Implications under the U.S. Foreign Corrupt Practices Act
by STEVEN BLAYNEY, Esquire
It has been alleged that in some cases some EB-5 regional center projects, in order to gain a competitive advantage in the Chinese market, may pay substantial commissions to Chinese emigration agents in China without informing Chinese investors of such commissions. In the case of the controversial Chicago Convention Center SEC case, it has been alleged that some Chinese emigration agents in China received commissions as high as US$125,000 per investor to promote the EB-5 offering in China.1 This article briefly analyzes possible exposure to criminal and civil liability under the U.S. Foreign Corrupt Practices Act (“FCPA”) and other legislation as well as China’s anti-bribery legislation arising out the payment of such alleged “kickbacks” to Chinese emigration agents. The information contained herein is gleaned from the publication entitled A Resource Guide to the U.S. Foreign Corrupt Practices Act by the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission (November 2012) (“Resource Guide”).
In brief, the FCPA prohibits “issuers”, “domestic concerns,” and certain other persons while on U.S. territory from “…offering to pay, paying, promising to pay, or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business.”2 Since “domestic concerns” basically includes any corporation, limited partnership, or other commercial entity organized under U.S. federal or state law, EB-5 regional centers, their project companies and their officers, members and directors are subject to the FCPA.3
Under the FCPA, the term “foreign official” includes “…any officer or employee of a foreign government or any department, or instrumentality thereof.”4 For EB-5 regional centers, the crucial issue is whether Chinese emigration agents may constitute an “instrumentality” of the Chinese government? If so, then the alleged “kickbacks” paid the Chinese emigration agencies in China may invoke liability under the FCPA.
According to the Resource Guide, the term “instrumentality” is broadly defined and may include state-owned or state-controlled entities.5 It would seem that whether a foreign entity constitutes an “instrumentality” of a foreign government turns largely upon the entity’s relationship to the foreign government and the extent of control of the foreign government over the entity in question. In assessing whether a foreign entity is an “instrumentality” under the FCPA, the following factors are relevant:
• The foreign state’s extent of ownership of the entity;
• The foreign state’s degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by government officials);
• The foreign state’s characterization of the entity and its employees;
• The circumstances surrounding the entity’s creation;
• The purpose of the entity’s activities
• The entity’s obligations and privileges under the foreign state’s law;
• The exclusive or controlling power vested in the entity to administer its designated functions;
• The level of financial support by the foreign state;
• The entity’s provision of services to the jurisdiction’s residents;
• Whether the government end or purpose sought to be achieved is expressed in the policies of the foreign government; and
• The general perception that the entity is performing official or governmental functions.6
Below we consider Chinese emigration agencies in light of the foregoing factors.
• The foreign state’s extent of ownership of the entity.
The only way to determine the ownership structure of a particular Chinese emigration agency is to inspect its Chinese business license and undertake other appropriate due diligence. I understand that in some cases some Chinese emigration agencies may be subsidiaries of Chinese government departments such as the local Administration for Industry and Commerce, the local Public Security Bureau, or the local government Chambers of Commerce. In other cases, some Chinese emigration agencies may be owned or controlled by current or former Chinese government officials, or Communist Party members.
• The foreign state’s degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by government officials).
It appears that local Chinese government Public Security Bureau Entry & Exit Administration Departments (“PSB”) exercise a high degree of direct and indirect control over Chinese emigration agencies. Under relevant Chinese government regulations, Chinese emigration agents must obtain a specific license from the PSB in order engage in business operations. Only Chinese nationals (without foreign citizenship or foreign permanent residence) may obtain the license. Foreigners need not apply.7
• The foreign state’s characterization of the entity and its employees.
Chinese emigration agents must submit to a quasi-governmental immigration agency association. In Guangdong Province, the relevant association is called the Guangdong Entry & Exit Immigration Service Association (“Guangdong Immigration Association”) According to Chinese news reports, the current head of one provincial immigrant agency association in China also runs one of the largest emigration agencies in China. In fact, in China, it is quite common for Chinese government officials to wear two hats; they may be both the regulator, and the party regulated. In some cases, a Chinese emigration agency might, practically speaking, be the PSB. This phenomenon is particularly true where Communist Party members in ostensibly commercial enterprises rub shoulders with Communist Party members in government administrative departments. As a result, the public-private distinction may be somewhat blurred and murky, which is fertile ground for corruption.
