Rockwell, thereafter, investigated the payments and self-reported.

Penalty

• Without admitting or denying the SEC’s allegations, Rockwell consented to the entry of a cease-and-desist order prohibiting Rockwell from further violations of the FCPA’s books and records and internal controls provisions, and agreed to pay disgorgement of $1,771,000, prejudgment interest of $590,091 and a civil penalty of $400,000.

Notes

• The cease-and-desist order specifically stated the SEC would not impose a civil penalty in excess of the $400,000 – a relatively modest penalty in today’s FCPA enforcement environment – based on Rockwell’s cooperation with the SEC in its investigation and enforcement action. 
• The Rockwell enforcement action once again demonstrates the need for US companies with wholly-owned foreign subsidiaries to maintain a robust global compliance program that accurately and transparently documents the services being provided and monies being paid in the books and records, or face the prospect of discovering years later a “poison pill” in the subsidiary’s records resulting in SEC enforcement and significant liability. 

Reference: SEC Administrative Release No. 64380, Accounting and Auditing Enforcement Release No. 3274, and Administrative Proceeding File No. 3-14364 in In Re Rockwell Automation Inc. (all dated May 3, 2011)

Conduct

Specifically, the SEC alleged IBM Korea, Inc., an indirectly wholly owned IBM subsidiary, and LG IBM PC Co., Ltd., a joint-venture in which IBM had a 51% interest, bribed South Korean government officials with approximately $207,000 in cash, gifts (including personal computers), travel and entertainment.  The bribes were made to influence or induce South Korean government officials to assist the IBM-related entities with obtaining and retaining business and directing business to other IBM business partners.  The business advantages included:  securing IBM Korea’s status as a preferred supplier of computers, related technologies and services; securing and maintaining the sale of various other products by IBM Korea and LG IBM; helping an IBM Korea business partner win bids to supply computers and related equipment; and obtaining confidential procurement information to which LG IBM was not entitled. 

The SEC also alleged employees of indirectly owned IBM subsidiaries IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd., (collectively, “IBM China”) improperly provided (directly and indirectly) Chinese government officials with gifts (such as cameras and computers), travel and entertainment. 

Further, the SEC alleged IBM’s internal controls allowed employees of IBM’s subsidiaries and joint-venture to use local business partners and travel agencies as conduits for improper payments as well as sources of slush funds, which were used to fund improper activities.  For example, in the case of IBM China, the SEC alleged at least 114 instances of internal controls failures between 2004 and 2009, which enabled:  IBM China employees to create fake invoices for unapproved travel to match approved customer travel; unapproved sightseeing activities to occur; and per diem payments and gifts to be provided to Chinese government officials. 

Finally, the SEC alleged the payments described above were not recorded properly and, instead, were recorded as legitimate business expenses. 

Penalties

IBM agreed to pay a $2 million civil penalty, disgorge $5.3 million in ill gotten profits and $2.7 million in prejudgment interest.  

Notes

In 2009, IBM stated that both the SEC and DOJ had contacted the company regarding the matters described above.  At present, it is unclear whether the DOJ has closed its investigation or whether it continues.

Also in 2009, IBM described the prosecutions brought by Korean authorities against IBM Korea, LG IBM, and employees of those entities for violations similar to those described above.  Many individuals were subsequently found guilty and sentenced while IBM Korea and LG IBM paid fines.