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China And The Foreign Corrupt Practices Act (FCPA). Sometimes You Just Have To Step Away....

By Dan Harris and Steve Dickinson

You got to know when to hold em, know when to fold em, Know when to walk away and know when to run. You never count your money when youre sittin at the table. There'll be time enough for countin when the dealins done. -- Kenny Rogers, The Gambler

A couple weeks ago, a long time client of mine called me with a concern. This is a tech products company that has been doing business globally since forever and with China for at least five years. It is a small, but very successful company and my dealings are typically with the company owner, which was true this time. Its product sells for around $100,000 each. I am going to have to be pretty vague here, but I can lay out the essentials. My client had been working with a Chinese company (let's call this China Company A) to which it had been selling its product for years. This Chinese company had told my client that a very large and clearly state owned company (China Company B) was interested in using China Company A to secure my client's product, with China Company A assisting in installation and ongoing service. Needless to say, my client was very interested. A few weeks later China Company A tells my client the deal is "done" with China Company B, but that as soon as my client receives the first payment from the deal, it will need to send 10% of that payment (and the same percentage from any subsequent payment) to China Company A to pay to a person who is with China Company B. China Company A explains that it was able to get this sweetheart deal by agreeing to make this payment. My client calls me. He tells me that even with paying out the 10% "commission," this would still be a good deal for him. But it is far from a make or break deal for the company and the company will be just fine without it. He tells me this deal (then adds, "make that no deal") is not worth going to jail over. I tell him that I am not expert in the Foreign Corrupt Practices Act (FCPA), but this deal has all the indicia of coming within that Act and he should NOT go forward with it unless it changes substantially. We then decide he will go back to China Company A and make very clear, in writing, that the US company will not pay anyone at China Company B anything, either directly or indirectly and that China Company A is also forbidden from paying anyone at China Company B anything either. China Company B a commission. My client will tell China Company A that if the deal cannot go forward without paying this person at Company B, it will not go forward at all. We also decide that If China Company A comes back to my client and says the deal is still a go, we will bring in an FCPA expert to figure out whether my client should go forward with the deal under this scenario and, if so, what steps it should take to avoid setting itself up for FCPA problems. Within a few days, China Company B comes back and tells my client the deal is off. My client thanks me for my counsel and I apologize for his deal having been ruined. He tells me he is fine with it and that it was apparently never a real deal in the first place. Smart client.

Full post as published by China Law Blog on May 10, 2009 (boomark / email).