Complying with the U.S. Foreign Corrupt Practices Act

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1 Complying with the U.S. Foreign Corrupt Practices Act 1. About This Manual This Manual describes the Foreign Corrupt Practices Act ( FCPA ), 15 U.S.C. 78m, 78dd, 78ff (collectively, FCPA ), anti-corruption policies and procedures of LONGHAI, and explains the basic legal requirement that LONGHAI employees and agents must avoid corrupt practices while acting on LONGHAI s behalf. 2. FCPA Responsibilities The Legal Department is responsible for interpretation, training, administration, revision and enforcement of the policies set forth in this Manual. Each LONGHAI business unit is responsible for implementing the policies identified in this Manual, with assistance and oversight from the Legal Department. Each LONGHAI employee is responsible for familiarizing him or herself with this Manual and LONGHAI anti-corruption policies, and for complying with the Manual and those policies at all times. 3. Reporting Obligations Each LONGHAI employee is required to inform the Legal Department if he or she has reason to believe that employees or agents of LONGHAI have engaged in, or intend to engage in, activities that violate the FCPA or applicable anti-corruption law. Such reports should be made to Dr. E. Kornotzki at LONGHAI will provide whistleblower protections as applicable against retaliation for LONGHAI employees who voluntarily provide information on corrupt activities.

2 4. LONGHAI s Policy On Anti-Corruption Statement by CEO It is the policy of LONGHAI to comply with the relevant laws and regulations applicable to our business. Compliance is of special importance in the field of anti-corruption law, including the U.S. Foreign Corrupt Practices Act ( FCPA ). This manual replaces any existing FCPA compliance manuals in any LONGHAI company or division. The consequences of failure to comply with the FCPA are serious, and may include high fines, restrictions on doing business, and damages claims by third parties. Individuals involved in corruption may be subject to criminal sanctions, including fines and imprisonment. In addition, corruption may result in negative publicity which would harm LONGHAI s reputation and business relationships. Compliance with anti-corruption law is expected of all LONGHAI employees at all times, and no employee may authorize another employee to deviate from this policy. Failure to comply with applicable anti-corruption law will be considered a serious breach of the employee s obligations towards his or her employer. LONGHAI s Legal Department is responsible for implementing this policy. Additional guidance may be issued in the future on complying with the FCPA. If you have any questions about this policy or FCPA compliance generally, please contact the Legal Department. /s/ Wang Chaojun,

3 5. Fines and Penalties Any individual or company that violates the FCPA may be subject to criminal and civil penalties. Individuals convicted of violating the FCPA anti-bribery provisions may be subject to fines up to US $100,000 and imprisonment up to five years per offense. Companies convicted of a criminal violation may be subject to fines of up to US $2,000,000 per offense. In addition to these criminal penalties, civil penalties of up to US $10,000 per violation may be brought against both individuals and companies. Any person or company who willfully violates the FCPA accounting provisions may be subject to a criminal penalty of US $5,000,000 in fines and/or twenty years imprisonment for an individual and US $25,000,000 million in fines for a corporation. Other harmful effects may include U.S. government contracting restrictions, export and import prohibitions, damages claims by third parties, and negative publicity. 6. Basic Concepts In The FCPA 6.1. Who Is Subject To The FCPA? The FCPA applies to: 1) issuers U.S. and foreign companies subject to Securities and Exchange Commission ( SEC ) jurisdiction; 2) domestic concerns individuals who are citizens, nationals or residents of the United States and companies with a principal place of business in the United States or organized under U.S. law; and 3) other persons foreign companies or persons who act in the United States to further a corrupt payment. Other persons has been interpreted broadly to include foreign entities that send an in furtherance of a corrupt act to a U.S. recipient, or that clear a corrupt payment through a U.S. bank What Is Prohibited By The FCPA? The FCPA prohibits companies and individuals subject to FCPA jurisdiction from providing to foreign officials any corrupt payments (i.e., bribes, kickbacks, and similar benefits) in order to obtain any unfair advantage with respect to government contracts, regulatory approvals, licenses, and other government actions for the purpose of obtaining or retaining business. The FCPA also requires issuers and their majority-owned subsidiaries to maintain accurate books and records that do not misrepresent their payments or expenses. Issuers are required to act in good faith to encourage their minority-owned subsidiaries to adopt reasonable internal accounting controls intended to avoid corrupt payments. Issuers, domestic concerns and other persons may be liable for the actions of their foreign subsidiaries and agents if they know or should know that a subsidiary or agent is likely to make a corrupt payment to a foreign official. 2

