Corruption in China: the challenges and the tools to tackle them

Under the leadership of President Xi Jinping, corruption has become a hot political topic in China. As party leader he has made rousing speeches, vowing to tackle the problem of corrupt officials at both a high and low level. Prior to assuming power, he was known for his zero-tolerance towards corrupt officials. Now President, many feel that he looks set to deliver more results than previous leaders, others are conscious that implementation takes time and are watching the reaction of different government entities closely.

Despite the rhetoric, the challenges of corruption remain a key consideration for all foreign companies doing business in China, with cultural differences playing a vital role in understanding and tackling these issues.

Challenges:

Legal definitions:

A key point to note is the legal notion of corruption in China.  In particular, while the UK Bribery Act, Foreign Corrupt Practices Act (FCPA) and Chinese legislation are similar in their extra-territorial reach, as far as prosecution for the bribery of foreign public officials is concerned, they differ regarding their definition of bribery per se. While in Western laws there are no lower monetary limits to bribes, in China, the definition of bribery is closely linked to the amount being conferred and to whom.

Chinese law makes a distinction between the corruption of officials and business corruption. Officials are defined as those who perform official duties in state-owned enterprises. Legal liability depends on the size of the ‘bribe’, to whom it is given and the intention to obtain an improper benefit. Chinese prosecution standards provide guidance on bribery thresholds for the corruption of officials such as:

• a payment of more than RMB10,000 (US$1,200) to a government official
• a payment of less than RMB10,000 to a government official under the following circumstances
  • giving bribes with the purpose of obtaining improper benefit
  • giving bribes to more than three government officials
  • giving bribes to judicial officials, law enforcement officials or political leaders
  • bribes resulting in serious losses to the state and the public

Business corruption is defined as a payment given falsely for the purpose of inducing a sale. This can be the payment of cash, gifts or other means to induce a sale or a purchase. These payments are usually falsely labelled as promotional fees, advertising fees, endorsement fees, research fees, labour fees, consulting fees, commission or the reimbursement of any type of expense etc. This is a broad definition to allow for the use of ‘etcetera’ which regularly appears as a ‘catch all’ in Chinese statutes. As with the corruption of officials, Chinese prosecution standards give guidance threshold for what constitutes business corruption; RMB5,000 (US$600) for accepting bribes with RMB10,000 (US$1,200) for individuals giving bribes and RMB200,000 (US$24,000) for corporations giving bribes.

Gifts & Hospitality:

Gift giving is common, particularly around public holidays and festivals such as the Mid Autumn Festival and Chinese New Year. A combination of saving face and carrying out business through personal relationships (关系) means that gifts and hospitality can be lavish. It is also customary to offer gifts not only to customers but to government officials providing licences or certificates. It is quite common also for customers to request suppliers to submit gifts as part of the raffle for the employees’ Chinese New Year banquet. In terms of gifts and hospitality levels, these in general vary greatly between the wealthier cities (predominantly coastal but also including interior cities such as Chongqing for example) and the poorer, in-country towns.

While observing these traditions, businesses clearly need to be wary of transgressing their mother country’s as well as the Chinese bribery laws that specify what it is legal to give and to whom.

Customers:

In our experience it is less likely that foreign companies would be asked for bribes, though it certainly still happens. A particular problem to be wary of is when a customer, having negotiated a price and a deal, insists that it is put through a distributor who appears to add no value. The concern is that this is a device for skimming off a bribe.

Due diligence:

Even in China, ethical due diligence on large suppliers is becoming quite common as it is in the UK, although the approach may not be the same.  In smaller to medium sized companies, although it is unlikely that they will have a Code of Conduct, there will be an awareness of bribery and corruption issues. In both cases, it is wise to pursue ethical due diligence, but to avoid souring relationships by implying a lack of trust.

ABC clauses:

Once a supplier has successfully gone through ethical due diligence checks, many foreign companies will now expect to protect themselves by including anti-bribery and corruption clauses in contracts. As with due diligence, this is likely to become increasingly common. However, while the concept is easily understood, care should still be taken with the presentation and explanation.

Facilitation payments:

Facilitation payments for permits such as environmental approvals remain a risk. Many consultancies exist which have extremely close ties to the official bodies providing the permits and it is not uncommon for success fees for these permits to be asked for up front. This does present a risk for companies bound by the UK Bribery Act and companies having to use such consultancies should scrutinise payments and communicate the organisation’s zero-tolerance approach to facilitation payments. There are risks associated with customs clearance too but few cases have come to light.

Tools:

A natural inclination of many foreign companies is to engage in anti-corruption ‘due diligence’ and to insist on heavy legal clauses. However, caution should be exercised when attempting this in order not to disaffect the Chinese counterpart. It is important for foreign companies to avoid the impression of a ‘colonial’ imposition of values.

In some Joint Ventures it may be relatively straightforward for a foreign company to insist on their Code of Conduct being used and ensuring the adoption of ABC procedures through management secondments. This is most likely to be the case when foreign capital is the majority in the share structure. However, when the JV partner is a majority shareholder or a state owned company, this may be more problematic.  When dealing with Chinese companies, and particularly with state owned enterprises, careful engagement is needed to avoid misunderstanding of concepts and offense being caused.  In our experience, when doing a major deal with a Chinese company it can be very worthwhile to dedicate some specific resource to engaging in a discussion on ethics and explaining the legal obligations facing foreign companies.  Stressing enhanced reputation and competitive advantage as part of this exercise is likely to encourage large state owned companies to take note

Similarly, within a foreign company’s own operation in China, clear rules and explanations of what foreign bribery laws and expectations require, without suggesting that corruption is rife locally, will help embed these policies.

Clear external communication of a company’s ABC stance (on its website etc.) is helpful to deflect the most overt bribery requests from customers, while internal communication and training is key to ensure the message resonates at all levels of interaction with stakeholders.

Written advice from with Steve Yu, a partner of the UK-China Trade Practice of Armstrong Teasdale LLP