The relationship of the Guangdong Immigration Association to the Guangdong PSB is described on the association’s website, which provides in part (in English translation):
“The Guangdong Entry & Exit Immigration Service Association is a lawful organ established for the dual purpose of serving its members and the Guangdong Provincial Public Security Bureau by functioning as a bridge, link and “staff assistant” of Chinese government administrative departments in order to safeguard the lawful rights and interests of the entry & exit industry, unite lawful organs of the Guangdong Province entry & exit service industry, strengthen the cohesiveness and self-defense of the industry, and promote the economic and social efficiency of the sector. The Guangdong Entry & Exit Immigration Service Association is subject to the operational direction and supervision of its administrative department, the Guangdong Provincial Public Security Bureau, and its registration authority as a social organization, the Guangdong Provincial Civil Affairs Office.”8
One could infer from the foregoing that the Guangdong Immigration Association considers itself basically to be an extension of the Guangdong PSB.
• The circumstances surrounding the entity’s creation.
The reason that the Chinese emigration agents are subject to the administrative jurisdiction of the PSB relates to the phenomenon of the Hukou, which is unique in China. In China, the local PSB has a file on every Chinese citizen (and foreign resident) that the PSB administers under its Hukou system. If a Chinese citizen wishes to move to another city, he/she must apply to have his/her file administratively transferred to the PSB of the destination city. Similar administrative arrangements must be undertaken if a Chinese citizen wishes to move temporarily or permanently overseas.
Over the course of China’s market reforms and liberalization many Chinese government functions, particularly commercial functions, were spun off to pseudo commercial enterprises. For example, commercial telecommunications functions were spun off of the Ministry of Information Industry to the state-owned Enterprise, China Telecom (China Mobile). Similarly, some of the commercial services of the PSB, including immigration functions, were spun off to the Chinese emigration agencies, which, in effect, became sideline businesses for PSB officials.
• The purpose of the entity’s activities – The purpose of the activities of the Chinese emigration agencies is basically to provide an interface between foreign immigration law firms, with which, under relevant Chinese regulations, the Chinese emigration agents are required to enter into cooperation agreements with as a condition of their licenses, and the local PSB which administers the Chinese client’s Hukou.
• The entity’s obligations and privileges under the foreign state’s law.
Because of China’s licensing regime, which excludes foreigners from engaging in immigration work in China, the Chinese emigration agents enjoy an exclusive, monopolistic position in the Chinese market.
• The exclusive or controlling power vested in the entity to administer its designated functions. The Chinese emigration agents are not autonomous. The Chinese emigration agents are directly subject to the PSB, and indirectly subject to the PSB through the PSB’s control over the local immigraton agents association.
• The level of financial support by the foreign state. It is doubtful whether the Chinese government provides financial support to the Chinese emigration agencies. However, it is foreseeable that a well-connected person in China could use his/her influence to obtain state bank financing to establish a Chinese emigration agency.
• The entity’s provision of services to the jurisdiction’s residents. The quasi-governmental relationship of the Chinese emigration agents to the relevant local PSB is reflected in the fact that the operational business territory of Chinese emigration agents parallels the administrative jurisdiction of its parent PSB. For example, licensed Chinese emigration agents in Guangdong Province may not engage in business activities outside of the PSB’s jurisdiction of Guangdong Province.
• Whether the government end or purpose sought to be achieved is expressed in the policies of the foreign government.
One might assume that since only Chinese nationals may obtain the Chinese emigration agents license that the Chinese government considers it important to exclude foreigners from this area of work in China. Since Chinese emigration agencies must join the relevant local immigration agency association, which is basically an arm of the local PSB, the system is set up such that Chinese emigration agencies, in effect, become part of the PSB.
