[A Part of the Student Series: January 23, 2013]

China’s State Secrets Law and the Foreign Corrupt Practices Act

By Sigrid Ursula Jernudd*

China’s state-owned enterprises (SOEs) and the companies that they control make up a major but unquantifiable part of the Chinese economy, accounting for approximately 50 percent of gross domestic product.[1] As American companies consider the attractive opportunities for overseas expansion investing in China’s large state sector provides, they must be aware of the risk of violating the Foreign Corrupt Practices Act (FCPA).[2] Although the business environment and expansive definition of foreign official under the FCPA lead to a high risk of liability, recent changes in Chinese law may make it more difficult to take the steps necessary to comply. Even as China focuses state attention on anti-corruption efforts, the revamped Law on the Protection of State Secrets[3] could expose employees and investigators to criminal liability for routine internal investigations, and prevent cross-border discovery efforts and enforcement actions. This article explores the challenges the State Secrets Law may pose to companies in regulating their own FCPA liability, and then goes on to examine how that may change in light of recent reforms within China.

I. Corruption in China and State-Owned Enterprises

Corruption is a serious problem within China. This creates risks for companies subject to the FCPA, which provides civil and criminal penalties for companies under American jurisdiction, defined broadly, and found guilty of bribing foreign officials. In a 2012 survey by Transparency International, China was ranked 80th out of 174 countries, receiving a score of 39, squarely in the corruption danger zone.[4] Although Chinese officials have taken steps to combat corruption, including within the SOEs, such as protecting and encouraging whistleblowers, a high risk of exposure to corruption for businesses operating in China remains and appears to be rising.[5] Though they have been steadily improving, the Chinese courts, tasked with enforcing these regulations, can be subjective and responsive to political pressure, which may make it difficult for them to serve as neutral arbiters of the law.[6]

Contributing to corruption is the “gift and hospitality culture” in China, manifested in the concept of guanxi.[7] Guanxi involves the exchange of “gifts and favors” to create reciprocal obligations and strengthen business relationships.[8] Although guanxi covers a wide range of behaviors and can be distinguished from corruption,[9] in operation it creates a “tangible risk” for companies that fall under FCPA jurisdiction.[10] Despite some legislative debate recognizing that this may lead to “very complex judgments” in the enforcement of the FCPA, the culture of the country in which the company operates is not a defense to violations.[11]

Foreign companies doing business in China incur additional risk of violating the FCPA because of the important role of SOEs in the economy. The Chinese government defines SOEs as “wholly state-owned,” either at the national or local level, or “a company in which the state has a stake, whether controlling or non-controlling,” encompassing a wide variety of enterprises.[12] The anti-bribery provisions of the FCPA[13] are aimed at preventing the “bribery of a foreign official to induce him to perform an official duty in a corrupt manner.”[14] There are five elements to a violation of the anti-bribery provisions: (1) an entity, subject to FCPA jurisdiction, or acting on behalf of such firm, (2) with corrupt intent (3) makes a payment or promises to pay “money or anything of value” to (4) “a foreign official, a foreign political party or party official, or any candidate for political office” (5) in order to obtain or retain business.[15] The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have broadly construed “foreign official,” which is defined in the statute as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof,”[16] to include employees of SOEs.[17] Although there has been minimal judicial interpretation of this broad construction, recent case law suggests that SOE employees fall squarely within the definition of “foreign officials.”[18] Charges under the books and records provision of the FCPA,[19] which requires that issuers take certain recordkeeping steps and apply internal controls, often accompany anti-bribery allegations, and can lead to FCPA liability even when the government is unable to prove all the elements of a violation of the anti-bribery provisions.[20]

A company can be held liable under the FCPA for the actions of its foreign partners. The anti-bribery provisions cover payments made by agents.[21] The books and records provisions, which impose a strict liability standard, can be used to hold a corporation liable for the acts of its subsidiaries.[22] This means a company covered by the FCPA can be held responsible for the acts of international subsidiaries and, under certain facts, joint venture partners.[23] Because a joint venture is a shared enterprise, the risk that a party subject to the FCPA may be found to acquire knowledge or authorize the actions may be greater than in the agency context.[24] FCPA liability in joint ventures with SOEs may be particularly complicated, given the structures involved.[25]

The risks of operating in China due to interactions with SOEs and liability for the actions taken by local subsidiaries or joint ventures can be clearly seen from recent FPCA settlements. Almost all of the over twenty corporations that have faced FCPA liability in actions brought by the DOJ or the SEC in China were alleged to have paid bribes to employees of state-owned or controlled entities.[26] For example, Schnitzer Steel was held liable for payments through an international subsidiary to Chinese government-owned steel mills, leading to a civil penalty of $7.7 million levied by the SEC and a deferred prosecution agreement with the DOJ.[27] RAE Systems, a California company, entered into a non-prosecution agreement with the DOJ and paid civil and criminal penalties based upon the corrupt actions of its joint-venture partners.[28] Other cases in which companies governed bye the FCPA operating in China incurred liability include DPC (Tianjin) (for payments to employees of state-owned hospitals[29]) and Faro Technologies (through its subsidiary, Faro China, for payments of “referral fees” to “state-owned or controlled entities”).[30]

II. The State-Secrets Law and the FCPA

In working with Chinese companies, particularly SOEs, foreign companies must be aware of the potential ramifications of the State Secrets Law for internal investigations. The law was revised in 2010 to increase transparency and reduce discretion in classifying state secrets[31] by adding a more restrictive definition of them. The law now specifies that, to be considered a state secret, the “information, if leaked could harm the state’s security and national interest” in certain listed areas. Although the law goes on to provide examples, it remains vague.[32] State secrets are “matters that relate to state security and national interests,”[33] which are defined as information that “could harm the state’s security and national interests in the areas of politics, economy, national defense, [and] foreign relations, among others.”[34] The law lists specific matters that should be considered state secrets, but also contains a catchall provision for “other secret matters.”[35]

