1. GOOD. SMART.BUSINESS. PROFIT.
TM

2. Clash of Compliance: Global Anti-Corruption
Considerations When Foreign Laws Are At Odds
with the FCPA
March 27, 2014

3. Chelsie Chmela
Events Manager
Chelsie.Chmela@ethisphere.com
703.960.2360
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3

4. Winston Chan
Of Counsel, Gibson, Dunn & Crutcher
Thomas Firestone
Of Counsel, Baker & McKenzie
Lauren Reynolds
Europe Regional Compliance Attorney, Microsoft
Corporation
SPEAKING TODAY

5. Hypothetical
• During a routine channel audit of distributor covering China, Russia and
Western Europe, distributor employee makes offhand comment to auditor
that distributor regularly relies on “special envelopes” to deal with “customs
issues”
• Chronology for discussion:
• Commencing internal investigation
• Data preservation and review
• Interviews
• Investigation work product
• Remediation
• Self Disclosure
5

6. China

7. China-Specific Challenges
• Limitations on Investigations
• Protection of Personal Information
• Case Study: Humphrey
• State Secrets Law
• Impact on Whistleblowers
• Document Review
• Document Production to Other Regulators
7

8. Limitations on Investigations
• Best practices and regulators in the U.S., U.K., and elsewhere
demand extensive diligence of business partners, suppliers,
customers, and others
• Demand from multinational corporations for diligence
investigations is growing, but the information that is publicly
available is being reduced
• Chinese law and government tactics limit the ability of
corporations and other private actors to do diligence on others
• Cracking back on corporate investigators
• Blocking access to basic information
• Forcing investigative firms out of business
• Incarcerating foreign investigators
8

9. Protection of Personal Information
• Private investigators must attempt to link personal and business
information in order to do adequate diligence individuals and
entities
• Yet privacy of personal information in China is a growing concern
and protected by law
• Article 253 of China's Criminal Law makes it illegal for personnel in
government agencies and certain business sectors (including those at
financial, telecom, education, and health institutions) to sell or illegally
provide information about citizens
• Both buyer and seller can be criminally liable
• Designed to counter rampant theft of and trade in personal information,
mostly used for scams
• Nonetheless, these rules also apply to those who collect personal data for
corporate risk assessment
9

10. Case Study: Peter Humphrey
• Chinese authorities arrested two private corporate investigators,
Peter Humphrey (a UK citizen) and his wife and business partner
Yu Yingzeng (an American citizen)
• Humphrey and Yingzeng own and lead ChinaWhys Co.
• One of many China-based firms hired by multinational companies to
investigate possible kickbacks, embezzlement, counterfeiting or other
malfeasance
• Humphrey is one of the best known corporate investigators in China
• Possibility that Humphrey appeared to have been arrested in connection
with his work for GlaxoSmithKline, the British pharmaceutical group
currently under high profile bribery investigation in China
10

11. Case Study: Peter Humphrey (cont’d)
• Accused of breaking Chinese laws related to “purchasing personal
information” on Chinese citizens by illegal means
• According to a China state-run news agency, authorities believe the couple
“used compilation, purchasing and other methods to illegally acquire and
sell a large amount of citizens’ personal information, seeking to make
illegal gains”
• Conceivably selling the private information to their clients
• Authorities reportedly found records of “household registration, car
ownership, property ownership, and exit-entry records” at ChinaWhys’
mainland offices
• Public broadcast of confession
11

12. Humphrey Case – Press Comments
• “The allegations against the couple will probably send a chill
through the fraud and commercial investigation firms in
China that help foreign investors navigate the country’s
business landscape”
• Arrest is the “latest indication that authorities are
uncomfortable with investigations by foreigners”
12

13. Considerations for Use of Investigators
Consider:
• Written agreement that all internal and external investigators must
abide by all Chinese laws, specifying those most applicable
• Training for all internal and external investigators on relevant laws
• Where appropriate and possible, seek approval for actions by relevant
government agency
• Exercise extra care around personal information
13

