China risk factor report: Foreign direct investment (FDI)
Thursday, January 17, 2013 at 2:08AM
Benjamin Kessler in China, China Anti-Corruption Handbook, China Bundle, China Compliance Digest, Deng Zhan, ENN Group, Foreign Direct Investment, Guo Jingyi, Liu Wei, Philips

In the coming weeks, China Compliance Digest will cover the most significant anti-corruption compliance risk factors facing multinationals operating in China. Subscribers will receive the latest reports via email as soon as they become available.

In the first half of 2012, China overtook the United States for the first time since 2003 to become the world’s leader in inflow of foreign direct investment (FDI).

Despite an apparent tapering-off in economic growth and widespread wage increases on the mainland, China is expected to continue to attract billions in foreign investment throughout 2013 and beyond.

China’s leaders aren’t leaving anything to chance. In November 2012, China’s State Administration of Foreign Exchange (SAFE) announced investor-friendly policy changes designed to allow foreigners more autonomy over the funds they bring into the country.

Yet would-be foreign investors are still subject to a convoluted approvals regime whose overarching logic appears arbitrary to some outsiders.

In a 2010 report comparing the FDI policies of the United States and China, the U.S. Chamber of Commerce said one of the key characteristics of the Chinese system was “relatively opaque inbound FDI approval processes that accord broad discretion to government administrators.”

Some companies have said this lack of transparency allows China leeway to favor homegrown enterprises over foreign ones while maintaining deniability.

In addition, recent history shows China’s foggy regulatory environment can be conducive to corruption.

In 2008, authorities uncovered a nest of corrupt officials within the Ministry of Commerce (MOFCOM) and the State Administration for Industry and Commerce (SAIC). Both agencies are heavily involved in determining which foreign ventures will gain entrée into the Chinese market.

The first to fall was director-general of MOFCOM Law Department Guo Jingyi, who was found to have accepted bribes totaling 8.45 million yuan (US $1.35 million).

Guo informed on several of his colleagues, including Deng Zhan, deputy director-general of MOFCOM’s department of foreign investment administration, and Liu Wei, deputy director of SAIC Foreign-Invested Enterprises Registration Bureau.

Deng’s close relationship with Guo reportedly stretched back to their student days at Peking University. The pair allegedly had many bribe-givers in common, including ENN Group, which is China’s largest private gas company, and lawyer Zhang Yudong.

Chinese media reported Deng accepted 400,000 yuan in bribes (US $63,000) from Dutch electronics company Philips.

Chinese media observers have suggested the probe into Deng Zhan may be linked to the ongoing FCPA investigation surrounding possible bribes paid to secure Avon China’s direct-sales license.

Avon’s internal investigation centering on anti-corruption compliance in China and elsewhere has so far cost the company more than $280 million.

Deng also served as president of the China Association of Enterprises With Foreign Investment (CAEFI), which promotes overseas investment into China.

Liu Wei allegedly collected illicit advantages worth at least 1.35 million yuan (US $214,822). Authorities said Liu received a 50 percent discount on his house in exchange for providing “consultation services” to ENN Group and developer Beijing Capital Co. Ltd.

In 2010, Deng and Liu were handed prison terms of 12 and 11 years, respectively.

The same year, Guo was sentenced to death with a two-year reprieve.

Sources: Jinghua Times (京华时报), Southern Weekend (南方周末)

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Article originally appeared on The FCPA Blog (https://www.fcpablog.com/).
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