SOEs have been given particular responsibility for taking certain actions to enforce the State Secrets Law. On March 25, 2010, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) passed the Interim Regulations Regarding Protection of Commercial Secrets of Central State-Owned Enterprises to clarify the responsibilities of SOEs to classify and protect state secrets.[36] Although the regulations only directly apply to Central SOEs—national-level SOEs that are wholly owned by the state and operate in select “pillar” or strategic industries[37]—other SOEs and state entities, including those at the provisional or local level, are likely to look to the regulations for guidance.[38] The Interim Regulations lay out a number of steps for secret protection, placing the primary responsibility for enforcement with legal representatives at the SOE and mandating the establishment of a Secrecy Office.[39] The regulations state that information the SOEs hold can be state secrets[40] and require that state secrets be recognized as such “according to legal procedures.”[41] However, the Interim Regulations do little to clarify how regulators will define ‘state secret’ in the context of an SOE.[42]

Recent uses of the State Secrets Law against employees of foreign companies illustrate the danger it poses. The law provides significant criminal penalties for those who divulge state secrets, “intentionally or through negligence,” or pass them to entities outside of China.[43] Trials for violations of the law take place in secret, with limited access to counsel.[44] Of particular note is the case against Xue Feng, a naturalized American citizen sentenced to eight years incarceration for purchasing a publically available commercial oil resource database for his U.S. employer. His trial was secret, as required under the State Secrets Law, which contributed to criticisms regarding potential violations of both American consular agreements and local Chinese law.[45] In another widely publicized case, four employees of Australian mining company Rio Tinto were accused of stealing state secrets, though the charges were later reduced to theft of commercial secrets and bribery.[46] Because the arrests followed a dispute between China Steel and Rio Tinto over iron ore prices, the use of the State Secrets Law was believed to be politically motivated.[47] Ethnic Chinese employees of companies working in sensitive or high profile areas, even if they are naturalized American citizens, may be at particular risk.[48] Because the law has been applied opaquely, with little guidance from enforcement agencies as to when information—information that may be commercially available and or in the public domain—will actually be treated as a state secret, it is difficult for foreign partners to predict when and what information will be deemed a state secret and how to protect employees.

A. The State Secrets law impacts the ability of American companies working with SOEs to conduct their own internal investigations.

The State Secrets law may diminish the ability of foreign companies to gather the information necessary to run an effective internal investigation for the purposes of improving compliance procedures or investigating a possible violation of the FCPA. In addition to documentary materials, restrictions on state secrets apply to “information obtained through live testimony,” such as employee interviews.[49] Although the law is designed to only cover “matters that relate to state security and national interests,”[50] Chinese authorities have applied it to almost “any matter of public concern”[51] that is “even tangentially related to the Chinese government or to an SOE,” even when information is obtained unintentionally.[52] This could extend to many types of information that would typically be gathered in an internal investigation, such as electronic evidence, employee communications (exchanged through email, voice mail, or text message), data files or other documents, financial records (including invoices and vouchers), and personnel files.[53] China has very strong data privacy laws that may implicate the State Secrets Law as well, and further prevent the collection, review, or transportation of broad categories of information out of China.[54] Employees, agents, or other third parties concerned about violating the State Secrets Law may be unwilling to cooperate, and it could be unwise for U.S. affiliates to insist on the handing over of information that would expose employees to state secret charges.

Under the Interim Regulations, investigations into transactions involving Central SOEs or their subsidiaries, or joint venture partners, may be at particular risk of violating the State Secrets Law. These industries often receive special government attention or support and operate in sensitive areas, making them more likely to deal with information that can be considered a state secret. Foreign investment or company ownership is restricted through the Guiding Catalogue on Foreign Investment in Industry in some of these areas, such as telecommunications, making FCPA problems with Central SOEs in these restricted sectors somewhat less likely.[55] However, the National Development and Reform Commission at the beginning of 2012 expanded the ability of foreign companies to partner with Chinese enterprises in some sensitive areas, notably in the energy industry, where foreign firms may now form joint ventures to extract fossil fuels.[56] Legal departments at Central SOEs or other state ventures are tasked with ensuring the State Secrets Law is properly administered.[57] The Interim Regulations include “operational” as well as “technical” information in their definition of a State Secret,[58] which the regulations define to include a number of types of information which counsel could encounter in a routine anti-bribery or books and records investigation, such as “management method,” “financial information,” “investment and financing decisions,” and “tender related information.”[59]

The State Secrets Law may limit investigations into interactions between employees of the foreign corporation or subsidiary within China and government officials. When an individual has previously been employed by the government, especially in the military, they may be unable to discuss their relationship or disclose information relevant to the internal investigation.[60]

State secrets may be an issue even when the company is not state-owned. Some employees or partners may simply refuse to cooperate with internal investigations or turn the results of their investigations over to American officials, as demonstrated by the experience of accounting firms in China and Hong Kong since the passage of the revised State Secrets Law. In late 2011, KMPG was forced to issue a “qualified opinion of scope limitation” for client China High Precision Automatic Group Ltd., which does some work in “aerospace and other fields which are classified as state secrets,” after it was unable to access accounting information.[61] China High Precision permitted its stock to be suspended from trading rather than provide information to auditors that its legal department considered subject to the State Secrets Law. In some cases, where auditors within China were able to access information, they have been unwilling to turn it over to American authorities[62] or access audit information prepared by Chinese affiliates.[63]