14. State Secrets Law
• Chinese Constitution imposes obligation on all citizens to
“keep state secrets”
• State Secrets Law came into effect in October 2010
• Defines seven categories of state secrets
1. Major policy decisions on state affairs;
2. Matters of national defense and the activities of the armed forces;
3. Diplomatic activities and matters of foreign affairs;
4. Secrets in the areas of national economic and social development;
5. Secrets concerning science and technology;
6. Secrets concerning activities for safeguarding state security and the
investigation of criminal offences; and
7. “[A]ny other secrets” as determined by the State Administration for the
Protection of State Secrets
• Broad catch-all to broad law
14

15. State Secrets Law (cont’d)
• New Implementing Regulations for the State Secrets Law came
into effect in March 2014
• The government “may not classify items that lawfully should be
made public as state secrets”
• Regulations do not clarify what ought to be made public. Unclear
whether new rules have any effect on the broad statutory definition of
state secret.
• “The scope of the classified item shall be timely adjusted
according to changing circumstances”
• This suggests the government will continue to have broad discretion
over what qualifies as a state secret.
15

16. State Secrets Law (cont’d)
• Expansive definition creates several compliance and investigation-
related challenges for multinationals
• The company handling that information may be dealing in state secrets
without being aware of the sensitivity of the information
• Documents or information received in the normal course of business may
easily fall into categories like “national economic and social development"
or "science and technology”
• Industries with state-owned entities (energy, mining and resources, or
telecommunications) likely have state secrets
• Criminal sanctions for intentional or negligent disclosure, illegally
obtaining, or unlawfully holding state secrets
• Illegal to remove data from the PRC if a state secret
• Law impacts use and handling of information and data within China
and the sharing of information and data outside of China
16

17. Case Study: Xue Feng
• U.S. geologist Xue Feng obtained publicly-available database
about China’s (most state-owned) oil industry
• Feng sold the database to his employer, U.S. consulting firm HIS
Energy (now known as IHS Inc.)
• This information was deemed to be a state secret after Xue had
sold the information
• Xue was prosecuted, convicted of stealing state secret
information, and sentenced to 8 years in jail
• Xue claims torture in detention
• Then U.S. Ambassador to China, Jon Huntsman, was at court for
the sentencing, in a show of high-level U.S. concern
17

18. Limitations on Whistleblowers
• Robust compliance program must allow employees and other individuals to
anonymously report acts of non-compliance
• On September 12, 2013, the Chinese government announced that it would
protect from retribution and attacks people who use an officially sanctioned
website to report corruption
• Nonetheless, whistleblowers in China that provide information to the DOJ,
SEC, or within the company but outside of China may be in violation of the
State Secrets Law
• In 2013, 52 whistleblower tips to the SEC came from individuals in China
and 20 tips came from individuals in Russia. Of countries outside the US,
only the United Kingdom (66) and Canada (62) had more tips.
• Potentially at odds with whistleblower provision of Dodd-Frank, and best
practices calling for internal anonymous reporting mechanisms within an
organization
• Consider:
• System for reporting allegations of non-compliance solely within China
18

19. Document Review
• Prohibition on removing documents and information
containing state secrets from China may slow down and
impair ability to review documents as part of government
and/or internal investigation
• Consider:
• Initial review for state secrets only
• Documents should be hosted in China
• Reviewers should be reviewing in China
• Once state secrets reviews is complete, substantive review can be
conducted outside of China
19

20. Document Production to Other Regulators
• Prohibition on removing documents and information
containing state secrets from China applies to requests and
subpoenas for documents and information issued by foreign
regulators
• In 2011, the SEC sued a Chinese technology company
suspected of fraud
• As part of that investigation, the SEC issued a third-party subpoena
for audit documents to China-based member firm of a Big Four audit
firm (the “Audit Firm”)
• The Audit Firm refused to produce documents from China on the
grounds that the documents included information relating to state-
controlled companies and which could potentially be classified as
state secrets
20

