China Chinese Markets

Corruption in China

Corruption in china

Introduction to Corruption in China

When entering the international arena many businesses encounter different forms of corruption, from government officials taking bribes to company executives expecting kickbacks; these forms of corruption are very common in developing countries (Hard to say if China is a Developing Country) and are deeply rooted in the business culture. So, where does corruption in China stand? According to Transparency International, corruption in China is fairly high. They rank China at 80 out of 176 countries on the Corruption Perceptions Index and give China a score of 39 out of 100 (Scores range from 0 (highly corrupt) to 100 (very clean)).

What does this all mean? Well, this means that when a business is considering entering China they must be aware of the different types of corruption/bribery and defend against illegal business practices. How can businesses prepare and defend against corruption? One way companies seeking to defend against corruption in China is to provided Foreign Corrupt Practices Act (FCPA) training to all managers and staff that will be managing assists in China.

Proper training and awareness can greatly reduce your risk of engaging in illegal business practices. With proper training managers will be able to better understand when a bribe is expected or suggested by Chinese business partners. Also, understanding the Chinese business culture will greatly improve your chances of knowing the difference between an acceptable gift and a bribe.

Chinese Business Culture

The Chinese business culture can be very confusing to foreigners and deeply rooted in this culture is the practice of gift giving. Gifts in the Chinese culture are about maintaining relationships but that can easily be abused in hopes of “sealing the deal”. The rules are unclear as to what is considered a bribe and the best practice might be to give gifts when you have completed a contract or during special occasions (birthdays, weddings, etc.). This article provides a decent write up on gift giving in Chinese business.

Foreign Corrupt Practices Act

Earlier in this article I mentioned FCPA training; but what is the Foreign Corrupt Practices Act?

“The Foreign Corrupt Practices Act [15 U.S.C. § 78dd-1, 15 U.S.C. §§ 78m(b)(2)(A) and (B)of 1977 is a well-established US law which impacts every US company which does business outside the USA. The FCPA has two provisions- Anti-Bribery and Accounting. In essence, the Anti-Bribery Provisions make it a crime for any US individual, business entity or employee of a US business entity to offer or provide, directly or through a 3rd party, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage. The Accounting Provisions basically make it illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls.” ~ The Association of Corporate Counsel

Understanding what the US considers bribery can greatly reduce your risk of being heavily fined or barred from doing business. Corruption in China and other under-developed countries is common practice which leaves US based companies at a clear disadvantage. Many competitors are willing to adept to the business environment with which they interact and this allows them to operate more effectively.

The temptation for US based firms is to cut corners to speed up government approval, production, or contracts. The risk for US firms/multinationals is not properly supervising their Chinese counterparts (see below in Cases of Corruption in China) who are unaware of the FCPA or do not feel it applies to them because their side of the business is China based.

Remember the FCPA states that: “The Anti-Bribery Provisions make it a crime for any US business entity to offer or provide, directly or through a 3rd party, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage.”

Cases of Corruption in China

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GlaxoSmithKline’s Current Case:

The first case we will look at is a current case (July, 2013). Currently GlaxoSmithKline (GSK) is in the middle of a major corruption scandal involving the bribery of doctors and officials. According to Reuters, “GSK’s reputation has been damaged and its management team in China left in disarray by Chinese police allegations that it funneled up to 3 billion yuan ($489 million) to travel agencies to facilitate bribes to doctors and officials.” How is GlaxoSmithKline trying to handle the scandal? They are denying they had any knowledge of the bribery.

According to ABC, GlaxoSmithKline released this statement: “Certain senior executives of GSK China, who know our systems well, appear to have acted outside of our processes and controls, which breaches Chinese law. We have zero tolerance for any behavior of this nature. I want to make it very clear that we share the desire of the Chinese authorities to root out corruption wherever it exists.”

What can we expect to happen to GSK? Well, at this point the story is still unfolding but we can assume that the company will experience a major setback in the Chinese market and they may even be investigated by the British authorities for violations of the UK Bribery Act. Overall, this will have a negative impact on their business operations in China.

Coca Cola Case:

Another notable company was caught up and a corruption scandal in September, 2009. The Coca Cola Company came under fire when two former employees were arrested by police in connections to bribery. According to China.org.cn, “One detained worker from Shenmei’s marketing division surnamed Zhu took more than 10 million yuan in bribes.”

According to The New York Times, “The employee took about $1.5 million in bribes.” Although I could find no major outcome from this scandal; the Chinese consumers are becoming more aware of these scandals and this can have a major effect on market share and profit.

Sinopec Case:

The Sinopec case is a little different. The story is about a businessman who was imprisoned for 5 years based on alleged charges of bribery and embezzlement. According to Bloomberg, Tiangang Sun is suing Sinopec on multiple counts based on his 2005 arrest.

“Sun said in the complaint that officials of Sinopec and the Chinese government had him arrested in 2005 after he sued the oil company in Beijing for breaching a contract with his company related to a pipeline to the Tahe oilfield in Xinjiang.”

This type of corruption in China is different because Sun is claiming that Sinopec and the government were working together to interfere with his legal lawsuit. Sun was attempting to sue Sinopec before his arrest in 2005. Sun was held for 3 years before he was given a trial and found not guilty of bribery and embezzlement. The new case is ongoing and it will be interesting to see the outcome.

China Red Cross – The Guo Meimei Story:

The last case is about the Red Cross in China. The story is about a young woman who claimed she was the “General Manager” of the China Red Cross Commerce Department. She posted photos of herself with expensive clothes, cars, bags, and jewelry on Sina Weibo. This lead many people to wonder how she could afford such expensive items if she was just the general manager.

After investigation and a few resignations, the Red Cross took a major hit in private donations. During the scandal the public back lash towards the Red Cross was severe and the organization is still trying to recover from this PR nightmare. According to the BBC, “The charity registered a 60% drop in private donations.”

Final Thought on Corruption in China

The final thought is before you enter any new business environment train your staff to understand the consequence of corruption and bribery and try to provide training on how to identify the different types of corruption. Forbes has a good article titled “How To Deal With Corruption In China.” The most important thing to remember is “Always know your business partners” know what type of company you are doing business with and make sure you have policies that clearly and completely cover the topic of corruption.

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