Although the ability of the SEC to suspend the trading of companies who fail to cooperate with their requirements or censure auditors provides some leverage to American regulators, even without the involvement of the courts, companies who wish to cooperate may still face harsh penalties within China.[64] In recent actions against Deloitte, which cited the State Secrets Law in refusing to turn over documents the SEC expressed its skepticism of the use of the Law as a means of avoiding SEC scrutiny.[65] This came to a head in December 2012, when the SEC charged the Chinese affiliates of Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers, and BDO with violations of securities laws for failures to produce documents from their audits of Chinese companies, putting both the accounting firms and the Chinese companies they represent in a difficult position.[66] Similar financial and accounting information may come up in FCPA investigations of non-state owned partners, and so the experiences of Deloitte and KMPG with the State Secrets Law send a worrying message about the ability to access information or to transport it out of China to U.S. authorities, without risking other sanctions.

Finally, the focus within China on fighting corruption, although arguably a positive development, adds to concerns about the State Secrets Law being used for political ends during internal investigations. Official corruption undermines public faith in and the legitimacy of the Communist Party of China (CCP), a theme recently reiterated by Premier Wen Jiabao, who, in a speech discussing the problem, called it “the most crucial threat to the ruling party.”[67] China issued its first white paper on corruption on December 29, 2010, and in 2011 updated its anti-corruption law in various ways, such as providing for greater whistleblower protections.[68] The Chinese government has touted an increase in corruption investigations.[69] This may indicate that China would prefer corruption investigations, even of companies subject to foreign jurisdiction, to be driven by the state, rather than the American government, in cases where both countries could prosecute. Given the reputation of the State Secrets Law as a political tool, and the PRC government’s broad view of what can impact the national interest, foreign companies certainly have ample reason to be wary of the use of the State Secrets Law in the FCPA context.

B. The State Secrets Law has serious implications for the ability of American authorities to enforce the FCPA.

There are a number of Chinese companies operating in the U.S. that are subject to both the FCPA and the State Secrets Law. The SEC and DOJ have jurisdiction to enforce the anti-bribery provisions against foreign companies listed on American exchanges.[70] The books and records provisions, enforced by the SEC, also apply to issuers which have securities registered and are required to file reports.[71] A look at the list of foreign SEC registrants indicates that a significant number of companies covered by the FCPA are also SOEs. As of December 2011, there were eleven companies registered and reporting with the SEC that are incorporated in China,[72] including at least five Central SOEs.[73] However, a recent estimate that took into account subsidiaries of Chinese companies incorporated elsewhere put the number of corporations with shares listed in the U.S. governed by the State Secrets Law as high as 210.[74] This is a particular problem because of the problematic track record these companies have in FCPA compliance.[75] When also considering subsidiaries or joint ventures located in China that are otherwise subject to the FCPA, but also theoretically subject to the State Secrets Law, the potential reach of the State Secrets Law in American litigation is very wide.

Experts have expressed concerns that the State Secrets Law could conflict with the enforcement of the U.S. securities laws.[76] When Chinese law conflicts with other laws, history and the experience of attorneys who have worked in the Asia market suggests that companies will generally prefer to follow local law rather than over foreign legislation.[77] The State Secrets Law, together with the Interim Regulations, provides little guidance as to what should be considered a state secret, giving Chinese companies a large amount of discretion in determining when to claim the law as a reason not to cooperate with the DOJ or SEC, whether in an FCPA investigation or some other context.[78] The leverage that U.S. authorities have in being able to resort to legal or administrative proceedings, including remedies like de-listing with a high cost to the offending company, does, however, mitigate this risk somewhat.

Chinese companies have already invoked the State Secrets Law in litigation taking place in U.S. courts, without much success. A number of companies have attempted to avoid discovery by claiming information is privileged as a state secret.[79] For example, in Munoz v. China Expert Technology, Inc.,[80] the defendant, a publicly traded company that had contracted with the local Chinese government, challenged a discovery order on state secrets grounds.[81] This case, which followed the revision of the State Secrets Law, has been flagged as an indication of things to come in U.S. securities lawsuits, which could extend to the FCPA context.[82] Discovery issues with the State Secrets Law have also come up at the grand jury stage in criminal bribery investigations.[83] Although courts have viewed the State Secrets Law “with some skepticism,”[84] it nonetheless represents a significant potential barrier to FCPA enforcement by raising the cost and duration of litigation, in addition to the risk that some companies will prefer sanctions or adverse judgments to violating Chinese law.

III. The State Secrets Law and Chinese Anti-Corruption Legislation

If the State Secrets Law prevents enforcement of the FCPA in China, then a renewed examination of Chinese anti-corruption laws is required. The recent development of a Chinese analogue to the FCPA raises the question of whether the State Secrets Law will be wielded in such a way as to endanger foreign companies, or prevent the use of its American equivalent.

