"We've all got the Foreign Corrupt Practices Act committed to memory. I've got a little copy taped to the wall of my head…"
By the end of 2012, entertainment company executives across Los Angeles and New York (and movie industry professionals in China) may be able to say this too.
On April 24, Reuters reported that the Securities and Exchange Commission had recently sent "letters of inquiry" to at least five movie studios regarding "inappropriate payments and how the companies dealt with certain government officials in China."i The Los Angeles Times subsequently reported that the SEC's letters "center on the studios' dealings with China Film Group," a state-owned entity that, among other things, determines which foreign films may be imported and exhibited in China.ii
Prior to the release of the Reuters story, FCPA practitioners and other observers had predicted that the SEC and Department of Justice could potentially target Hollywood in an FCPA investigation. This prediction – made by, among others, The Hollywood Reporter,iii as early as 2008 – was generally based on three factors:
The Los Angeles US Attorney's Office successfully prosecuted two film producers for FCPA violations "in relation to a sophisticated bribery scheme that enabled the defendants to obtain a series of Thai government contracts, including valuable contracts to manage and operate Thailand's yearly film festival."iv
The defendants, Gerald and Patricia Green, were sentenced to and served six months in jail. (The government had sought a much stiffer sentence.)
Prior to the Green prosecution, the Los Angeles Times
reported that it had obtained the full budget for the movie Sahara
, which, according to the Times
, noted "‘Courtesy payments,' ‘gratuities' and ‘local bribes' totaling $237,386 were passed out on locations in Morocco to expedite filming."v
In the past few years, SEC and DOJ FCPA enforcement efforts have devoted significant resources to "industry sweeps" (i.e.,
investigations of conduct across an industry). In other words, once the government thinks one company may have violated the FCPA, it increasingly investigates that company's competitors to see if they are engaging in the same allegedly violative conduct. The SEC has noted it "will continue to focus on industry-wide sweeps, and no industry is immune from investigation."vi
Why the FCPA matters to the entertainment business: three developments
While it is unclear what ultimately prompted the SEC's present interest in film industry conduct in China, the news of its interest coincides with three new developments. First, the day after the Reuters story ran, the SEC reconfirmed its interest in both the FCPA (and China-related FCPA conduct specifically), announcing that it was charging a former executive of a US investment bank with violating the FCPA by "secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to" the executive's former employer.vii
Second, Chinese box office is growing tremendously. According to Reuters, "Chinese box office revenue grew roughly 35 percent to $2.1 billion" last year (while US box office fell slightly).viii This growth is projected to continue: the chairman of China Film Group estimates that China's box office revenues will double 2011's results "within five years."ix While only a limited number of US films may be imported in a given year, those that manage to secure a slot can be very successful. According to the Los Angeles Times, at least three American films in recent years have grossed more than US$100 million in China. In recent weeks, two American films grossed more than US$41 million (combined) in China in one week.x
Third, the news of the SEC’s interest in Hollywood’s dealings with China comes one month after some Chinese state officials reportedly visited Los Angeles. In addition to “most of the major studios,” the delegation reportedly planned to meet with “certain directors and actors and post-production houses.”xi Such visits highlight the need for anyone who is covered by the FCPA to be wary if they offer to pay expenses on behalf of foreign officials traveling to the US. The SEC has brought multiple cases against US companies for alleged inappropriate travel expenses.xii The Chinese Communist Party and its disciplinary committee has in recent years also been clamping down on overseas travel and sightseeing trips involving government officials.
The need for heightened awareness, or perhaps even legal counsel, extends well beyond entities such as major studios. The scope of entities and individuals covered by the FCPA is very broad and, perhaps more importantly, DOJ's interpretation of who is covered by the FCPA is (arguably) broader still. According to the DOJ's "Lay-Person's Guide" to the FCPA, the act "potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm." More specifically, the FCPA covers, among others, any issuer that has securities registered in the US and any "domestic concern," i.e., individuals who are a citizen or resident of the United States and US-based or US-organized business entities.xiii
Given that breadth, it is possible that the SEC's inquiry letters will be merely the first chapter in this saga, and that they will be followed by one of Hollywood's greatest products: a sequel.
For more information about the broad reach of the FCPA and its potential effect on your business, please contact:
i "Exclusive: SEC probes movie studios over dealings in China". Available here.