DOJ Declares “Enough Is Enough”—Targets Chinese Companies with “China Initiative”

White Collar Watch (December 2018 • No. 3)

On November 1, 2018, then-U.S. Attorney General Jeff Sessions announced the creation of the China Initiative (the “Initiative”) to support the U.S. Department of Justice’s (“DOJ”) “priority of countering Chinese national security threats…” The Initiative consists of a task force aimed at identifying suspected Chinese trade theft cases for investigation and enforcement. Sessions stated, “[t]his theft is not just wrong; it poses a grave threat to our national security. And it is unlawful.” In short, “Enough is enough. We’re not going to take it anymore.” This Initiative comes after several high-profile investigations of Chinese enterprises and citizens concerning espionage and theft of key U.S. technologies and intellectual property. Of note are the Initiative’s focus on one specific country—China—and the strong language used by Sessions in his comments.

The Initiative 

The Initiative will be led by Assistant Attorney General John Demers and is composed of senior DOJ and Federal Bureau of Investigation personnel, including five U.S. attorneys. Prosecutions will utilize several federal statutes to meet their stated objectives. The task force is charged with addressing 10 goals, including: 1) identifying priority trade secret theft cases; 2) implementing the Foreign Investment Risk Review Modernization Act (“FIRRMA”) for the DOJ; and 3) identifying violations of the Foreign Corrupt Practices Act (“FCPA”) by Chinese companies competing with American businesses.

Setting an Example

During the rollout of the Initiative, Sessions announced that the DOJ had indicted a Chinese company for allegedly engaging in economics espionage. The indictment, filed September 27, 2018, but unsealed November 1, accused Fujian Jinhua Integrated Circuit Co. Ltd. (a Chinese state-owned company), United Microelectronics Corp. (“UMC”) (a Taiwanese semiconductor company listed on the NYSE), and three Taiwanese nationals, of stealing trade secrets from Micron Technology, a U.S. semiconductor manufacturer. The Jinhua/UMC case is, in all likelihood, to be among the first of these types of cases that focus on targeting Chinese companies that compete with American businesses. Given the stated policy of the DOJ, there are likely more prosecutions in store for Chinese companies for such violations.

The basis for the case against Jinhua/UMC is the Economic Espionage Act (“EEA”), as amended by the Defend Trade Secrets Act (“DTSA”). These laws give the U.S. government broad powers in prosecuting theft of trade secrets claims against Chinese companies. The EEA and the DTSA have broad jurisdictional reach by applying to conduct outside the United States: a) if the offender is a citizen or permanent resident alien of the United States or an organization under the laws of the United States; or b) if some act in furtherance of the offense takes place in the United States.

Company executives also face significant risks as a result of the Initiative. For example, shortly after the Initiative was announced, on December 1, 2018, Meng Wanzhou, the CFO of Chinese telecommunications company Huawei Technologies Co., was arrested for extradition to the United States while switching planes in Canada. Huawei confirmed that Ms. Wanzhou faces prosecution in the Eastern District of New York, whose U.S. Attorney is a working group member for the Initiative. The charges against Ms. Wanzhou were “unspecified” at the time of her arrest. 

The FCPA Focus

The Initiative’s specific goal of identifying FCPA cases involving Chinese companies that compete with American businesses is particularly noteworthy, given the relative lack of FCPA enforcement actions against Chinese companies to date. While China has been the source of a wealth of FCPA enforcement in recent years, Chinese-based companies are rarely the subject of prosecutions. Indeed, over 30 percent of all corporate FCPA cases since 2011 involved improper conduct in China, but none of these cases involved China-based companies. Rather, the target of those enforcement actions were multinational companies with Chinese business operations. 

It will be interesting to see how the Initiative achieves its FCPA goal. The FCPA’s jurisdictional reach applies only to Chinese companies if they qualify as “issuers,” or if any part of the related transaction touches U.S. soil. This can be as simple as a transfer of funds through a U.S.-correspondent bank account or an e-mail passing through a U.S.-based server. Thus, if a Chinese company competing with a U.S. company for business in South America or Africa meets one of these jurisdictional hooks, it could soon find itself in the DOJ’s crosshairs under the new Initiative if it violates the FCPA. As cases like the recent FIFA prosecution demonstrate, the DOJ is not averse to prosecuting foreign companies and individuals, and certainly possesses the experience and the tools to do so, as well as the creativity to find jurisdictional hooks. Here, the Initiative expressly directs prosecutors to identify violations of the FCPA—something they have become very good at doing over the past decade. 

The Initiative also provides a forum for U.S. companies to raise concerns to federal prosecutors of potential FCPA violations. If a U.S. company reasonably believes that it lost a government contract in a foreign country to a Chinese company due to an alleged FCPA violation, prosecutors are encouraging companies to come forward with that information. This could result in a DOJ investigation, including a request for information directed to the foreign country where the alleged violation took place. Such a request could, in turn, lead to an investigation in that other country, as well.

Preparing for the Initiative

As a result of the Initiative, Chinese companies, particularly those in the technology or manufacturing sector, should evaluate their past and present international trade practices to ensure ongoing compliance to avoid being targeted by the DOJ. Moreover, Chinese companies that do business with foreign governments would be well advised to have strong anti-corruption policies and processes in place to ensure that their activities do not run afoul of the FCPA. A well-designed anti-bribery compliance program can provide tangible benefits for a company, including the avoidance of enforcement actions, a reduction in the fines or penalties sought by regulators, and the establishment of credibility within an industry. Chinese companies also would be well served to review their policies and procedures for protecting proprietary technology legally obtained from other companies, as well as procedures ensuring that technology does not enter the company inappropriately. Implementation of appropriate procedures may be useful in defending against an EEA claim. The DOJ’s message cannot be any clearer—for Chinese companies, the time to act is now.  

©2018 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.