Risk Management

Corrupt or Careless?

Enforcement of China's anti-bribery laws is on the rise, and foreign companies could easily be on the wrong side of Chinese law without knowing it.
Don DurfeeMarch 20, 2007

On January 19, the managers of seven multinational corporations operating in China received some bad news: the Shanghai police had announced the arrest of 22 of their employees on suspicion of bribery.

The police gave few details about the investigation, which involved McKinsey, McDonald’s, and ABB, among others (oddly, the actual arrests seem to have happened as far back as May last year). Local Chinese press reported that in one case, a local computer company had admitted bribing employees in McKinsey’s information technology department to obtain a contract to install an IT network. McKinsey said the company itself hasn’t been accused of any bribery or corruption, and that it continues to cooperate with local authorities.

Shady deals are nothing new in China — the country’s complex anti-bribery laws are often not rigorously enforced — but the arrests came as a shock to multinational corporations and left unanswered questions. Were the arrests related to the anticorruption probe in Shanghai, which has already toppled the mayor? Do they signal a new focus on the activities of multinationals? And why did the police wait until January to make the detentions public?

What is clear, according to Leslie Ligorner, a partner with international law firm Paul Hastings in Shanghai, is that enforcement of China’s anti-bribery laws is on the rise. “This is not limited to Shanghai,” she says. “We have seen more enforcement around the country by the Chinese government.”

In many respects, China’s laws resemble the U.S. anti-bribery law, the Foreign Corrupt Practices Act (FCPA). Bribery of government officials is outlawed along with the payment or acceptance of kickbacks in commercial transactions. China’s regulations have some additional wrinkles, though. For example, the law calls for criminal penalties for the bribery of government officials. Further, the official limits on gift giving are uncomfortably low: the most a government official can accept is 200 renminbi ($25.80), which is less than the cost of dinner at many restaurants in Shanghai (the typical U.S. company sets gift limits at closer to $100). And, as with the FCPA, China’s definition of “government official” is remarkably broad: any employee of a state-owned enterprise — still the most common type of company in China — qualifies. A foreign company could easily be on the wrong side of Chinese law without knowing it.

In fact, the typical multinational corporation almost certainly is, says Steven Vickers, CEO of Hong Kong-based consulting firm International Risk. “Kickbacks, such as those we saw in Shanghai, are absolutely endemic,” he says. “It should come as no surprise to [multinationals] that they would be affected. Unfortunately, many of them have a veneer of legal compliance that covers a local company culture that remains very mainland-oriented.”

Ligorner sees multinationals taking a greater interest changing that culture. She urges companies to increase compliance training and review employee handbooks in China to make sure that gift-giving limits are in line with local law. Carson Wen, a partner with international law firm Jones Day in Hong Kong, agrees. “You have to make sure you have the proper checks on employees in procurement and business development, especially,” he says. “China has a commercial culture that doesn’t take bribery seriously enough. But the government is now really keen on cracking this problem.”