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April 24, 2012
S.E.C. Asks if Hollywood Paid Bribes in China
By EDWARD WYATT, MICHAEL CIEPLY and BROOKS BARNESwww.nyt.com The Securities and Exchange Commission has begun an investigation into whether some of Hollywood’s biggest movie studios have made illegal payments to officials in China to gain the right to film and show movies there, according to a person with knowledge of the investigation.
The inquiry creates a potential roadblock for the industry’s plans to expand in one of the world’s largest markets.
The S.E.C. investigation has so far focused on at least three studios, the person said, but all of the largest and some smaller studios have been contacted or made aware of the inquiry, according to the person, who has direct knowledge of the investigation but who spoke on the condition of anonymity because the matter could end up in court.
In the last year, both the S.E.C. and the Justice Department have increased investigations under the Foreign Corrupt Practices Act, known as F.C.P.A., which forbids American companies from making illegal payments to government officials or others to ease the way for operations in foreign countries.
Government investigators have been particularly interested recently in the practices of United States companies in China, one of the largest potential markets and one that Hollywood executives have been particularly keen to enter.
An S.E.C. spokesman declined to comment on Tuesday.
The investigation was first reported on Tuesday by Reuters, which said that five companies had been contacted by the S.E.C., including 20th Century Fox, which is owned by News Corporation, the Walt Disney Company and DreamWorks Animation.
Officials at those companies declined to comment, as did a spokesman for the Marvel Entertainment unit of Disney, which recently said it would film part of “Iron Man 3” in China.
Spokesmen for the other major Hollywood studios, none of which are known to be under investigation, either declined to comment or did not respond to a request for comment.
Hollywood has been trying to get more films into the Chinese market for decades, but efforts have picked up in recent years in large part because China has identified cinema as a growth priority. China is racing to build more modern theaters to entertain an expanding, cinema-loving middle class. The country is also escalating local film production, partly as a way to spread its culture across the globe.
In February, Xi Jinping, China’s vice president and likely future leader, visited politicians in Washington and movie executives in Hollywood. Soon after, China raised the number of foreign-produced films that can be shown there each year and increased the portion of box-office revenue from China that the movie studios get to keep.
Under the agreement, China agreed to allow 34 foreign-produced films to be shown annually, up from a quota of 20, as long as the additional films use either Imax or 3-D technologies. China also agreed to let studios keep about 25 percent of the box-office revenue; currently, Hollywood gets about 15 percent.
The discussions leading to the deal were conducted at a high level, as Vice President Joseph R. Biden Jr. joined Mr. Xi in personal negotiations. Given the level of diplomacy involved in reaching the agreement, the S.E.C. inquiry could be an embarrassment to the Obama administration.
Jeffrey Katzenberg, the DreamWorks Animation chief executive, and Robert A. Iger, Disney’s chief executive, also helped forge the agreement.
China currently has about 6,000 movie screens, up from roughly 1,500 three years ago, according to studio distribution executives. The Chinese government has said it expects 20,000 screens to be operating by 2015 and 40,000 by 2040, bringing it on par with movie exhibition in North America.
Ticket revenue in China is expected to reach $5 billion by 2015, up from $2.1 billion last year, according to box office tracking companies.
Hollywood is facing a slowing movie market at home. Last year, attendance in North America dropped to its lowest level since 1993. Studios, contending with a dying DVD business, are more reliant than ever on showings in theaters and see China as a major antidote to their various economic problems.
All of that means that movie and entertainment deals in China have become a routine occurrence in Hollywood. DreamWorks Animation has announced plans to build, with a trio of Chinese partners, a $330 million offshoot studio called Oriental DreamWorks focused on family-friendly entertainment. Disney has its own partnership to develop and produce films and television shows; Disney is also building a major theme park in Shanghai.
Imax, the large-format film company, is teaming with China’s largest theater operator, the Wanda Cinema Line Corporation, to spent $100 million to build 75 theaters by 2014. Imax currently has 45 theaters open in China, with an additional 57 in the works.
Even as they covet the Chinese market, however, executives and filmmakers in Hollywood have remained wary of Chinese censorship rules, which are so restrictive that most of the films being made and shown there are heavy on fantasies to avoid being perceived as commentaries on political affairs.
In an interview earlier this month, Peter A. Chernin, the chief executive of the Chernin Group, a media company that joined in producing “Rise of the Planet of the Apes” for Fox, said he was more inclined to deploy his own company’s next investments in India or Indonesia. The chase for media investments in China had become “overheated,” he said, and heavy regulation has made China less attractive to him than other Asian markets.
Government officials have contended that American companies might be cutting corners to enter the growing Chinese market. As part of a reorganization at the S.E.C. over the last two years, the commission created a specialized investigative unit devoted to violations of the Foreign Corrupt Practices Act.
The S.E.C.’s crackdown on foreign bribery grew to 20 cases in the year ended last September, up from 16 the previous year and 13 in 2009. The commission has brought seven cases so far in the current fiscal year.
Kara Brockmeyer, the chief of the S.E.C.’s Foreign Corrupt Practices Act unit, said in February that the commission had begun receiving better cooperation recently from financial regulators in other countries, noting that new antibribery laws had been passed in Russia and China.
Foreign bribery allegations have recently touched some of the largest companies doing business in the United States, including Aon, Siemens and Johnson & Johnson.