Bribery in China is addressed by a “patchwork” of regulations,[85] and enforcement, especially against foreign entities, has been described as “sporadic and politically motivated.”[86] Criminal bribery, which provides for serious penalties, governs payments made to an “official” of the government, which includes a member of the management of an SOE, for an “illegitimate purpose.”[87] Commercial bribery, which is a more minor charge, governs bribes paid by a “business operator” to an employee of the other party in a private transaction.[88] Commercial bribery is considered criminal where the amount of money given is “relatively large” or “very large.”[89] There is a wide degree of latitude in choosing to bring criminal or commercial bribery charges, despite the existence of internal prosecution guidelines issued by the Supreme People’s Procuratorate.[90] In addition to these laws, there are interpretative court decisions and regulations issued by the CCP.[91] These include provisions that address some of the issues that arise in the FCPA context, such as a requirement that government departments disclose their “expenditures on overseas trips, public relations activities, and vehicles.”[92] There have also been some efforts to protect whistleblowers, though they remain limited and insufficient.[93]

Chinese law does not have a statute paralleling the books and records provision of the FCPA. Although there are a number of laws governing accounting practices and internal controls,[94] these laws are not intended for use in bribery prosecutions and there are no specific sanctions for accounting violations associated with the payment of bribes.[95]

In early 2011, China amended the Criminal Law to cover bribery of officials of foreign governments and international organizations, creating a regime similar to the FCPA.[96] Amendment 8 punishes“[a]n individual who gives something of value to a foreign public official or official of an international public organization in pursuit of improper commercial interests.”[97] The amendment does not define “foreign public official,” nor does this term appear elsewhere in the Criminal Law, though there is speculation that China will use the U.N. definition.[98] The law applies to any company organized under Chinese law, including joint ventures, wholly foreign-owned enterprises, and the representative offices of foreign companies.[99] There is a possibility of leniency if the actions are disclosed before being charged.[100] The new provisions do not impact commercial bribery that takes place within China or to obtain a business benefit in the country, which already apply to both foreign and Chinese companies.[101]

The amended anti-corruption laws may be used to justify the use of the State Secrets privilege in a way that could be dangerous for foreign companies. Because of the heightened attention to both areas, the revised State Secrets Law, especially in concert with the Interim Regulations, can been seen as a sign that bribery is a now “matter of national security.”[102] This may lead to an increasing number of bribery charges being brought under any provisions of the bribery laws as “criminal” instead of “commercial,” with attendant higher penalties. At the moment, the provisions of the bribery law governing foreign corruption, which brought the anti-bribery legislation in line with international norms, remain largely hypothetical, and have not been used in the year since their passage, though some investigations may have begun.[103] However, this may also lead to an increased use of the State Secrets Law where the information potentially implicates China’s own bribery laws or investigations. Given the focus accompanying these anti-corruption provisions and the renewed seriousness with which authorities are treating other forms of corruption, American companies need to be beware of the greater risk that they now face regarding potential use of bribery charges or the State Secrets Law in China.

The long-term effect of these developments remains to be seen. A more optimistic view may see the amendments of anti-bribery and state secrets provisions, and the renewed seriousness with which they treat accusations of bribery, as having the accidental consequence of addressing concerns about the FCPA damaging American competitiveness in China[104] or superimposing Western norms against corruption on less economically powerful nations.[105] However, there is also a risk that enforcement of anti-corruption laws will remain politicized and inconsistent, while the State Secrets Law is used to stifle investigations that could damage China’s reputation or economy.

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* Sigrid Ursula Jernudd is an associate at Hughes Hubbard & Reed LLP. She is a 2012 graduate of the University of Chicago Law School. This article represents solely the author’s views.

[1] See Andrew Szamosszegi & Cole Kyle, U.S.-China Economic and Security Review Commission, An Analysis of State-owned Enterprises and State Capitalism in China 1 (Oct. 26, 2011), http://www.uscc.gov/researchpapers/2011/10_26_11_CapitalTradeSOEStudy.pdf.

[2] 78 U.S.C. §§ 78dd-1, et seq. (1977).

[3] Zhonghua renmin gongheguo baoshou guojia mimi fa [Law on the Protection of State Secrets] (promulgated by the Nat’l People’s Cong. Standing Comm., Sept. 5, 1988, effective May 1, 1989; revised Apr. 29, 2010, effective Oct. 2, 2010) Congressional-Executive Commission on China, http://www.cecc.gov/pages/virtualAcad/index.phpd?showsingle=1601 (1989 text) and http://www.cecc.gov/pages/virtualAcad/index.phpd?showsingle=140200 (2010 revisions) (last visited Mar. 25, 2010) (hereinafter State Secrets Law).

[4] A “very clean” score is 100. See Transparency International, Corruption Perceptions Index 2012 (2012), http://files.transparency.org/content/download/537/2229/file/2012_CPI_brochure_EN.pdf.

[5] See Congressional-Executive Commission on China, 112th Cong., Annual Report 2011 at 166 (1st Sess. 2011) (hereinafter CECC Annual Report); Congressional-Executive Commission on China, China’s White Paper on Corruption and Official Anti-Corruption Efforts (Dec. 14, 2011), http://www.cecc.gov/pages/virtualAcad/index.phpd?showsingle=165443 (discussing the increasing number of corruption cases and China’s worsening transparency score between 2009 and 2010).

[6] See Jerome A. Cohen, Politics, “Guanxi” and the Rule of Law, U.S. Asia Law Inst., Mar. 2, 2010, http://www.usasialaw.org/?p=2944. See, e.g., Sky Canaves, As Chinese Judge Takes Stand, Court Corruption Goes on Trial, Wall St. J., Feb. 4, 2010, available at http://online.wsj.com/article/SB10001424052748703357104575044890834624852.html (describing the cases against Chinese judges, including the former judicial chief of Chongqing province and the former vice president of the Supreme People’s Court).

[7] See F. Joseph Warin et al., FCPA Compliance in China and the Gifts Hospitality Challenge, 5 Va. L. & Bus. Rev. 33, 60 (2010).

[8] See id. at 59.

[9] See Yadong Luo, Guanxi and Business 215 (2007).

[10] See Warin et al., supra note 7, at 60.

[11] See Gregory M. Lipper, Foreign Corrupt Practices Act and the Elusive Question of Intent, 47 Am. Crim. L. Rev. 1463, 1486 (2010) (quoting S. Rep. No. 100-85, at 54 (1987)).

