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Domestic Preference   and   China’s   Accession   to   the   WTO’s   GPA:  Implications for FCPA Enforcement Given the major role played by the government in Chinese economy, it comes as no  surprise that some multinational companies, with inadequate internal control, might  fall foul of the Foreign Corrupt Practices Act (“FCPA”) when doing businesses in  China. Less understood is the exposure under PRC Government Procurement Law for  dealing   with   local   government   entities.   China’s   eventual   accession   to   the   WTO’s  Agreement on Government Procurement (“GPA”), where the US and EU are current  signatories, will also have implication for FCPA enforcement in the region. Enforcement   statistics   indicate   that   most   FCPA   actions   concerning   conduct   in  China occur   during   the   course   of   securing   sales   contracts   from   state­owned  companies, as well as government entities like hospitals. It should be noted that in the  latter   case,   the   PRC   Government   Procurement   Law   (promulgated   in   2002)   is  applicable. According to Article 10 of the law, government entities must use domestic  goods and services, unless they are not available or cannot be acquired on reasonable  commercial terms. For example, in 2008 Siemens and AGA Medical were subject to FCPA enforcement  actions for paying bribes in connection with the sale of medical devices to hospitals in  China. And yet, while both companies ran afoul of the US anti­corruption law, they  and their peers regularly evade enforcement under the local procurement law. It is  unlikely   that   medical   devices   supplied   by   Siemens   or   AGA   Medical   fell   into   the  exception categories of Article 10, since suppliers of competitive items are less prone  to use bribery means to win contracts. In fact, it is widely known that Article 10 of PRC Government Procurement Law is not  strictly enforced. The reasons for this are threefold: 1. The absence of a legal or authoritative definition of the term “domestic”;  2. The absence of penalties for non­compliance; and  3. The absence of implementing regulations to support the statute.

As a   result,   today   foreign   companies   effectively   participate   in   the   government  procurement market in China without restrictions. US multinationals, with their well­ known   brands   and   superior   products,   are   among   the   strongest   competitors   in   the  information technology, pharmaceutical and industrial equipment sectors. However, in recent years there has been mounting pressure from local entrepreneurs in  China, requesting the government to impose a genuine domestic preference practice in  public   procurement.   It   is   argued   that   the   same   domestic   preference   practices   are  currently   adopted   by   other   developing   countries   (e.g.   Buy   Brazilian   Act)   and  developed countries (e.g. Buy American Act and EU Utilities Directive). As a result,  the   Chinese   government   is   enacting   the   Implementing   Regulations   of   PRC  Government Procurement Law, with a draft version issued on 11 January 2010. Domestic forces are not the only ones shaping the government procurement market in  China. International pressures are also at work. On 19 June 1997 China began the  accession   process   for   the   WTO’s   Agreement   on   Government   Procurement,   a  multilateral agreement that today has over 40 signatories. Signatories are obligated to  open   their   government   procurement   markets   to   companies   from   other   signatories.  China’s third accession offer, submitted on 30 November 2011, places the procurement  activities   of   its   central   government   agencies,   as   well   as   selected   provincial   and  municipal agencies, within the GPA’s ambit. Once China becomes a party of GPA,  foreign companies from signatory countries will enjoy treatment no less favorable  than domestic companies when contracting with specified government agencies. These   developments   in   government   procurement   practices   present   important  implications for FCPA enforcement in China. First, if the “buy local” movement has  its way, then an increased preference for domestic sources would limit foreign firms’  access to the government procurement market. With fewer multinationals (and, by  extension,   companies   with   US   anti­corruption   law   exposure)   competing   for  government business, FCPA violations could fall as a result. Since   GPA   accession   would   allow   foreign   bidders   to   take   part   in   some   PRC  government contracts, it may provide more rooms for FCPA violations. Nonetheless,  on the other hand, GPA would impose an obligation on China to implement fair and  transparent tendering processes for government contracts. The attendant increase in  public   scrutiny   may   reduce   the   instances   of   bribe   giving,   bribe   taking   and   other  corruption practices.

Domestic Preference and China’s Accession to the WTO’s GPA: Implications for FCPA Enforcement  

It is an analysis of the possible changes in China’s public procurement market, and their implications for FCPA enforcement.

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