Latest Column: A Federal Inquiry May Be Slowing Studios’ Chinese Ambitions

When the Beverly Hills Bar Assn. had a recent panel on doing business in China — called, in a tinge of irreverence, “Breaking Into China Without Going Broke” — there was a big elephant in the room.

“On a practical matter, we are actually in the middle of a negotiation with one of the major studios, and it is presently on hiatus until this dark cloud of SEC inquiry is sort of taken care of,” he said. “That has nothing to do with us as a company, and it has more to do with [studios] trying to get their ducks in a row, trying to understand how to deal with China, how to properly deal with it under the rules and regulations.”

What is at stake, he said, is missed opportunities.

“In a worst-case scenario, China can become like a Japan or a Bollywood where eventually they end up being able to cater to consumers with their own product in such a way that they really don’t need the United States product,” he said. “So obviously we have a little bit of a ticking clock to figure this out.”

That is, of course, the Securities and Exchange Commission inquiry into the studios’ dealings with Chinese officials. In April, studio sources revealed that they had received letters from the feds, ostensibly with a focus on whether there were instances of bribery in the often vexing quest to get pics approved as part of China’s strict quota system.

While all signs pointed to any investigation being in the early stages, what was clear by experts on the panel is that there was ample reason for concern.

Bethany Hengsbach, partner at Sheppard Mullin Richter & Hampton, called it a “perfect storm” that has been brewing in China, with a culture of gift-giving as part of business deals; heavy government involvement in all sectors of society, including China Film Group; and a drive by U.S. firms to not miss out on the opportunity for huge growth. All of that is intersecting with the U.S. government’s stepped up enforcement of the Foreign Corrupt Practices Act, which prohibits payment of bribes or anything of value to foreign officials as a way to secure business.

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