China Inc taps into seam of bribery

By Olivia Chung

HONG KONG - The sense of outrage in the West that greeted the arrest in China of four Rio Tinto executives last month was predictable. The subsequent trial may indicate whether or not the outrage is misplaced. For the case of the Rio four follows a lengthening list of overseas companies allegedly doing in China what the Chinese there are noted for doing - bribing their way through business, at times getting caught.

About two-thirds of the half-million corruption cases investigated by Chinese authorities over the past 10 years have reportedly involved parties from overseas.

Chinese prosecutors say Stern Hu, an Australian citizen who headed London-based Rio Tinto's iron ore business in China, and his three Chinese national sales staff obtained commercial secrets about China's steel and iron industries through "improper means" and were involved in bribery. Earlier claims that they were involved in spying and stealing state secrets have been dropped.

Australian opposition Senator Barnaby Joyce was in little doubt that there was a mendacious hand behind the arrests. "This should be a sobering wake-up call for all Australians," Joyce said in an e-mailed statement three days after the Rio staff were taken into custody on July 5. "This should be a clear example to Australia, and other countries around the world, of the extent of the relationship between a 100% owned entity in the People's Republic of China and the actions of the Chinese government."

The arrests came as Rio was deadlocked in annual talks on iron ore prices, with China, the world's largest buyer of the key product in steel, holding out for larger price cuts than had been granted to South Korean and Japanese steelmakers.

A few days later, Australian Prime Minister Kevin Rudd was assuring a concerned public that his government was working on the case at "multiple levels" with Chinese authorities.

Rudd said he had raised the issue of Hu's detention with a Chinese vice foreign minister during a meeting of world leaders in Italy, Bloomberg reported. A day later, he ratcheted up tensions by warning the Chinese that the "world is watching" how the case is handled. In the United States, Commerce Secretary Gary Locke chipped in by urging "greater transparency" by the Chinese authorities and due process.

The Chinese responded, perhaps not unreasonably, that Rudd's comments were an "interference" with the nation's legal sovereignty.

Civilian "experts" were also quick to come forward with comment on what some perceived as brute government intimidation in a business negotiation. Jerome Cohen, a professor at the New York University School of Law and a member of the New York-based Council on Foreign Relations, even called for overseas businesses dealing in China to take this opportunity to become more involved in China's human-rights issues.

"This case is a shock to the foreign investment community in China because they've shown little interest in human-rights cases and issues of due process there in the past," he said. "Business people like to look the other way. This shows that they should pay more attention and put more pressure on the Chinese government to meet international standards."

Foreign multinational companies (MNCs) on the mainland have tried to distinguish themselves from domestic companies by stressing operational efficiency, integrity and professionalism - to the extent that leading Chinese companies seek also to meet those standards, or at least to give that appearance.

The rod to the backs of most overseas businessmen is a convention adopted by the 30-member Organization for Economic Cooperation and Development (OECD) that prohibits the bribing of foreign public officials. China is not an OECD member, most industrialized countries including the US and Australia are.

China's fast modernization has gone hand-in-glove with increasing levels of corruption, leading to a widespread perception that it has become deeply ingrained in society during the past 30 years of economic reforms.

China, the world's third-largest economy, scores dismally in the annual corruption listing put out by Transparency International (TI). The communist country ranked 72nd out of 180 countries in the organization's Corruption Perceptions Index last year. On a scale of 10, with 10 being the least corrupt, China scored a mere 3.6.

China is Australia's second-biggest trading partner and Australia's largest source of foreign investment, yet Australia is at the other end of TI's corruption spectrum, its 8.7 score ranking it ninth, five places behind the top Asian nation, Singapore and ahead of 12th-ranked Hong Kong, now a semi-autonomous part of China.

The world's top two economies - the United States and Japan - shared 18th spot.

Death for corruption
Whatever fate might await the Rio four, it is thought unlikely to be as severe as that meted out to senior Chinese executives breaking bribery rules.

Execution for corruption was the fate just last Wednesday of Li Peiying, the former chairman of Capital Airport Holding Co, which controls or has stakes of 31 airports. Li, 59, whose company, founded in December 2002, also does business in the securities and real estate industries, was found guilty of embezzling 82.5 million yuan (US$12 million) and accepting 26.6 million yuan in bribes during his tenure.

His death came two days after the head of China's nuclear power program was put under investigation for corruption.

Kang Rixin, party secretary and general manager of the state-owned China National Nuclear Corporation (CNNC), is the latest of several officials to be investigated for allegedly interfering in the tendering process of the company's nuclear projects. In a separate case, China Guangdong Nuclear Power Corp has been implicated in the leaking of business secrets to foreign nuclear power companies before a public tender process last year.

