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| 2 minutes read

Supply chain delays and facilitation payments: a timely reminder

Statements by Tesla CEO, Elon Musk, this week about “a ton of expense and hardly any output” at factories because components were “stuck” at a Chinese port exemplified the difficulties being faced by U.S. and European manufacturers in obtaining essential components from China. Delays have built up at Chinese ports, as authorities struggle to clear backlogs due to recent Covid lockdowns. Several European car makers have had periodically to suspend production due to lack of Chinese-sourced components. A backlog of containers at Shanghai port reportedly peaked at 260,000 in April 2022. 

Where manufacturers are incurring overheads but are unable to ramp up production due to lack of components, shippers, local agents and intermediaries may come under pressure to bypass ordinary processes and facilitate expedited shipment of components from Chinese ports.

Facilitation payments are nominal, unofficial payments to secure or expedite the performance of a routine, non-discretionary government action. Such payments are typically requested to expedite customs clearance, visa applications or administrative procedures. It is important to remember that facilitation payments are not legal in many jurisdictions. The UK Bribery Act, the Singapore Prevention of Corruption Act, and the PRC Criminal Law do not permit facilitation payments. For example, under the UK Bribery Act, organizations will be liable for the “corporate offence” of failing to prevent bribery where they do business in the UK and their agents and overseas third party contractors pay facilitation payments. Although the U.S. Foreign Corrupt Practices Act (“FCPA”) has a narrow exception for facilitation payments, it applies “only when a payment is made to further routine government action that involves non-discretionary acts.”

Importers and users of freight and cargo handling services are reminded to ensure that their anti-bribery procedures are robust, including by assessing the risks involved, undertaking due diligence on their agents/contractors, and checking that their contract documentation contains robust anti-bribery and anti-corruption “ABAC” wording, setting out obligations to comply with clear policy guidelines, together with consequences for non-compliance. The ability to recover the cost of regulatory exposure in case of breaches of “ABAC” wording may of course be impacted by express contractual or other limitations on a counterpart’s liability. Businesses should be aware of the risks involved in engaging third-parties, as they can be liable for corrupt or improper actions undertaken by third-parties. FCPA enforcement actions demonstrate that third parties, including agents and consultants, are commonly used to funnel improper payments to foreign officials in international business transactions. There are meaningful ways for businesses to mitigate ABAC risks associated with third-parties. First, conduct periodic due diligence and audits of third-parties. Second, provide periodic trainings to third-parties on applicable anti-corruption laws. Third, request annual written certifications by third-parties that they have complied with their ABAC obligations. Last, businesses should clearly inform third parties of their compliance programs and commitment to ethical and lawful business practices and their expectations for third parties to engage in ethical and lawful business practices.

Reed Smith is one of very few international law firms with a large team of Mandarin-fluent investigation attorneys in Asia, the team provides on the ground support at ports and key trade centres across the PRC and wider Asia-Pacific region. We help our clients to balance local and international ABAC regulations to ensure compliance and the smooth operation of their business transactions in Asia-Pacific.

This post has been written by Calvin Chan, Rosanne Kay, Thor Maalouf and Steven Li. 

Elon Musk says Tesla's new factories in Germany and the US are "losing billions of dollars" due to battery shortages and supply disruptions in China.


anti-bribery, logistics, regulation, transport & infrastructure, supply chain, transportation