4 Prohibition of Corrupt Payments to Foreign Officials The FCPA s anti-bribery provisions prohibit corrupt payments to foreign officials in order to influence an official act or secure any improper advantage in connection with obtaining or retaining business. (Other U.S. federal and state laws prohibit the bribery of officials of the U.S. Government or U.S. state or local governments.) The specific elements of an FCPA violation include: PAYMENT: The FCPA applies to payments where the entity making the payment knew or should have known that the payment would be for the benefit of a foreign official. The payment can be anything of value, such as money, services, promises of future employment, or donations to a charity affiliated with the foreign official. The FCPA also applies to payments by subsidiaries, affiliates, agents or others acting on behalf of the parent company. FOREIGN OFFICIAL: The FCPA applies to payments to or for the benefit of a foreign official, which is defined to include officials of foreign governments, foreign state-owned enterprises, foreign political parties, international organizations, and any person acting on behalf of those entities, even in an unpaid capacity. Benefitting the family or friends of a foreign official in return for an improper advantage is treated the same as benefitting the official directly. CORRUPT PAYMENT: Payments are corrupt under the FCPA if they are made with the intent to unfairly or improperly influence the foreign official in his or her official capacity. OBTAINING OR RETAINING BUSINESS: The FCPA has been interpreted to apply to payments that have a business purpose, such as winning a contract or reducing tax liability Examples of FCPA Violations It will violate the FCPA to: Pay kickbacks to foreign officials, including officials of government-owned companies, in return for a contract; Pay bribes to reduce foreign tax liability or to obtain necessary business permits; Pay for foreign officials travel, lodging, meal and entertainment expenses when those expenses are not reasonably related to a legitimate business purpose; Pay for spouses or other family members to accompany a foreign official on an otherwise legitimate business trip; or Provide money or other benefits to any entity in return for an improper business advantage from a foreign official. 3

5 7. Rules Of Conduct In order to prevent possible violations of the FCPA and other anti-corruption laws, LONGHAI has adopted the following rules of conduct for LONGHAI and its employees: 7.1. General Rules Each employee shall refrain from offering bribes or improper benefits to anyone in order to gain or maintain a business advantage. Each employee shall immediately inform a supervisor, the Legal Department or internal auditors if he or she has reason to believe that any LONGHAI employee has engaged, or intends to engage in the near future, in any corrupt activities, including any activities that may violate the FCPA Accounting Policies No undisclosed or unrecorded funds or assets of LONGHAI are to be established for any purpose. False, inflated or artificial entries may not be made in books and records for any reason, and no employee shall engage in any arrangement that results in such entries. No accounting record or document relating to any transaction may be falsified in any manner that obscures or disguises the true nature of the transaction. No payment on behalf of LONGHAI will be approved without adequate supporting documentation, or if made with the intention or understanding that any part of such payment is to be used for any purpose other than that described by the documents that support the payment. Compliance with generally accepted accounting principles and established internal audit controls and procedures is required at all times Gifts While exchanging gifts with customers, suppliers and business partners is a customary part of international business, in no circumstances should LONGHAI officials or employees receive or offer gifts of cash. Gifts other than cash may be offered or accepted so long as they: Are directly related to the conduct of the company s business; Are of minimal economic value and clearly appropriate under the circumstances; Do not violate the law or policies of the giver or recipient; Do not place the recipient under any obligation; and 4