China, the world's second-largest power market, has 11 working nuclear reactors and is adding at least another 24, including five plants scheduled to start construction this year.

In April, construction started on China's first third-generation pressurized water reactors using AP 1000 technologies developed by US-based Westinghouse, a company now owned by Japan's Toshiba. China wants to have 100 Westinghouse nuclear reactors in operation or under construction by 2020, more than double what was anticipated, the Pittsburgh Tribune-Review reported in June 2008, citing chief executive Aris Candris. In 2007, the company beat out French rival Areva to win a $5.3 billion contract to build four AP 1000s in China, the report said.

Severe sentences are clearly not deterring Chinese nationals from having their palms greased by their overseas counterparts in the mutual pursuit of profits.

In recent years, Germany-based engineering conglomerate Siemens, French supermarket chain Carrefour and Lucent Technologies, now part of French telecommunications giant Alcatel-Lucent, are just some of the multinationals whose staff have blended in with the local corruption culture - to the disappointment of some locals.

"They cannot bring their clean operation and integrity from abroad," said He Jun, senior analyst on economic and public policies of Anbound Group, a Beijing-based information consultancy. Although accurate figures on how widespread bribery is involving MNCs on the mainland are by their nature absent, there is an increasing trend of corruption involving overseas outfits in China, he said.

About 64% of the 500,000 corruption cases that had been investigated on the mainland in the past 10 years involved multinationals or foreign trade, He said, citing a survey published at the end of 2006.

Experts attributed this to a culture of local corruption, big state-owned enterprises enjoying monopolies and a lack of a comprehensive corruption law.

Multinationals may try to uphold high ethical standards, but they have made concessions by paying bribes as part of their business costs when becoming more accustomed to the Chinese culture, He said.

"When doing business in China, most foreign companies have no clues due to the lack of transparency in China's business environment. On the contrary, guanxi - having to develop connections with government agencies - is usually viewed as a common way of doing business. When in Rome do as the Romans do. That's why foreign companies bend themselves to this hidden rule in China."

He also blamed rampant multinational bribery on the structural problem of China's business market.

"With the [government's] preferential policy treatment, state-owned enterprises [SOEs] enjoy monopolies and their heads have been preconceived as being easy targets for doing business with ... some SOEs are taking advantage of their positions to earn as much as they can. Besides, without checks and balances in these enterprises, we will only hear more cases involving such big fish," He said.

Sometimes not such big fish.

Germany's Siemens last year said it agreed to pay total fines and penalties of about 1 billion euros (US$1.4 billion) in Germany and the US for its bribery in several countries, including China. Siemens Healthcare allegedly paid $64,800 to a doctor of the radiation department at Songyuan Hospital in northeast China's Jilin province to sell a $1.5 million magnetic resonance imagining system to the hospital, according to US Securities and Exchange Commission (SEC) documents filed to a Washington court in December, 2008.

Siemens Healthcare was suspected of paying five Chinese hospitals $14.4 million from 2003 to 2007 to help it win orders for healthcare facilities worth $295 million, the SEC said.

In 2007, Lucent Technologies, then a US company and now part of French telecommunications giant Alcatel-Lucent, agreed to pay $2.5 million to settle charges that it violated US anti-bribery laws by paying for about 315 trips taken by Chinese officials to secure millions of dollars in contracts.

The SEC said Lucent spent $10 million on trips for 1,000 Chinese government officials for sightseeing and entertainment trips to the US and other countries between 2000 and 2003.

Metamorphosis of bribery
Payment for such trips reflects the changing forms corruption can take, said Mei Xinyu, a senior researcher under the Ministry of Commerce. This hinders Chinese authorities seeking to crack down on corruption, particularly when it involved overseas businesses, Mei said.

"The big Chinese companies are more attracted by MNCs, which are not based in China," he said. Bribery in recent years "has evolved from a mere cash payment to various forms including free field trips, tuition fees for Chinese officials' children studying overseas and free MBA courses".

Weak law enforcement is another reason behind the growing level of corruption. US label maker Avery Dennison is a typical example.

A spokesman from Avery's Asia-Pacific Group confirmed last week that the company had found some of its employees involved in bribery.

According to a document released by the SEC on July 28, Avery's Chinese division paid about $30,000 to Chinese officials between 2002 and 2005 to win business contracts. In one transaction, Avery China won a contract with a state-owned company by indirectly paying an official about $25,000.

