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Common in China, Kickbacks Create Trouble for U.S. Companies at Home

But using middlemen as conduits for payments does not insulate U.S. and U.S.-listed companies against American anti-corruption statutes, said Patrick M. Norton, managing partner of the Beijing office of the law firm O'Melveny & Myers LLP.

The Foreign Corrupt Practices Act's anti-bribery provisions, which carry criminal penalties of up to five years in prison for individuals and fines reaching $2 million for companies, specifies that "U.S. persons" are forbidden from paying or offering to pay "anything of value" to a "foreign official" with a "corrupt purpose" of gaining business. Norton said the Justice Department has been interpreting the statute to include bribes paid by foreign companies and agents on behalf of U.S. companies.

"Willful ignorance is not a defense," Norton wrote in the journal China Law & Practice last year. "U.S. businesses in China are responsible under the FCPA for ensuring that their agents do not do indirectly what the U.S. businesses are prohibited from doing directly."

Nevertheless, such behavior appears common. "What happened at Lucent is happening at all the big tech companies," said a senior manager at a distribution company that sells products for Hewlett-Packard Co. He said H-P cuts his company in as a means of lubricating deals without handling the money directly.

"This happens 90 percent of the time on H-P's Unix business," the distributor said. "The bosses at H-P know the situation."

In a written statement, H-P said it uses distribution companies "to effectively expand coverage" across China, adding that the company operates "in a legal and ethical manner around the world."

"We are unaware of any specific examples of inappropriate behavior by our partners at this time," the statement continued. "Should proof be provided to the contrary we will clarify and pursue the matter, and follow up with appropriate action."

Most kickbacks are handled as rebates that land in a communal fund inside the government agency or company responsible for the purchase, to avoid making individuals vulnerable to corruption charges, sources said.

"The fund is for the department's use," said a former executive for a major U.S. technology company. "It pays for vacations to Las Vegas and Hong Kong, visits to hostess bars, gifts for spouses. Everybody knows about this."

Staff Researcher Richard Drezen in New York and Special Correspondents Eva Woo and Jason Cai in Shanghai contributed to this report.


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