[12] See Zhonghua renmin gonghe guo qiye guoyou zichan fa [Law of the People’s Republic of China on the State-Owned Assets of Enterprises] (promulgated by the Nat’l Peoples Cong. Standing Comm., Oct. 28, 2008; effective May 1, 2009) art. 5, http://www.gov.cn/flfg/2008-10/28/content_1134207.htm (available in English at http://www.junhe.com/en/law_muluZDDetail.asp?menu=4&id=48); Szamosszegi & Kyle, supra note 1, at 5.

[13] 15 U.S.C. § 78dd-1(a); 15 U.S.C. § 78dd-2(a); 15 U.S.C. § 78dd-3(a).

[14] See United States v. Kay, 359 F.3d 738, 761 (5th Cir. 2004).

[15] See 15 U.S.C. § 78dd-1(a); 15 U.S.C. § 78dd-2(a); 15 U.S.C. § 78dd-3(a); Department of Justice, Lay Person’s Guide to the Foreign Corrupt Practices Act 1-3, http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf (hereinafter Lay Person’s Guide).

[16] See 15 U.S.C. § 78dd-2(h)(2)(A).

[17] See Rollo C. Baker, Foreign Corrupt Practices Act, 47 Am. Crim. L. Rev. 647, 660 (2010); Mike Koehler, The Unique FCPA Compliance Challenges of Doing Business in China, 25 Wis. Int’l L. J. 397, 410 (2007) (noting that the FCPA risks are greatest in China “given the number of individuals . . . who will be deemed ‘foreign officials’”).

[18] See, e.g., United States v. Aguilar, 783 F. Supp. 2d 1108, 1110 (C.D. Cal. 2011) (holding that a state-owned corporation may be considered an “instrumentality” and its officers “foreign officials” within the meaning of the FCPA); United States v. Carson, No. SACR 09-00077-JVS, 2011 WL 5101701, at *8 (C.D. Cal. May 18, 2011) (holding that “some business entities may be considered an ‘instrumentality [of a foreign government],’” depending on the facts of the case). However, a challenge was recently brought to this broad definition of “foreign official” in the Eleventh Circuit. See Corrected Brief of Appellant, United States v. Esquenazi, No. 11-15331-C (11th Cir. May 31, 2012).

[19] 15 U.S.C. § 78m(b) (2011).

[20] See Warin et al., supra note 7, at 46 (2010).

[21] See 15 U.S.C. § 78dd-1(a); 15 U.S.C. § 7dd-2(a); 15 U.S.C. § 7dd-3(a).

[22] See 15 U.S.C. § 78m(b)(2); Eric M. Pedersen, The Foreign Corrupt Practices Act and its Application to U.S. Business Operations in China, 7 J. Int’l Bus. & L. 13, 18 (2008). A parent company that owns 50 percent or less of the subsidiary is only required to in “good faith” encourage proper accounting procedures. See 15 U.S.C. § 78(b)(6).

[23] See Lay Person’s Guide, supra note 16, at 4.

[24] See Lucinda A. Low et al., The Foreign Corrupt Practices Act: Coping with Heightened Enforcement Risk, 1619 P.L.I./Corp. 95, 106 (2007).

[25] Walter G. Ricciardi et al., FCPA: The Longer Arm of the Law, Asia Law, July 2009, http://www.asialaw.com/Article/2261549/Channel/16709/FCPA-The-longer-arm-of-the-law.html.

[26] This figure was calculated by using a database of cases provided Shearman & Sterling LLP, available at http://fcpa.shearman.com/?s=matter&mode=list&tab=list&tabmode=list, and running a search for cases involving China.

[27] See FCPA Blog, Schnitzer’s Victory, Sept. 16, 2007, http://www.fcpablog.com/blog/2007/9/17/schnitzers-victory.html. Schnitzer Steel’s Korean subsidiary pled guilty and paid a $7.5 million criminal fine, while Schnitzer Steel itself paid a $7.7 million civil penalty and entered into a deferred prosecution agreement with the DOJ. Id.

[28] See Press Release, Department of Justice, RAE Systems Agrees to Pay $1.7 Million Criminal Penalty to Resolve Violations of the Foreign Corrupt Practices Act, (Dec. 10, 2011), http://www.justice.gov/opa/pr/2010/December/10-crm-1428.html; Press Release, Securities and Exchange Commission, SEC Charges RAE Systems for Illegal Payments Made Though Joint Ventures to Win Chinese Government Contracts (Dec. 10, 2010), http://www.sec.gov/news/press/2010/2010-242.htm.

[29] Press Release, Department of Justice, DPC (Tianjin) Ltd. Charged with Violating the Foreign Corrupt Practices Act (May 20, 2005), http://www.justice.gov/opa/pr/2005/May/05_crm_282.htm.

[30] Press Release, Department of Justice, Faro Technologies Inc. Agrees to Pay $1.1 million penalty and Enter Non-Prosecution Agreement for FCPA Violations (June 5, 2008), http://www.justice.gov/opa/pr/2008/June/08-crm-505.html.

[31] See Li Huizi & Cheng Zhuo, China narrows definition of “state secrets” to boost gov’t transparency, Xinhua, Apr. 29, 2010, http://news.xinhuanet.com/english2010/china/2010-04/29/c_13272939.htm.

