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July 16, 2014

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Anti-corruption drive showing its teeth

WHEN Xi Jinping, then still president-in-waiting, vowed to fight both “flies and tigers” in his anti-corruption campaign back in January 2013, few anticipated the scale, duration and depth of his determination.

The seriousness of Xi’s campaign has been proved by the sacking of 33 provincial/ministry leaders since the National Congress of the Communist Party of China in November 2012.

The effort has extended to the private sector and foreign business, especially after the GlaxoSmithKline (GSK) China bribery scandal burst out last July, resulting in investigations of executives from the company’s China operations.

On Monday, new leads were revealed as state media reported British investigator Peter Humphrey and his American wife, Yu Yingzeng, were being charged in Shanghai. The couple was hired by GSK.

The GSK case has triggered a national probe of multinational health companies in China, an industry where bribery is commonplace. The investigation is expected to reach other industries soon.

“Much of the ongoing enforcement (of commercial bribery) is targeting multinational companies,” says Benjamin Miao, a litigation partner with Fangda Partners. “The pharmaceutical industry, of course, and there are two others, the petrochemical industry, where over 20 officials were sacked, and the investigations of leading investment banks and private funds for hiring princelings.”

Miao was invited by the Canadian Chamber of Commerce to speak at a recent anti-corruption and compliance seminar titled “Gift or Bribe?” Since last year, similar seminars have been organized by foreign embassies, consulates and chambers of commerce, as well as companies of different sizes. Internal and external investigations have also been carried out in many foreign companies to ensure they are in compliance.

“I have always been told the greatest trick to do business in China is to swim in the gray zone,” says Steven, an executive of a Beijing-based American firm who did not want his surname revealed. “And all of a sudden, my friends, clients and colleagues are interested in finding out what is black and what is white.”

The American has muddled his way through the gray zone since he arrived in 2008 during the Beijing Olympics, and has “possibly not followed all regulations strictly on the way,” he admits.

“But I had to (make payments),” he says. “It makes everything so much easier, from day-to-day life to business contracts, and there often is no law saying what I did was illegal. It was all part of living and doing business in China.”

He gives the example of some licenses required of his company.

“I followed all instructions and waited for two months without any responses,” he recalls. “Then I found this Chinese guy through a friend, I gave him a few thousand bucks, and just like that, it was all done after two weeks. And everyone I know was doing the same. It would be stupid not to.”

A government relations director at an international enterprise says it is also part of the competition.

“There is no way to know for sure,” he says. “But there is a sense that all your competitors are doing something more than the everyday job. Then you are facing this ultimate question: Do you risk losing your business?”

Unwilling to further reveal his job, he admits he has been much less busy since last year. Many government officials, who are also his friends, have become much more cautious and have rejected his invitations for meals and gifts, “even when it is between friends rather than business.”

He says to some extent, the campaign is good if it can put everybody back to zero and clearly define what is white and what is black.

“I believe it is possible to conduct business, and we have done so, on China’s mainland, without under-the-table deals,” says Kristina Koehler-Coluccia, director of Koehler Group, a family-owned business that helps foreign companies enter the Chinese market.

“Even if it takes longer, and even when it is frustrating, we do the same as we do in Hong Kong. This way, we expand slower, but I can sleep at night,” she adds.

The family has lived in Hong Kong for 45 years, where Koehler-Coluccia was born and raised. She moved to Shanghai to establish the branch in 2003.

“Some of our clients are a bit of naïve about the Chinese market,” she says. “They hire local managers to run the local operations and oftentimes these local managers do it the local way.”

Over the past 11 years conducting business all across China, Koehler-Coluccia and her employees have encountered countless times where bribes were offered or asked, and she has seen and experienced great changes since the case of Bo Xilai.

“All the officials in China are more worried about getting caught,” she says. “We are getting much fewer bribery offers, and the government officials have really been strict, especially in tier-1  cities like Shanghai and Beijing. It is still kind of wild in tier-2 and 3 cities.”

She cites as an example her company’s recent cases to help set up companies in Beijing.

“It was really strict, pure black and white,” she recalls. “I was very impressed. It should become the example for the rest of China.”

While everything in China looks complicated to foreigners, the anti-corruption and anti-bribery campaign is especially so. It involves several government departments, including the Administration of Industry and Commerce (AIC), mainly targeting companies and commercial bribery; the Discipline Inspection Committees of the Chinese Communist Party, which goes after government officials; the Supreme People’s Procuratorate, basically the state prosecutor; and the Public Security Bureau, the police force, among many other organs.

Often more than one organ is involved in a case. And in some cases, the investigation of Chinese officials and foreign corporations are interwoven.

Sometimes, foreign law enforcers took the first step to investigate foreign companies bribing Chinese officials, which then triggered state authorities to take measures against the officials. Other times the reverse happens.

“What is tricky in China is the concept of state officials in Chinese law. In other countries, the answers may be straightforward, but in China, state and private sectors often intermingle, and the concept is not very clear. The laws in China fail to provide very clear definition,” says Miao.

This is important since many countries’ anti-corruption laws forbid  bribery to foreign officials, and in China executives of state-owned or affiliated companies often are appointed by government organs.

Areas of high risk

These are common situations where commercial bribery is likely to take place, according to Benjamin Miao.

• Meetings and conferences, especially when they are organized by third parties, which may involve fake numbers and fake accounts.

• Speaker fees, especially common in the pharmaceutical industry. Companies often invite senior doctors to conduct internal training sessions and pay them high fees.

• Falsified/inflated expense claims. This is very common in China, where in many places you have to use cash instead of a bank card, which makes the payments more difficult to monitor. Fake receipts or fapiao are also quite regularly available in the market.

• Use of the third-party agents. The majority of bribery cases involve third-party agents, who collude with company employees.

• Discounts, again something peculiar to China. A discount is permissible when it is transparent, so it is a fine line between a legal discount and improper benefits for customers. It is not easy to practice. The current practice of AIC requires discounts to be recorded.


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