21. Document Production to Other Regulators
(cont’d)
• The Audit Firm argued that the disclosure would expose itself and its
employees to the risk of criminal liability under applicable Chinese laws, and
urged diplomatic solution between SEC and Chinese regulators
• Eventually resolved by diplomatic agreement between Public Company
Accounting Oversight Board, China Securities Regulatory Commission, and
China Ministry of Finance
• In January 2014, a SEC judge issued an initial decision barring the
Chinese units of the Big Four Firms from auditing US-listed
companies for 6 months
• The SEC sought audit work papers from the Firms as part of a series of
accounting fraud probes.
• The Firms refused to provide the work papers, claiming disclosure would
violate Chinese secrecy law.
21

22. Document production to other regulators
(cont’d)
• The SEC judge found the Firms “willfully” failed to disclose these
documents.
• “[T]o the extent [the Firms] found themselves between a rock and
a hard place, it is because they wanted to be there.”
• “[The Firms] operated large accounting businesses for years,
knowing that, if called upon to cooperate in a Commission
investigation into their business, they must necessarily fail to fully
cooperate and might thereby violate the law.”
• The Firms filed an appeal to the initial decision in February 2014.
The appeal will be heard by the 5-member panel of Commissioners
22

23. Document Production to Other Regulators
(cont’d)
• Consider:
• Reasoned explanation to foreign regulators regarding Chinese
laws and attendant restrictions
• If truly impossible to comply with both foreign subpoenas and
Chinese laws, urge diplomatic solution, but be prepared to fight
• If no resolution possible, potential need to balance costs of non-
compliance within each country
23

24. Russia

25. Privilege
− Applies only to “advocates,” a special class of lawyers allowed
to represent defendants in criminal proceedings
− Does not apply to ordinary lawyers or in-house counsel
− As a practical matter, it is almost impossible to maintain
privilege in Russia
25

26. Data Privacy
− Personal data defined broadly to include name, date and place
of birth, information about family status, profession, income,
education
− Creates a second category of “sensitive personal data” defined
as personal data relating to race/ethnic origin, religious beliefs,
health condition and sexual life
− Processing is also defined broadly to include obtaining,
organizing, accumulating, updating, using, disclosing, etc.
26

27. Data Privacy (cont’d)
− Consent is required for processing of personal data unless
where necessary to the performance of a contract to which the
subject is a party
− Express written consent is required for processing of sensitive
personal data
− Personal data can be transferred out of Russia only if the
recipient country adequate and sufficient protection, defined as
those countries which have signed and ratified the COE
Convention on Processing of Personal Data (Strasbourg, 1981)
27

28. Data Privacy (cont’d)
− Exceptions to transfer prohibition:
• 1) Where necessary to the performance of a contract to which
the subject is a party
• 2) Where subject has given written consent
• 3) Where transfer is necessary to the performance by the
Russian Federation of its obligations under an international
agreement
• Question as to whether anti-corruption legislation creates
another exception
28

29. Data Privacy (cont’d)
− Ambiguity regarding terms and exceptions means that best
practice is to get express written consent of employees
− This can usually be obtained if the Country Director issues an
order directing employees to cooperate with the investigation
29

30. Employee Termination
− Heavily regulated by local labor law
− Article 81 of the Labor Code identifies the circumstances
under which an employer may unilaterally terminate.
Includes:
• “Committing at the place of work a theft of the property of others,
embezzlement or wilful destruction or damaging of property if this
has been established by a court conviction or by a resolution of a
judge, body or official duly authorised to consider cases on
administrative breaches, and if this conviction has come into legal
force.”
30

31. Employee Termination (cont’d)
− As a result. it is extremely difficult to terminate an employee
for committing a crime absent a criminal conviction
− If an employee is wrongly terminated, court can order
reinstatement and compensation
− Practical solution is usually to create a record of poor
performance, unsuitability, disciplinary violations and then
negotiate a termination
31

32. Termination of Distributors
− Federal Anti-Monopoly Service (FAS) is very aggressive
in policing alleged abuse of dominant position and
unjustified refusals to deal by foreign importers
− FAS defines “market” very narrowly and “dominance”
very broadly.
− Consequently, foreign companies that terminate local
distributors for suspected corruption can be prosecuted
for unjustified refusal to deal (Novo-Nordinsk)
− Best practice is to have transparent criteria for selecting
and terminating distributors and to make a record
32