[32] See State Secrets Law art. 9; Congressional-Executive Commission on China, National People’s Congress Standing Committee Issues Revised State Secrets Law, May 20, 2010, http://www.cecc.gov/pages/virtualAcad/index.phpd?showsingle=140456; Jerome A. Cohen & Jeremy Daum, Behind Closed Doors, U.S. Asia Law Inst., May 25, 2010, http://www.usasialaw.org/?p=3687 (“The purported narrowing of the vast scope of information that can be designated secret, for example, is more apparent than real.”). The Legal Affairs Office of the State Council is, however, developing regulations to further clarify the implementation of the State Secrets Law, for which it sought public comment due June 15, 2012. See Amin Amirka, Draft Proposal to State Secrets Law, China Law Update Blog, May 24, 2012, http://www.chinalawupdate.cn/2012/05/articles/foreign-direct-investment/draft-proposal-to-state-secrets-law/.

[33] State Secrets Law art. 2.

[34] Id. at art. 9.

[35] Id. at art. 9(7).

[36] See State-Owned Assets Supervision and Administration Commission of the State Counsel, Circular on Distributing Interim Regulations Regarding Protection of Commercial Secrets of Central State-Owned Enterprises (Mar. 25, 2010) (hereinafter Interim Regulations).

[37] See Hearing on China’s Industrial Policy and its Impact on U.S. Companies, Workers and the American Economy Before the U.S.- China Economic and Security Revision Commission (Mar. 24, 2009) (statement of George T. Haley, PhD, Professor & Director, Center for International Industry Competitiveness, College of Business, University of New Haven), http://www.uscc.gov/hearings/2009hearings/written_testimonies/09_03_24_wrts/09_03_24_haley_statement.php (describing the Central SOEs and rationale behind them). For a list of the Central SOEs, see SASAC’s website at http://www.sasac.gov.cn/n2963340/n2971121/n4956567/4956583.html.

[38] See Friven Yeoh & Bingna Guo, Tighter Controls Over Business and State Secrets But Little Clarification (O’Melveny & Meyers), at 2, http://www.omm.com/files/upload/Tighter%20Controls%20Over%20Business%20and%20State%20Secrets,%20But%20Little%20Clarification_Final.pdf (last visited Mar. 26, 2012).

[39] See Interim Regulations at arts. 6-9.

[40] See id. at art. 3 (“Where the operational information and technical information of Central SOEs falls into the scope of [a] state secret, such information shall be protected as a state secrets according to related laws.”).

[41] See id. at art. 11.

[42] See Sigrid Ursula Jernudd, China, State Secrets, and the Case of Xue Feng: The Implication for International Trade, 12 Chi. J. Int’l L. 309, 321 (2011)

[43] See State Secrets Law at arts. 31 and 32; Criminal Law of the People’s Republic of China (adopted by the Nat’l People’s Cong., July 1, 1979; revised Mar. 14, 1997) Congressional-Executive Commission on China, arts. 111 (providing for a penalty of between five years and life imprisonment, depending on the seriousness of the circumstances, for an individual who “steals, spies into, buys or unlawfully supplies State Secrets”), 282 (providing for a penalty of up to seven years plus other deprivations of political rights for an individual who “unlawful obtains” state secretes), 398 (providing for a penalty of up to seven years for a “functionary of a State organ” who “intentionally or negligently divulges State secrets”), http://www.cecc.gov/pages/newLaws/criminalLawENG.php.

[44] See Congressional-Executive Commission on China, Chinese Courts Use “Secrets” Law to Sentence Tibetan Online Authors to Imprisonment, Jan. 21, 2010, http://www.cecc.gov/pages/virtualAcad/index.phpd?showsingle=133098 (citing Articles 96 and 152 of the Criminal Law). Recent amendments to the Criminal Law provide that trials on “commercial secrets” are no longer required to take place publically, meaning that this risk now applies even for a less serious class of secrets. See David Tring, China’s courts take a step back, China Law & Practice, Mar. 15, 2012, http://www.chinalawandpractice.com/Article/2995431/Chinas-courts-take-a-step-back.html.

[45] See Jerome A. Cohen, How China Handles “State Secrets” Prosecutions: Xue Feng’s Case, U.S. Asia Law Inst., Jul. 19, 2010, http://www.usasialaw.org/?p=3851 (speculating that delays arose because the court was “awaiting instruction from the Communist Party leadership, as is common in sensitive cases”).

[46] See Davis Barboza, Rio Tinto Trial in China Concludes, N.Y Times, Mar. 24, 2010, available at http://www.nytimes.com/2010/03/25/business/global/25riotinto.html?scp=5&sq=rio%20tinto%20state%20secrets&st=cse.

[47] See id. See, e.g., Stanley Lubman, Rio Tinto trial shines harsh spotlight on Chinese criminal justice, E. Asia Forum, Mar. 29, 2010, http://www.eastasiaforum.org/2010/03/29/rio-tinto-trial-shines-harsh-spotlight-on-chinese-criminal-justice/ (characterizing the case as “marked by an extraordinary lack of transparency of the proceedings, the usual procedural handicaps imposed on defense lawyers, and manipulation of judicial procedures for political purposes”).

[48] See Andrew Jacobs, Engineer’s Return to China Leads to Jail and Limbo, N.Y. Times, Nov. 26, 2011, available at http://www.nytimes.com/2011/11/27/world/returning-to-china-engineer-finds-jail-and-then-limbo.html?scp=3&sq=rio%20tinto%20state%20secrets&st=cse.

[49] See You Can’t Always Get What You Want: China’s State Secrets Laws, Anti-Corruption Quarterly (Sidley Austin), 3rd Quarter 2011, at 4, http://www.sidley.com/files/upload/Anti-Corruption.pdf.

[50] See State Secrets Law art. 2.

[51] See National People’s Congress Standing Committee Issues Revised State Secrets Law, supra note 31.