In August 2004, Avery China was awarded two government contracts to install graphics on about 15,400 police cars by agreeing to increase the price of the graphics by more than $41,000, which would be funneled to officials. The company's Asia-Pacific Group discovered the scheme before the bribes could be paid and blocked the illegal payments.

The SEC statement marked the end of the commercial bribery investigation into Avery China after the company accepted a fine of $200,000 and promised to forfeit future profits from illegal deals. The document didn't mention who the Chinese officials were.

Qiao Xinsheng, professor of Zhongnan University of Finance, Politics and Law, said Avery was giving up a pawn to save a chariot; that is, the company had decided to take a loss in China, where it was doing little business, to protect its more lucrative business in the US.

Avery turned itself in under an action based on the 1977 Foreign Corrupt Practices Act aimed at combating business crimes overseas.

According to the act, if a US company is found to have been involved in bribery, its headquarter and overseas companies will be the subject of criminal and civil enforcement actions, resulting in large fines and suspension and debarment from federal procurement contracting.

A company listed on a US exchange or with significant operations in the US, such as Siemens, Europe's largest engineering company, which is listed in the New York Stock Market, is subject to the act irrespective of where the corruption occurs.

Safeguards in place
To safeguard themselves, some companies seek to instill anti-corruption ethics in their workforce, implementing detailed compliance programs intended to prevent and to detect any improper payments by employees and agents.

California-based Intel, the world's biggest maker of computer chips and which employs more than 6,000 people in China, has stringent anti-corruption policies and its employees around the globe are given regular briefings on them, spokesman Chuck Mulloy said.

"We have external and internal auditors," he was quoted as saying by the San Jose Mercury News. "If we ever find anything that is not in alignment with our standards, we take action immediately."

Where companies do discover that their staff have been involved in corrupt practices, many firms have turned themselves in, Qiao said.

In June last year, eight supervisors of Paris-based Carrefour stores in Beijing were jailed for one to five years for taking bribes ranging from 17,000 yuan to 114,000 yuan from suppliers, a year after an internal graft crackdown by Carrefour, Europe's largest retailer and with 27 outlets in China.

In June 2007, Carrefour called in the police to investigate about 20 people, including 12 suppliers, after the company launched a 24-hour complaint hotline for its suppliers in its department of purchasing.

Even so, the imbalance in punishment of the different parties involved is of concern to Mei.

"Avery China ended up being fined, but how come the Chinese counterparts who received the bribes get off free?" Mei said, and called for companies and the officials involved in such cases to be named and punished.

"It's strange that Avery China faces punishment in the US, but not in China. It's obvious that the absence of strong supervision and punishment from the Chinese counterparts have posed huge negative effects to the country's efforts to check corruption. Besides, only the individuals are the subject of criminal enforcement actions, but not the enterprises or institutes," Qiao said.

For Siemens and Lucent, the corruption cases in the US are over, but the investigations in China could help strengthen the country's capacity to fight commercial corruption and punish those involved by drawing on the clues and information gathered by authorities overseas.

In the Siemens case, only the former head of the radiation department at the Jilin hospital was sentenced, being handed a 14-year jail term. In the Lucent case, the company removed four executives from its China operation for violations of US law, but no one has been arrested by Chinese authorities.

Despite the string of corruption cases, the US remains China's second-largest trade partner, with bilateral trade volume totaling $132 billion, trailing the European Union, which shares trade with China worth $159.97 billion.

Meanwhile, Rio stands firmly behind its four arrested staff members, with chief executive Sam Walsh last Wednesday saying, "Rio Tinto will strongly support its employees in defending these allegations. From all the information available to us, we continue to believe that our employees have acted properly and ethically in their business dealings in China."

A Hong Kong steel analyst, who asked to remain anonymous, last week said that their arrest "certainly strengthened China's bargaining power" in the continuing steel-price talks, even though the Chinese authorities said it was an individual judicial case and not political.

Whatever the case, China's steelmakers and Fortescue Metals Group, Australia's third-largest iron ore exporter, agreed at the weekend on a 35% price reduction compared with last year. That is well down on the 45% the Chinese side had been pursuing, but is better than the 33% cut that had been on offer from Rio Tinto.

The Chinese side will now ask Rio, Brazil's Vale and BHP Billiton for the same deal, Shan Shanghua, secretary general of the China Iron & Steel Association, said on Monday at a press conference in Beijing, Bloomberg reported.

As a part of the Fortescue deal, China's lenders will arrange $6 billion of financing to help the Australian company expand and compete better with the larger Rio Tinto and BHP Billiton. That's a business sweetener - not corruption.

Olivia Chung is a senior Asia Times Online reporter.