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Politics

Sammy Fang: Playing the anti-corruption card

While China's official gross domestic product growth last year slowed to 7.4%, the central government's crackdown on corruption, bribery, antitrust violations and tax evasion continued apace.

     The statistics are remarkable. Last year alone, 232,000 officials received Communist Party or administrative punishment, according to state news agency Xinhua. Of those, at least 42 were high-ranking provincial or senior-level officials.

     Major foreign multinational corporations, such as Microsoft, have been handed huge fines for violations ranging from corruption to tax evasion to anti-competitive pricing. Executives -- Chinese and foreign nationals alike -- have been arrested, investigated and prosecuted.

     President Xi Jinping has been quoted as saying that people need to "get used to the new normal." This suggests the days of high-flying growth are over and that companies will need to watch out for certain noncompliant practices, including favors to "maintain good relations" and other gifts, entertainment and lavish reimbursements of a questionable variety.

     Corporate officers, especially those in the legal sphere, who are tasked with monitoring the China operations of multinationals and other companies certainly need to be vigilant.

     The wave of enforcement is not limited to large state-owned enterprises or multinationals. Consistent with Xi's declaration of targeting both "tigers" and "flies," we have seen small and large companies investigated by the authorities. The market has witnessed crackdowns in nearly every industry, from life sciences to technology, from media and advertising to manufacturing, and from natural resources to banking and finance.

     Under this pressure, mergers and acquisitions are taking longer to complete as buyers dig deeper into their targets' practices.

Ethics shortfall

At the heart of many anti-competitive or corrupt activities in China is a longstanding lack of strong ethical business practices. This has given rise to a corporate culture that can be knowingly or even willfully blind to illegal dealings, perpetuated by the attitude that "everyone is doing it" or that "the law is not enforced."

     What the market is currently experiencing is a dramatic shift in mindset. Companies are rethinking the issues of good governance and risk management, considering how to establish strong ethics, and looking to set a tone from the top to the middle on anti-corruption and anti-bribery compliance. What worked before is not going to work anymore, and businesses are taking action because the stakes are now very high.

     Many multinationals active in China are putting more resources into monitoring compliance with anti-bribery laws and other regulations, convinced this must become an ongoing process rather than a troubleshooting effort. This is leading to competition for skilled specialists.

     Government watchdogs, meanwhile, are communicating with one another more regularly and in more detail than ever. At the Asia-Pacific Economic Cooperation summit last November in Beijing, 21 economies agreed to an information-sharing initiative called the Network of Anti-corruption Authorities and Law Enforcement Agencies. This will strengthen collaboration and enforcement across national boundaries.

     Additionally, laws with extraterritorial reach, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, have increased the risk for multinationals engaging in acts of corruption. An investigation in one place could potentially spark probes in other jurisdictions.

     As multinationals become more sophisticated, it is important for them to maintain a global commitment to ethical practices and compliance. Chinese regulators know that corruption is bad for business, bad for society and bad for the Communist Party. Levying hefty fines on companies that allow such behavior is not only popular among the people, it might actually be quite profitable.

     The tide is already turning and for some, it will lead to watershed changes in business culture and practices. Companies in the region will continue to commit greater resources to their compliance capabilities, to reduce exposure to risk.

     They must, as there is little reason to expect government pressure will relent in 2015. In fact, increasing levels of assertiveness by various Chinese regulatory agencies -- and competition among them -- could mean companies will face challenges on new fronts. Already this month, tax officials have announced plans to scrutinize compliance by multinationals. State media have also reported findings by the Communist Party's anti-corruption agency regarding unethical procurement and hiring practices at several major state-owned companies. The message is clear: No company can afford to be complacent.

Sammy Fang is a partner at DLA Piper and is the head of investigations and compliance for the Asia-Pacific region. He is based in Hong Kong.

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