6 Are not provided in return for any improper benefit Travel and Entertainment Expenses Payment for reasonable and bona fide expenditures for seminars, travel, meals, lodging and entertainment for potential customers, existing customers, customer representatives and public officials is permissible if those expenditures are directly related to the promotion, demonstration or explanation of the company s products or services or the performance of a contract. However, such payments: Must be directly related to bona fide marketing, business development or contract performance expenses; May not be provided in return for any improper benefit; Must be for lawful activities, reasonable in amount, and appropriate under the circumstances; Must be approved under standard company procedures; Must be verified through reasonably detailed documentation of actual expenses, including receipts and explanations of the payments purposes and the legitimate business reasons for them; and Must be accurately recorded in the company s books and records. Paying travel, meal, lodging or entertainment expenses for family members or friends of government or business officials is not permitted without specific written authorization from the Legal Department Facilitating or Grease Payments Facilitating payments are payments to secure the performance of routine governmental action ordinarily performed by lower level foreign officials, such as issuing non-discretionary permits, providing utility service, loading and unloading cargo, or protecting perishable products or commodities from spoilage. Routine governmental action does not include decisions where the foreign official has legal discretion on how he or she will act on the issue at hand. Facilitating payments are permitted under the FCPA in order to speed up a particular bureaucratic process, but payments that could affect the ultimate outcome are not allowed. Such payments may be permissible when the payment is authorized in writing by the Legal Department in advance and the following conditions are met: The facilitating payments are small and infrequent in nature; The facilitating payments are made for a valid business purpose and without any attempt to secure an improper advantage; 5

7 The facilitating payments are of a type and nature not treated as illegal by local law enforcement authorities; Facilitating payments have not been made repeatedly to the same officials; The facilitating payments are necessary in order to avoid a significant harm to the company; and The facilitating payments are properly documented and recorded in accordance with normal company accounting and control procedures. 8. Agents and Representatives Agents and representatives can be important in LONGHAI business activities in certain countries, providing LONGHAI with knowledge about local regulatory and political conditions, marketing LONGHAI services to potential customers and business partners, and working with local political systems to advance LONGHAI s interests. However, such relationships can create an increased risk of corruption due to the agent s direct interaction with public officials and potential customers. This risk is higher in countries with less government and corporate transparency and in cases where an agent is the company s sole representative in a particular area. Agents and representatives for LONGHAI must uphold the same standards of anticorruption compliance applicable to LONGHAI itself. Before entering into any engagement with an agent or representative, LONGHAI employees should familiarize the potential agent with LONGHAI s anti-corruption policies and practices so the potential agent is aware of LONGHAI s expectations for ethical conduct. In addition, LONGHAI personnel shall perform due diligence on agents and representatives acting on behalf of LONGHAI to ensure they will comply with LONGHAI s anti-corruption standards. The attached FCPA summary can be used to inform the agent of its FCPA obligations. If the results of this due diligence raise any concerns ( red flags ) about the potential for corrupt activities by the prospective agent or representative, the contracting employees must inform the Legal Department and obtain its written consent before entering into any representative relationship with that entity. Examples of red flags concerning agents or representatives include the following: The agent refuses to agree to abide by the FCPA, applicable anti-corruption laws or LONGHAI s anti-corruption policy. The agent has close family or business ties with government officials who could provide LONGHAI or the agent with an improper advantage. The agent requests that the agency relationship be kept confidential. 6

8 The agent is recommended by a government official who could provide LONGHAI or the agent with an improper advantage. The agent lacks sufficient staff or experience to perform the contracted-for services. The agent cannot provide references to document its claimed experience. The agent s fee is excessive in relation to the services it provides. The agent makes unusual requests such as to backdate or alter invoices, to overinvoice, to provide an unusually large credit line, etc. The agent requests unusually large bonuses, substantial up-front payments, or inflated commissions Agency Contracts When the decision to engage an agent, representative or distributor is made, the engagement contract should contain the following provisions related to anti-corruption: Information on the agent s name, business registration number and business address; the agent s specific responsibilities under the contract; and the fee amount and method of payment. All agency payments should be made if possible by check or wire transfer to a bank in the country where services are rendered, and should be made directly to the agent. Agents should be required to provide regular, detailed reports on their activities during the contract. Agents should acknowledge their obligations under applicable anti-corruption law, including the FCPA, and agree to uphold those obligations and LONGHAI s anticorruption policy in all respects. Agents should acknowledge LONGHAI may disclose the contents of the agreement to government officials, outside counsel and auditors, as LONGHAI may consider appropriate in order to ensure compliance with anti-corruption requirements. Agents must warrant that none of their principals, officers, directors, key employees, or substantial owners are government officials, political candidates or other persons who might assert improper influence on the company s behalf. Agents should agree that they may not transfer the contract to other entities without the company s written consent. Agents should agree to allow LONGHAI to audit the agents books and records to confirm that no corrupt payments have been made. 7

9 The agency contract should allow LONGHAI to terminate the contract in the event of any improper payment by the agent. 8