REGULATIONS
Mooncakes and the Law
October 1, 2006
Patrick M. Norton, O’Melveny & Myers, LLP

"If a gift is legal under the “written laws” of the host country, the gift does not violate the FCPA." -Patrick M. Norton ARTICLE TOOLS Print Version Reprints RECENT ARTICLES Different cities, same customers China is the region's top stop for exporting Improving wire transfers Quantifying your banks' performance

China’s traditional Mid-Autumn Festival is celebrated on the fifteenth day of the eighth lunar month.  This year it falls on October 5.  Like every good Chinese holiday, the Mid-Autumn Festival is associated with a particular food -- in this case the “mooncake,” a round pastry traditionally filled with bean paste or lotus seed paste and stamped with an image of the moon, a moon goddess, or another traditional symbol.  Each autumn Chinese businessmen shower their customers, employees, business contacts and government officials with millions of boxes of these round pastries.  Many U.S. companies in China follow this custom too, but they must do so with one eye on U.S. criminal law.    

The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. companies and individuals from bribing foreign officials or, more specifically, from paying “anything of value” to a “foreign government official” with the “corrupt” intention of inducing that official to perform his or her duties so as to help the company or individual obtain business.  Penalties for violations may be severe.  Companies may pay criminal fines of up to US$2 million per violation.  Individuals can also be fined; more importantly, individuals can and do go to jail.   Companies listed on U.S. capital markets (including non-US companies) face additional penalties for mis-recording any improper payments in their books and records.

Bribes need not take the form of cash, and therein lies the problem.  The FCPA is drafted broadly to cover all eventualities:  “payment” of  “anything of value” to an official may violate the statute if the payment could influence the official’s decisions.  The FCPA prescribes no minimum amount necessary to qualify as a violation.  “Anything of value” may encompass the smallest of gifts and the most modest of entertainment.   Hence the mooncake dilemma:  Even the gift of a box of pastries can theoretically trigger criminal liability under the statute.

Gifts of mooncakes do not, in fact, generally present a significant risk of FCPA liability for several reasons.  These traditional pastries are useful, however, for illustrating the difficulties that U.S. companies face in attempting to comply with a vague U.S. criminal law in the often confusing and sometimes corrupt Chinese business culture.  

Some gifts to Chinese officials may be perfectly lawful under both Chinese law and the FCPA.   Published communist party regulations permit Chinese officials to accept gifts valued at less than RMB 200 (US$25) in value.  And if a gift is legal under the “written laws” of the host country, the gift does not violate the FCPA.  It is still possible to purchase basic boxes of mooncakes for less than RMB 200 and thereby to comply strictly with both US and Chinese law. 

The FCPA also permits certain promotional expenditures, including gifts, as long as the expenditures are “reasonable” and not “lavish.”  What exactly this means is less than clear since U.S. authorities have consistently declined to promulgate specific standards, and judicial decisions interpreting the FCPA are few and far between.  Nevertheless, the “lavishness” standard seems to offer some flexibility over and above the RMB 200 safe harbor, although the farther one departs from that standard, the greater the risk that U.S. authorities may disagree with what is and is not “lavish.” 

 As a practical matter, moreover, it is highly unlikely that a specific gift like a box of mooncakes would trigger the interest of U.S. enforcement authorities.  They simply have more important matters on which to focus.  U.S. authorities might also fear, with some justification, being able to prove that an official was actually “corruptly influenced” by a box of pastries.  In some businesses and government offices in China individual officials receive literally dozens of boxes of mooncakes each autumn.  It is difficult to imagine, much less prove, that a specific decision was influenced by one of those boxes.

Nevertheless, gift-giving and related entertainment issues present difficult FCPA questions for US companies, often out of all proportion to the amounts at stake.

 The real issue is rarely the specific gift or entertainment but rather the company policy it reflects.  U.S. enforcement authorities expect U.S. companies to have compliance programs in place that include adequate controls over expenditures that may benefit foreign officials.  The adequacy of these controls becomes an issue when a more flagrant violation of the statute comes to light -- for example, evidence of a bribe or kickback in the conventional sense.  At that point, the authorities may review the company’s controls to see if the particular bribe or kickback was an aberration or a reflection of a generally lax approach to these issues.  A pattern of lavish gifts or entertainment could seriously compound an otherwise limited problem.   

It can be a challenge, however, to devise gift and entertainment policies that reconciles the puritanical standards implicit in the FCPA (and, for that matter, communist party guidelines) with the conspicuous consumption that has characterized Chinese business culture for generations.  Chinese culture simply does not favor modest gift-giving or entertaining.  In China, the value of gifts or entertainment is often finely calibrated to indicate the respect that the giver wishes to show to the receiver.  Giving an official a cheap box of mooncakes, or taking an official out for a delicious but inexpensive meal, may well be counterproductive, causing both sides to lose face. 

The scope of the FCPA gift-giving dilemma is also unusual in China because China has more “government officials” for FCPA purposes than is typical in other countries.  When US companies are making out their mooncake gift lists or devising broader gift and entertainment policies, they need to consider not only the numerous government bureaucrats whose approvals may be necessary to their businesses.  They also need to consider that many of their Chinese customers and suppliers are “state-owned enterprises,” and that US law treats the officers and employees of “SOEs” as government officials too.  Prohibiting employees from paying outright bribes is relatively easy.  The greater headache is devising a gift-giving and entertainment policy in a society where half of the businessmen qualify as “government officials,” and contacts -- “guanxi” -- are the grease that lets the wheels of business turn. 

U.S. companies must wrestle with these problems both in developing their FCPA compliance programs and in adapting those programs to the daily reality of doing business in China.  It is, perhaps, ironic that even the gift of mooncakes raises potential FCPA issues since most Americans consider the typical mooncake an inedible confection more useful as a paperweight or doorstop.  But the FCPA’s criminal liability standards are a serious matter, and U.S. companies must tread carefully when dealing with foreign officials, especially in China.

Patrick M. Norton is a partner with the Washington, DC office of O’Melveny & Myers, LLP and was formerly the head of O’Melveny’s Beijing office.

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