Do you Really Know What’s Happening in Your China Operations? The Lessons to Be Learned from the Story of Orbotech

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You are sitting in your New York office, focusing on growing your sales volume. Your company has various subsidiaries across the globe. One of the subsidiaries is in China, which is clearly a key destination. You visit China twice a year to show that China is important to your business. However, do you really know what’s going on in your Chinese subsidiary?

Do you have a legal and compliance team that is deeply familiar with the specific risks that are involved in doing business in China? Are you relying on your ‘in- house lawyer’ or your general corporate law firm in New York to manage your China legal affairs? Are you aware of the fraud-related risks which are a part of doing business in China?

The story of Orbotech shows the rollercoaster ride that foreign investors may face when doing business in China due to the fraud of their employees, and the importance of having an ongoing legal and compliance team that supervises what is going in China.

Orbotech is a leading manufacturer of automated optical inspection systems for flat panel displays and printed circuit boards. Orbotech is listed in Nasdaq and was retained by LG Corporation and Samsung Electronics Co, Ltd. for the development of the next generation television screens.

Orbotech was exonerated last week after a lengthy criminal trial which could have crippled its business. According to the criminal complaint filed by the Korean prosecutor, it was alleged that Orbotech and certain employees were involved in the theft of corporate secrets from LG Corporation and Samsung Electronics Co. Ltd.

The indictment alleged that, in June 2012, Orbotech Korea employees photographed OLED technology circuits for 55-inch televisions during visits to the two companies’ factories to fix problems in Orbotech’s inspection equipment. The employees kept the pictures on USB drives they concealed in belts or shoes, and then sold them to Chinese screen manufacturer BOE Technology Group Co. Ltd. and other companies.

Gladly, Orbotech was acquitted from the charges. Nonetheless, this ordeal cost Orbotech a great deal of legal fees and some reputational damage. According to the Orbotech 2012 Annual Report filed on December 31, 2012, Orbotech costs related to the particular Korean Matter exceeded $4 million dollars.

The story of Orbotech manifests the importance of having close supervision of your company’s China operations. The actions of one of more employees in China can bring down the whole operation of a company, even large and reputable corporations such as Orbotech.

Many foreign invested enterprises fail to have the basic mechanisms to show that they have conducted all the required measures to reduce their potential vicarious liability due to their employee’s unlawful actions.

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Key methods to protect your company’s interests include:

  • Background checks
  • Confidentiality non compete agreements
  • Protocols to ensure that all documents are password protected
  • Policies prohibiting employees from bringing external hard drives to work place
  • Whistle blower hotline and reward policy

Creation and implementation of such mechanisms requires close cooperation with a local law firm licensed in the jurisdiction(s) of your operations, to create the legal shield which can save the future of your company.

Amit Ben-Yehoshua is a dual citizen of the United States and Israel and is licensed to practice law in California and Israel. Amit holds a Master Degree in Chinese law from Tsinghua University of Beijing and serves as a Senior Counsel at Da Cheng Law Offices, Asia’s largest law firm. Amit can be reached atamit.ben-yehoshua@dachenglaw.com or +86-137-6136-0176 .

This article is provided for general information purpose and should not be relied upon as a comprehensive analysis of fraud prevention mechanism. 

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