FCPA Compliance and Ethics Blog

August 29, 2014

Extraordinary Rendition and Ripples From the Chinese Corruption Investigations

Extraordinary_Renditions_CvrAs many of you know, I am a recovering trial lawyer. So I was very interested when I received a book for review by Paul Batista, entitled Extraordinary Rendition. Not only is Batista a practicing trial lawyer specializing in federal criminal defense, he also authored one of the leading treatise on the federal racketeering statute, “Civil RICO Practice Manual,” first published in 1987 by John Wiley & Sons, and now in its third edition (Wolters Kluwer 2008).

I learned long ago that there are two basic story lines: Hero Takes A Trip and Stranger Comes To Town. They both are great formats and I enjoy them equally if the writing and story-telling is good. Extraordinary Rendition falls into camp one and I found it to be the journey of discovery of a nearly burned out trial lawyer, Byron Carlos Johnson, who comes to defend Ali Hussein, a Syrian national who had lived in the US for 10 years prior to 9/11 and was accused of being a banker for Al Qaeda. The story follows twists and turns of not only the trial but the various agents and agencies of the US Government as they try to derail Johnson and his attempts to defend Ali Hussein. While it certainly could be called a legal thriller, it is a rollicking good ride and I give my hardiest recommendation to anyone interested in the legal issues involved or a thriller about a man caught up in forces far beyond his control; yet does take control of what he can.

I thought about Batista’s book when I read a recent article in the Financial Times (FT), entitled “Beijing probe touches west’s cereal bowls” by Lucy Hornby. Her basic thesis was set out in the first line of her piece, “Never before have China’s domestic politics had such ramifications for global business.” She wrote about two tangible examples of what she termed the “ripple effects” of the Chinese anti-corruption investigation, which began in earnest last summer with the revelations of corruption by the UK pharmaceutical giant GlaxoSmithKline PLC (GSK).

Hornby reported on the Canadian company, Athabasca Oil Corporation, “the partner company for major Chinese investments in Canadian oil sands – fell 13 per cent this week. They are down 24 per cent since the beginning of April, when Athabasca announced PetroChina, a listed unit of CNPC, would buy the 40 per cent of the Dover oil sands project that it did not already own. Since then, two executives from PetroChina’s Canadian operations have fallen prey to the corruption purge – and the C$1.32bn (US$1.23bn) transfer payment has not been made.” But it has also reached the British breakfast table as Chinese authorities announced they were investigating the owner of the company that makes the breakfast staple Weetabix.

Business ventures in other countries such as Cambodia and Australia have been put off due to the Chinese corruption investigation. This has been because of both corrupt payments made to Chinese officials and in some cases corrupt payments alleged to have been made by Chinese officials. For instance in Cambodia a project that was mired in such problems that the primary funding partner, The World Bank, had suspended funding has now run into such problems that Standard Chartered may lose up to $250MM in funding which it provided. Further, Hornby reported that “In Australia last year, a A$1.4bn bid for Sundance Resources – which had proposed a $A5bn iron ore mine on the border of Cameroon and the Republic of Congo – collapsed after high-flying Chinese entrepreneur Liu Han abruptly vanished. Mr Liu had built his mining business by cultivating ties with Mr Zhou while the latter governed southwestern Sichuan province. He was sentenced to death in May for organised crime. His defence was that he was carrying out orders for unnamed “leaders”.”

Things are particularly difficult at PetroChina, a major investor in Canadian oil sands, because, as Hornby noted, “dozens of senior executives have been detained or questioned in the past year. Many, including the head of its Indonesian business, played key roles in its international projects.” However Hornby believes that “capital expenditure commitments by state-owned enterprises are likely to be honoured as the investigation continues, because China’s large and growing economy has a fundamental need for resources.”

Another large Chinese energy concern CNPC has also been hard hit by the corruption scandal. Attached, as a diagram, to Hornby’s article is a graphic that shows the extent of the company’s investments of the past 10 years or so. The graphic also notes that the company “has been hardest hit by the ongoing corruption purge, with dozens of senior executives detained or questioned.” The chart below shows the “ripple effects” of CNPC investment.

Country Investment Amount
Kazakhstan $12.7bn
Peru $2.6bn
Turkmenistan $1.2bn
Scotland $1bn
Ecuador $0.7bn
Australia $4.1bn
Canada $3.3bn
Syria $0.6bn
Mozambique $4.2bn

Hornby’s article touched on another area, which has significance for the Foreign Corrupt Practices Act (FCPA) practitioner, that beg the question of whether a state-owned enterprise is an instrumentality or in any other way covered by the FCPA? She wrote that “the unusually public nature of this corruption investigation has given outsiders a clearer insight into the way money and power have become entwined, and influence dealmaking, in today’s China.” She quoted Luke Patey, author of the book The New Kings of Crude, for the following, ““For years, Chinese national oil companies have fought hard against the label that they are political instruments of the Chinese government and Communist party. That political nature is now on full display.””

Hornby’s article demonstrates not only the pervasive nature of Chinese corruption but also how many countries such corruption may have effected. For those FCPA naysayers who argue that the law brings a competitive disadvantage to US companies, they should read her article to open their eyes. Many of these Chinese investments are now on hold with no hope of completion or even funding because of the domestic turmoil inside China over corruption. Companies and countries want a reliable business partner, starting with one which does not engage in bribery and corruption to obtain a contract and then onto a company which fulfills its contractual obligations. Think about that as a selling point the next time you are oversees.

And while you are traveling overseas, read a copy of Batista’s Extraordinary Rendition on the trip over. You can purchase a copy by clicking here or here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

2 Comments »

  1. Thomas – this article puts a timely finger on an emerging issue: recent reports in the Australian media, including the Business press: as here –
    on Chinese investors moving to Australia to escape the Chinese government’s crackdown on corruption. Does this article miss an important point. It’s here:

    http://www.businessspectator.com.au/article/2014/8/29/china/how-australia-cashing-chinas-corruption-crackdown?utm_source=exact&utm_medium=email&utm_content=884650&utm_campaign=pm&modapt=

    HW

    Comment by H K Whitton — September 2, 2014 @ 10:29 pm | Reply

    • Thanks for sending the article link along. Very interesting consequences from the Chinese anti-corruption campaign.

      Comment by tfoxlaw — September 3, 2014 @ 5:52 am | Reply


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