[52] See Rocky T. Lee, New Laws in China Regarding “State Secrets” and Related Issues (Cadwalader, Wickersham & Taft, Hong Kong, H.K. S.A.R.), May 2011, at 4, http://www.cadwalader.com/assets/client_friend/052511NewLawsInChinaReStateSecrets.pdf.

[53] See D. Michael Crites, Recent Trends in White Collar Crime in International White Collar Enforcement 19, 30 (2011) (describing the evidence collected in an internal investigation).

[54] See You Can’t Always Get What You Want, supra note 48, at 4; Tom Antisdel and Tarek Ghalayini, The Challenge of Conducting Data Collections and Investigations under Unclear Data Privacy Rules, China Bus. Rev. 3, Oct. 2011, available at http://www.alixpartners.com/en/LinkClick.aspx?fileticket=gKMFcT0iTqA%3d&tabid=1092.

[55] See Lester Ross, Robert Woll, and Kenneth Zhou, China Releases New Foreign Investment Catalogue (2011 Edition), WilmerHale, Jan. 12. 2012, http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=10011.

[56] See Aaron Back and Andrew Galbraith, China Shifts Foreign-Investment Focus, Wall St. J., Dec. 31, 2011, available at http://online.wsj.com/article/SB10001424052970204720204577130011797163488.html.

[57] See Interim Regulations at arts. 6-9 (“Administering Organs and Duties.”).

[58] See id. at art. 3.

[59] See id. at art. 10.

[60] See Richard M. Strassberg, Foreign Corrupt Practices Act Investigations—Challenges and Strategies for White Collar Lawyers and Their Clients, in International White Collar Enforcement, supra note 52, at 67, 72-73.

[61] See Isabella Steger, When the Auditor Meets China’s ‘State Secrets’ Law, Wall St. J. Deal Journal, Nov. 2, 2011, http://blogs.wsj.com/deals/2011/11/02/auditing-in-china-what-construes-a-state-secret/ (quoting the KPMG report).

[62] See id. (discussing how Deloitte Touch Tohmatsu’s China unit resigned from the audit of Longtop Financial Technologies Ltd., a U.S.-listed company that dealt in financial services, but later declined to hand over information to the SEC because of the State Secretes Law). Longtop was delisted by the SEC after discovery of serious fraud.

[63] See Stanley Lubman, Unpacking the Law Around the Chinese Reverse Takeover Mess, Wall St. J. China Real Time Report, Jan. 24, 2012, http://blogs.wsj.com/chinarealtime/2012/01/24/unpacking-the-law-around-the-chinese-reverse-takeover-mess/.

[64] See Paul Handley, US charges Deloitte over Chinese Client Data, A.F.P., May 9, 2012, available at http://news.yahoo.com/us-charges-deloitte-over-chinese-client-data-011611608--finance.html (discussing SEC actions against Deloitte in the Longtop case).

[65] See id. (quoting SEC Enforcement Division director Robert Khuzami stating, “[f]oreign firms auditing US issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of US investors”).

[66] See Edward Wyatt, S.E.C. Charges 5 Firms Over Audits in China, N.Y. Times DealBook, Dec. 3, 2012, http://dealbook.nytimes.com/2012/12/03/s-e-c-charges-the-chinese-affiliates-of-5-big-accounting-firms/; John Foley, S.E.C.’s Fair but Futile Stance on China-Based Auditors, N.Y. Times DealBook, Dec. 4, 2012, http://dealbook.nytimes.com/2012/12/04/s-e-c-s-fair-but-futile-stance-on-china-based-auditors/ (arguing that a “mass delisting is no longer far-fetched”).

[67] See Congressional-Executive Commission on China, New Provisions Impose Stronger Requirements on Officials for Reporting Personal Assets, Nov. 5, 2010, http://www.cecc.gov/pages/virtualAcad/index.phpd?showsingle=145193; Tong Hao and Zhao Yinan, Premier Wen: Corruption is crucial threat, China Daily, Mar. 27, 2012, http://english.peopledaily.com.cn/90785/7769642.html.

[68] See China’s White Paper on Corruption and Official Anti-Corruption Efforts, supra note 5. An English text of the white paper is available at http://www.gov.cn/english/official/2010-12/29/content_1775353.htm (“Combating corruption and building a cleaner government is related to China’s national development, the fundamental interests of the overwhelming majority of the Chinese people, social fairness, justice, harmony, and stability.”).

[69] See Prevention has bigger role in anti-corruption, Xinhua, Mar. 11, 2012, http://www.chinadaily.com.cn/china/2012-03/11/content_14808545.htm (claiming a year-on-year increase from 2010 to 2011 of 6.2 percent in prosecutions for offering bribes.

[70] See 15 U.S.C. § 78dd-1(a).

[71] See 15 U.S.C. § 78m(b)(2).

[72] U.S. Securities and Exchange Commission, Number of Foreign Companies Registered and Reporting with the U.S. Securities and Exchange Commission, December 31, 2010 – Geographic Listing by Country of Incorporation (Dec. 31, 2011), http://www.sec.gov/divisions/corpfin/internatl/foreigngeographic2011.pdf. This is the most recent information available on the SEC website as of January 2013.

[73] See Szamosszegi & Kyle, supra note 1, at 46.

[74] See Hearing on China’s Information Control Practices and the Implications for the United States before the U.S.-China Economic and Security Review Commission (June 30, 2010) (statement of Gordon G. Chang) (hereinafter Chang Statement), http://www.uscc.gov/hearings/2010hearings/written_testimonies/10_06_30_wrt/10_06_30_chang_statement.php. For example, 74.2% of the equity interest as of March 31, 2011, in China Mobile Ltd., which is incorporated in Hong Kong, is owned by China Mobile Communications Corporation, a Central SOE. See Reuters, Profile: China Mobile Ltd. (CHL), http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=CHL; State-Owned Assets Supervision and Administration Commission of the State Counsel (SASAC), the People’s Republic of China, Central SOEs, http://www.sasac.gov.cn/n2963340/n2971121/n4956567/4956583.html.