• The general perception that the entity is performing official or governmental functions.
It is self-evident from the quotation above taken from the Guangdong Entry & Exit Immigration Association website that the association (and its members) considers itself to be an arm of the Chinese government, specifically the Guangdong PSB.
From consideration of the foregoing factors in relation to Chinese emigration agents it could perhaps be argued that reasonable people might differ on the issue of whether Chinese emigration agencies constitute “instrumentalities” of the Chinese government. Accordingly, it may be advisable for U.S. EB-5 regional center principals to seek the advice of experienced FCPA counsel or seek a U.S. Department of Justice Opinion on whether the particular Chinese emigration agency in question selling their EB-5 project in China might be an “instrumentality” of the Chinese government under the FCPA.
It is important to note that even if Chinese emigration agents are not an “instrumentality” of the Chinese government under the FCPA, the fact that Chinese EB-5 investors are allegedly not informed that the EB-5 offering “subscription fees” and “administrative fees” are allegedly kicked back to the Chinese emigration agents is potentially worrisome since even ostensibly “private” bribery “…may still violate the FCPA’s accounting provisions, the Travel Act, anti-money laundering laws, and other federal or foreign laws. Any type of corrupt payment thus carries a risk of prosecution.”9
Chinese Anti-Bribery Law
China does not currently have a unified anti-commercial bribery law, similar to the U.S. FCPA; however, bribery is prohibited under various Chinese criminal and civil statutes, including the PRC Criminal Law, the PRC Anti-Unfair Competition Law, and the State Administration for Industry and Commerce Provisional Regulations on Prohibiting Commercial Bribery (“Provisional Regulations”). Under the Anti-Unfair Competition Law and the Provisional Regulations, “commercial bribery” includes “acts of unfair competition where a business operator, with the objective of eliminating competitors and with a view to securing a trading opportunity, surreptitiously offers property or other advantages to relevant personnel of the transaction counterparty and other relevant personnel who have an influence on the transaction.”10
Under the Provisional Regulations, the term “property” means cash and physical goods…in the guise of a promotion fee, sponsorship fee, research fee, service fee, consulting fee, or commission, or through the reimbursement of various expenses in order to sell or purchase merchandise.”
In assessing the legality of a regional center payment to a Chinese emigration agent, U.S. regulators are likely to take into account whether in the context of the transaction the payment was “reasonable” under the circumstances and whether it was “improper” under local law.11
The information contained herein should not be relied upon as legal advice. Readers seeking advice on the FCPA or other relevant legislation should retain legal counsel experienced in FCPA matters.
Steven Blayney is a Hong Kong-based, U.S. qualified lawyer (Washington State) with extensive experience marketing EB-5 projects in China. Blayney speaks and reads Mandarin Chinese fluently. Hong Kong-based agents provide access to the Chinese market and may possibly be exempt from the SEC broker-dealer registration requirement as non-U.S. persons. For more information, please contact Mr. Blayney at Blayney Consulting Limited, BlayneyConsulting@gmail.com.
1See SEC & USCIS Take Action to Stop EB-5 Visa Scheme Committing Fraud (Feb. 10. 2013) http://eb5info.web11.hubspot.com/bid/171882/SEC-USCIS-Take-Action-to-Stop-EB-5-Visa-Scheme-Committing-Fraud
215 U.S.C. sec. 78dd-1; 15 U.S.C. sec. 78dd-2
3See Resource Guide, p. 11.
415 U.S.C. sec. 78dd-1(f)(1)(A)
5See Resource Guide, p. 20.
6See Resource Guide, p. 20.
7See Article 6(2) of the Beijing Regulations regarding Implementing the Entry-Exit Intermediary Agency Activities Administrative Measures.
8See the website of the Guangdong Entry & Exit Immigration Service Association: http://www.gdeia.org/xiehuidongtai/xiehuizhichuang/xiehuijianjie/
9See the Resource Guide, p. 20.
10 See Article 8 of the PRC Anti-Unfair Competition Law (adopted September 2, 1993)
11See 15 U.S.C. sec. 78dd-2(c) (1)(2)