33. Questions?
33

34. Thomas Firestone is a senior counsel in the London office of Baker & McKenzie. His practice focuses on
corruption risks and compliance, including transactional due diligence and internal investigations. He
frequently moderates and speaks at legal and business conferences and intergovernmental meetings on
crime, corruption and compliance. He also designed and taught special courses at a local law school on
white-collar crime and on the US Foreign Corrupt Practices Act (FCPA).
Prior to joining the Firm in 2012, Mr. Firestone worked at the US Department of Justice, first as an Assistant
US Attorney in the Eastern District of New York and then as Resident Legal Adviser at the US Embassy in
Moscow. Mr. Firestone worked on a number of important cases involving money laundering, racketeering,
organized crime and corruption.
Mr. Firestone earned his undergraduate degree from Harvard University, his master’s degree in political
science from the University of California at Berkeley, and his Juris Doctor from Harvard Law School.
Thomas Firestone Baker & McKenzie
100 New Bridge Street
London EC4V 6JA
UK
+ 44 20 7919 1685
Tom.Firestone@bakermckenzie.com
34

35. Lauren Reynolds is a U.S.-qualified attorney and Regional Compliance Attorney for Europe at Microsoft
Corporation. In this capacity she is in charge of overseeing regional internal investigations and enforcing
Microsoft’s compliance policies. Before joining Microsoft, Ms. Reynolds was a member of the Gibson
Dunn & Crutcher’s White Collar Defense and Investigations Group and International Corporate
Transactions Group in Munich. Ms. Reynolds focuses on corporate compliance and on white collar criminal
matters, in particular on issues related to the enforcement of the Foreign Corrupt Practices Act (FCPA). Ms.
Reynolds has advised as a member of a larger team on matters arising from FCPA Compliance Monitorships
and numerous internal investigations relating to compliance and disclosure issues under the FCPA.
Ms. Reynolds earned her undergraduate degree from Columbia University, and her Juris Doctor, cum laude,
from Georgetown University Law Center. Ms. Reynolds holds a Master of Laws from Humboldt University
of Berlin.
Lauren Reynolds Microsoft Corporation
Microsoft Deutschland GmbH
Konrad-Zuse-Straße 1
85716 Unterschleißheim
Germany
35

36. Winston Y. Chan is resident in Gibson, Dunn & Crutcher’s San Francisco office. He is an experienced trial
and appellate attorney, and is a member of the firm’s White Collar Defense and Investigations Practice
Group. He regularly represents entities and individuals in Foreign Corrupt Practices Act matters, including
government enforcement actions, internal investigations, compliance reviews and transactional due
diligence, both domestically and abroad.
From 2003 to 2011, Mr. Chan served as an Assistant United States Attorney in the Eastern District of New
York, where he investigated and prosecuted a wide range of matters as part of that office’s Business and
Securities Fraud Section, including Foreign Corrupt Practices Act violations, hedge fund improprieties,
insider trading, accounting fraud, market manipulation, False Claims Act matters, and fraudulent offerings
of securities. Mr. Chan served in a number of supervisory roles, and received a variety of awards and
commendations.
Mr. Chan earned his undergraduate degree, magna cum laude, from Yale University, and his Juris Doctor
from Yale Law School, where he was on the Yale Law Journal and president of the Pacific Islander, Asian
and Native American Law Students’Association. Following law school, Mr. Chan served as a law clerk for
the Honorable Leonard B. Sand of the United States District Court for the Southern District of New York,
and then for the Honorable Chester J. Straub of the United States Court of Appeals for the Second Circuit.
Winston Y. Chan Gibson Dunn & Crutcher
555 Mission Street
San Francisco, California 94105-0921
+1 415.393.8362
wchan@gibsondunn.com
36

37. <Presentation Title/Client Name>
37
Gibson Dunn Offices
Beijing
Unit 1301, Tower I
China Central Place
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Beijing 100025, China
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Centre
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The Landmark
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Hong Kong
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Telephone House
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England
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Germany
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Orange County
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Brazil
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San Francisco
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38. Q&A

39. April 2, 2014
Privacy Protection in the EU: What Can
Global Companies Expect in 2014?
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