[75] See FCPA Blog, Short Seller Hits China Valves With FCPA Concerns (Nov. 24, 2011), http://www.fcpablog.com/blog/2011/11/24/short-seller-hits-china-valves-with-fcpa-concerns.html (discussing concerns that China Valves reinstated a policy of paying bribes through its subsidiary, Watts Water Technology, following a $3.7 million SEC settlement for FCPA violations).

[76] See Chang Statement, supra note 68.

[77] See id. (explaining that “business, when faced with conflicting legal requirements from different jurisdictions, generally chose to follow the law of their home country and violate the conflicting law of other nations”).

[78] See Jernudd, supra note 41, at 321-22.

[79] See Laura K. Donohue, The Shadow of State Secrets, 159 U. Pa. L. Rev. 77, 89 n.38 (2010) (providing the results of docket searches for uses of the Chinese State Secrets Law).

[80] No. 07 Civ. 10531(AHK), 2011 WL 5346323 (S.D.N.Y. Nov. 7, 2011).

[81] See id. at *2. For a helpful discussion of the treatment of the State Secrets Law in U.S. courts, see Richmark Corp. v. Timber Falling Consultants, 959 F.2d 1468 (9th Cir. 1996).

[82] See Jeffrey Kidluff et al., Door Opens for Discovery on Auditors of China-based U.S.-listed Companies in U.S. Securities Lawsuits (O’Melveny & Meyers), Nov. 22, 2011, at 3, http://www.omm.com/fcwsite/abc.aspx?url=newsroom%2fpenPDF.aspx%3fpub%3d1180.

[83] See In re Grand Jury Subpoena Dated August 9, 2000, 218 F. Supp. 2d 544 (S.D.N.Y. 2002). While the decision is anonymous to preserve grand jury secrecy, the facts of the case, in which the foreign office of a U.S. corporation asserts a state secrecy law following a consultation with the Ministry of Justice, are likely applicable to an investigation involving the State Secrets Law.

[84] See Munoz, 2011 WL 5346323 at *1.

[85] See Kristi Swartz & Lister Swartz, The Changing Face of Corruption in China, 2010 Aspatore Special Rep. 15, *7 (2010).

[86] See Warin et al., supra note 7 at 42.

[87] See Lee, supra note 51, at 7. While a definition is not provided in the law for “SOE,” the Supreme People’s Court has issued guidance on the matter. See Cynthia Tang, China, in Anti-Bribery Risk Assessment 59, 60 (Thomas Gruetzner et al. eds., Hart 2011).

[88] See Lee, supra note 51, at 6.

[89] See Tang, supra note 81, at 59.

[90] See id. at 61; Lee, supra note 51, at 7.

[91] See Swartz & Swartz, supra note 79, at *7.

[92] See China’s White Paper on Corruption and Official Anti-Corruption Efforts, supra note 5.

[93] See CECC Annual Report, supra note 5, at 166.

[94] Daniel F. Roules & Zijie (Lesley) Li, China in Anti-Corruption Regulation 2011 58, 59 (Homer E. Moyer Jr. ed., 2011).

[95] Id. at 60.

[96] See Eric Carlson E-Alert: China Amends Criminal Law to Cover Foreign Bribery, (Covington & Burling), May 2, 2011, at 1, http://www.cov.com/publications/?Practices=047bc14e-9f10-4564-b0e6-476dd1edd2ea&search=1 (follow hyperlinked title). The amendments took effect on May 1, 2011. Id.

[97] Extraterritorial Effect of the Anti-Corruption Law of the People’s Republic of China (Paul Hastings), Apr. 2011, at 1, http://www.paulhastings.com/assets/publications/1894.pdf?wt.mc_ID=1894.pdf.

[98] See Carlson, supra note 90, at 2. Article 2 of the United Nations Convention Against Corruption defines “foreign corrupt official” as “any person holding a legislative, executive, administrative or judicial office of a foreign country, whether appointed or elected; and any person exercising a public function for a foreign country, including for a public agency or public enterprise.” Id.

[99] Extraterritorial Effect of the Anti-Corruption Law, supra note 91, at 2.

[100] See Roules & Li, supra note 88, at 59.

[101] See Tang, supra note 81, at 62-63.

[102] See Lee, supra note 51, at 7-8.

[103] See Eric Carlson, China’s Overseas Bribery Law One Year On, FCPA Blog, May 29, 2012, http://www.fcpablog.com/blog/2012/5/29/chinas-overseas-bribery-law-one-year-on.html.

[104] See, e.g., Eric M. Pederson, The Foreign Corrupt Practices Act and its Application to U.S. Businesses in China, 7 J. Int’l Bus. & L. 13, 38 (2008) (“China’s transition from a non-capitalist regime to a modern economy raises questions as to whether the United States should continue in its lonely quest to discourage corrupt payments through enforcement of the FCPA.”).

[105] See, e.g., Jacqueline L. Bonneau, Note, Combating Foreign Bribery: Legislative Reform in the United Kingdom and Prospects for Increased Global Enforcement, 49 Colum. J. Transnat’l L. 365, 409 (2011) (discussing the criticisms of the FCPA as imposing non-universal norms that “operate like clandestine sanctions on the developing world”).

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Sigrid Ursula Jernudd

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