Crackdown on Corruption, State-Owned Enterprises in China

The Chinese Government’s anti-corruption campaign has targeted its highest ranking official so far, charging former security chief Zhou Yongkang with bribery, abuse of power and intentional disclosure of state secrets. Bloomberg reports that Chinese President Xi’s anti-graft investigations have identified a large number of state officials in the past two years at various levels of the Communist Party.

The investigation into corruption in China in 2015 will also include investigating 26 key state-owned enterprises in various industries. The South China Morning Post reports that a nationwide audit found more than $6 billion in public funds and state capital had been misused.

China also plans to overhaul its state-owned enterprise system in order to boost its economy and disconnect the ties between their role as regulator and their ownership of the entities. China will reportedly consolidate some of the larger SOEs as part of its “Made in China 2025” strategy. State-owned enterprises in China manage more than 25 trillion yuan, which is roughly $4 trillion in U.S. dollars. The Wall Street Journal reports that industrial state-owned firms average less than half of the return on equity of their private counterparts.

For U.S. companies and issuers in China, it doesn’t look like this change will remove their status as state owned enterprises so interactions with them will continue to put the company at risk for violations of the Foreign Corrupt Practices Act. According to the January 2015 count by FCPA Blog, there were 40 corporate investigations into possible FCPA issues in the country.

There has even been some speculation that changes to the corporate structure could actually increase the risk of problems for U.S. companies as it becomes less clear which joint ventures or new public companies have ties to the state or the new asset managers. This prospect brings with it the risk of penalties for violations by the Securities and Exchange Commission and/or the Department of Justice.

There is also the potential for large fines coming out of China. Last year, China fined GlaxoSmithKline nearly $500 million from its suspected bribery of Chinese authorities.

China isn’t the only country trying to clean up the way business is done with its government recently. Brazil is looking into multi-billion dollar corruption allegations at Petrobras and in its tax department. South Africa also recently announced an investigation into a $3 billion train contract awarded to Bombardier, a Canadian transportation company.

We represent individuals with information about corruption and suspected FCPA violations. The SEC whistleblower program authorizes rewards for certain individuals if the terms and conditions of the law are met. For additional information, please contact one of our FCPA whistleblower attorneys.

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